On August 1, 2018, Congress passed the National Defense Authorization Act for 2019 (NDAA), which includes the Foreign Investment Risk Review Modernization Act (FIRRMA). FIRMMA is designed to "modernize and strengthen" the Committee on Foreign Investment in the U.S. (CFIUS), an interagency committee, led by the U.S. Department of Treasury, which reviews proposed foreign investments in U.S. businesses and can advise the president to block such deals on national-security grounds. Furthermore, the NDAA would include the Export Controls Act of 2018 (ECA), which will make changes to U.S. export controls administered by the U.S. Department of Commerce Bureau of Industry and Security (BIS). The NDAA is expected to be signed into law soon.
Changes to CFIUS under FIRRMA
Among the changes to be implemented under FIRRMA are the following:
- Expansion of "covered transactions": CFIUS is currently authorized to review mergers, acquisitions, and takeovers that may result in control of a U.S. business by a foreign person. However, FIRRMA will create four additional kinds of "covered transactions," which would include:
- Real estate transactions: Purchases or leases of land, air, or sea ports, or of land located near U.S. military installations and other sensitive locations;
- Certain non-controlling investments: Certain non-controlling investments in U.S. businesses involving "critical infrastructure," "critical technologies," or "sensitive personal data" of U.S. citizens. "Critical technologies" is defined to include "emerging and foundational technologies" as discussed further below;
- Change in rights of foreign person: Any change in rights that a foreign investor has in a U.S. business if