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CFIUS Reform and its Likely Impact on Inward-Bound US Investment

The Foreign Investment Risk Review Modernization Act (FIRRMA) was signed into law by US President Donald Trump in August 2018. It is the first change to be made to the Committee on Foreign Investment in the United States (CFIUS) regime in more than a decade. It broadens the scope of the CFIUS review process beyond simply transactions that could result in a foreign person gaining the ability to control a US business.

Currently, CFIUS filings are voluntary unless the committee requests or initiates a review in a specific case. FIRRMA, however, will require filings in deals where a foreign government will obtain a “substantial interest” in a US business, and potentially in transactions involving certain critical technology. As a result, CFIUS filings may become mandatory for many more investment deals.

The committee will also have authorisation to review:

(a) foreign investments in real estate located in sensitive locations even when no US business is acquired;

(b) certain non-controlling foreign investments in US companies involved in “critical infrastructure”, “critical technologies” and “sensitive personal data”; and

(c) changes in investor rights that could lead to foreign control or covered non-controlling investments.

The review’s broader scope could also cover transactions in which the foreign investor would get non-public technical information, a place on the board of directors, or involvement in decision-making.

In an interview with HKTDC’s Assistant Principal Economist (Global Research) Louis Chan, Tatman R. Savio, a partner with Akin Gump Strauss Hauer & Feld LLP, and a registered foreign lawyer in the firm’s Hong Kong office, shared with us her views on the short-term and long-term effects on the CFIUS filing process and on what Hong Kong and mainland Chinese companies can do to improve their chances when investing in the US in the future.

Photo: Akin Gump Strauss Hauer & Feld LLP partner Tatman R Savio
Akin Gump Strauss Hauer & Feld LLP partner Tatman R Savio
Photo: Akin Gump Strauss Hauer & Feld LLP partner Tatman R Savio
Akin Gump Strauss Hauer & Feld LLP partner Tatman R Savio

Chan: What are the main changes brought forward by the CFIUS reform?

Savio: FIRRMA will make some fundamental changes to the CFIUS regime.  Pre-FIRRMA, CFIUS’s review jurisdiction was limited to “covered transactions,” which were defined as “any transaction[s] . . . that could result in foreign control of any US business.” FIRRMA broadens the scope of transactions potentially subject to CFIUS review and makes other significant modifications to what was previously a voluntary review process. 

For example, FIRRMA expands the scope of transactions potentially subject to CFIUS review to cover real estate transactions located near sensitive US government locations and ports, even when they don’t result in foreign control of a US business.

It includes certain non-controlling foreign investments in US companies related to what the law terms “critical infrastructure,” “critical technologies” and “sensitive personal data”, and changes in foreign investor rights that could result in control of a US business. It also allows any transaction or arrangement designed to evade the CFIUS regulations to be reviewed.

In certain cases, FIRRMA makes what has until now been a voluntary filing process a mandatory one. Specifically, under FIRRMA, transactions involving foreign government investors and, potentially, US critical technology will trigger mandatory CFIUS filings.

Furthermore, it amends the filing process by allowing companies to submit short-form declarations or “light filings” to CFIUS. These can be processed more quickly.  It provides for a longer review timeline for transactions. Specifically, it increases the timeline for CFIUS review and investigation from 75 days to 105 days.   And it authorises filing fees for CFIUS reviews for the first time, which will help pay for more staff to handle the expected increased workload, and provides for extra appropriations funding for CFIUS.

Finally, it also modifies CFIUS’ annual reporting requirements by imposing new obligations for its reports to Congress.  Specifically, CFIUS must include significantly more information in its annual reports, including detailed information on the outcome of reviews, the parties involved, the nature of the businesses at issue, and any withdrawals from the review process.  The new requirements should result in greater visibility into the CFIUS process and the committee’s national security concerns.

Chan: What do you think will be the immediate impacts of the CFIUS reform?

Savio: Most FIRRMA provisions won’t come into effect until the Department of Treasury publishes its final regulations on implementing FIRRMA requirements. That has to happen no later than February 2020.

Many FIRRMA provisions simply codify or clarify CFIUS’s current internal practices. However, other provisions and CFIUS’s recently announced pilot programme under FIRRMA will directly impose new requirements and impact the review process, resulting in potentially more CFIUS filings, longer review timelines, and for the first time, penalties for failure to meet mandatory filing obligations.

FIRRMA’s new timeline for CFIUS review went into effect immediately.  It extends the initial review period from 30 calendar days to 45 calendar days and permits the addition of 15 calendar days to the end of an investigation in "extraordinary circumstances."  With these changes, the CFIUS review cycle may now be as long as 105 days, as opposed to 75 days.

In this regard, however, it’s worth noting that even though the review timeline was shorter pre-FIRRMA, the committee was often unable to complete its reviews within those time constraints.  This meant that companies were often compelled to withdraw their CFIUS notices and re-file them in order to restart the review clock.  For that reason, it could be the case that even though the review period is theoretically longer post-FIRRMA, CFIUS may be able to conclude its reviews within the time available, especially given that it will also have additional resources resulting from new funding, filing fees and corresponding staffing increases.

Chan: How about in the longer run?

Savio: From a legal perspective, FIRRMA makes more transactions “covered transactions,” including certain non-passive, non-controlling investments in US businesses associated with sensitive personal data, “critical infrastructure” or “critical technology”.

There is still the potential for some protection of passive investments. Although FIRRMA doesn’t use the term “passive investment,” it does require that for non-controlling investments to be covered, they must give the foreign person access to “material non-public technical information” of the US business; membership, observer or nomination rights for the board or equivalent body of the US business; or any involvement, other than through voting of shares, in substantive decision-making related to sensitive personal data, critical technologies, or critical infrastructure.

In this way, the new law may provide some insulation for transactions that are solely for the purpose of passive investments, which reflects the approach of the existing CFIUS regulations towards these sorts of transactions.

Making it mandatory to submit a CFIUS notice under FIRRMA, and putting penalties in place for failing to meet this requirement, will make a difference to the volume of filings being made.  Pre-FIRRMA, many companies would analyse their transactions and then decide not to file CFIUS notices, because they concluded that a particular transaction didn’t meet the definition of a “covered transaction”, or that a filing was not warranted based on an internal evaluation of perceived national security risk.  With FIRRMA, these two fundamentals of the approach to CFIUS review and analysis have changed. It is now the case that more transactions will be covered transactions and that parties may have no discretion as to whether or not they submit a filing.

This will almost certainly result in a greater number of fillings to the committee. Before FIRRMA, CFIUS filings were already increasing in both numbers and complexity. FIRRMA looks to address those issues by implementing funding and other reforms.

Chan: Which types of investments will be impacted most?

Tatman: CFIUS’s new pilot programme, which began on 10 November 2018, has already impacted certain types of investments. Under the pilot programme, CFIUS has expanded its jurisdiction to focus on certain non-controlling investments in US businesses that produce, design, test, manufacture, fabricate or develop a “critical technology” (i.e., most export-controlled technology) associated with any of 27 industry sectors under specific North American Industry Classification System (NAICS) codes. They’re called “Pilot Program US Businesses.”

“Critical Technology” Industries under FIRRMA Pilot Program

Aircraft Manufacturing
Aircraft Engine and Engine Parts Manufacturing
Alumina Refining and Primary Aluminium Production
Ball and Roller Bearing Manufacturing
Computer Storage Device Manufacturing
Electronic Computer Manufacturing
Guided Missile and Space Vehicle Manufacturing
Guided Missile and Space Vehicle Propulsion Unit and Propulsion Unit Parts Manufacturing
Military Armoured Vehicle, Tank, and Tank Component Manufacturing
Nuclear Electric Power Generation
Optical Instrument and Lens Manufacturing
Other Basic Inorganic Chemical Manufacturing
Other Guided Missile and Space Vehicle Parts and Auxiliary Equipment Manufacturing
Petrochemical Manufacturing
Powder Metallurgy Part Manufacturing
Power, Distribution, and Specialty Transformer Manufacturing
Primary Battery Manufacturing
Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing
Research and Development in Nanotechnology
Research and Development in Biotechnology (except Nanobiotechnology)
Secondary Smelting and Alloying of Aluminium
Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing
Semiconductor and Related Device Manufacturing
Semiconductor Machinery Manufacturing
Storage Battery Manufacturing
Telephone Apparatus Manufacturing
Turbine and Turbine Generator Set Units Manufacturing

Source: Determination and Temporary Provisions Pertaining to a Pilot Program to Review Certain Transactions Involving Foreign Persons and Critical Technologies, Federal Register

Parties must make a CFIUS filing, either in short or long form, for investments that could result in control of the Pilot Program US Business or would give a foreign person access to particular information or governance or decision-making rights, even if the investment in the Pilot Program US Business is non-controlling. CFIUS may impose substantial civil penalties, up to the value of the transaction, for failing to make such a filing in advance of closing (that’s 45 days beforehand, if filing a short-form declaration). The pilot programme doesn’t apply to transactions for which the parties have executed a binding written agreement or other document establishing the material terms of the transaction before October 11, 2018.  But otherwise, the parties involved will now have compliance risk associated with failing to meet the mandatory reporting requirement.

In order to meet their obligations and risks under the pilot programme, the parties will need to conduct due diligence to determine whether the target US business comes within its scope.  This is likely to require a detailed export control analysis to identify any potential critical technologies. Assuming that a US company is or could be captured, the parties will then need to decide if there is a way of achieving what they want from the proposed transaction while also satisfying CFIUS requirements.

Chan: Which economy or country will be impacted most?

Savio: The pilot programme applies to all foreigners and is not country-specific. CFIUS has said that no countries were exempted from the programme because it was intended to be a comprehensive examination of the nature of foreign direct investment in relation to critical technologies and the industries in the pilot programme.

However, the discussion about CFIUS reform has centred on China and China’s Made in China 2025 industrial policy, which is focused on expanding its high-technology sectors and developing its advanced manufacturing base. Various stakeholders in the US government, including the US Congress, have been concerned about trends in Chinese investments and the way in which China has been able to use passive or minority investments, joint venture arrangements, and other mechanisms to make successful investments in the US economy and obtain critical technology, or access to critical infrastructure, or other sensitive assets or information. The concern is that China’s development and dominance in this high technology area in a programme subsidised by the state could affect US leadership in areas related to national security. FIRRMA looks to address this perceived national security threat by filling in the so-called gaps where China has been acquiring technology.

In this context, it is worth noting that for several years now Chinese companies have dominated CFIUS reviews, as CFIUS’s annual reports to Congress make clear. According to CFIUS’s Annual Report to Congress for 2015 (the most recent year for which such data is available), acquisitions by investors from mainland China accounted for a larger share of the notices filed for the three-year period from 2013 to 2015 than those from any other single country. 74 notices involved Chinese investors – that’s 19% of the total. That’s ahead of Canadian investors, who accounted for 49 notices, investors from the UK who accounted for 47, and those from Japan who were responsible for 40. Chinese investors also accounted for the most notices filed in each individual year in this period – 21 in 2013, 24 in 2014 and 29 in 2015.

Table: Covered Transactions by Acquirer Home Country or Economy, 2013-2015
Table: Covered Transactions by Acquirer Home Country or Economy, 2013-2015

Chan: Any tips for prospective Hong Kong or mainland Chinese investors to mitigate the possible adverse impacts?

Savio: While some of FIRRMA's provisions came into effect straight away, significant changes to CFIUS’s scope and structure will not become effective until February 2020, or 30 days after CFIUS publishes a determination that the regulations and necessary resources to administer FIRRMA are in place, whichever is sooner. In the meantime, prospective investors, companies and other affected parties will have an opportunity to comment on the forthcoming proposed regulations, including definitions of key terms that will ultimately determine the scope of CFIUS review powers. Companies’ experiences in the pilot programme are likely to affect the feedback that they are able to provide during the notice and comment period that will follow the publication of proposed regulations.

While FIRRMA makes many changes to the CFIUS regime, it doesn’t alter the committee’s case-by-case approach to reviewing foreign investment transactions. For every transaction that it evaluates, CFIUS will continue to look at the potential threat posed by a particular investor, the vulnerability of the investment target, and the consequences of the transaction.  FIRRMA does not change this. In this regard, there may be cases where CFIUS sees no national security issues associated with a particular transaction, or sees ones that can be mitigated somehow.

Finally, it is important not to view FIRRMA in isolation. One needs to understand it in relation to wider issues, including the broader Sino-US trade dispute, and also a new export control reform law that passed at the same time as FIRRMA to control so-called “emerging” and “foundational” technologies. Both this new export control law and the trade dispute are underpinned and motivated by concerns about China’s acquisition of US technology and theft of IP in the context of the Made in China 2025 industrial policy.

While CFIUS is a legal process, it can become politicised, as we have seen in many prior transactions. Because of this, it’s important when dealing with CFIUS issues to have a clear overall strategy – not just a legal strategy but a public policy and public relations one as well.

Content provided by Picture: Louis Chan
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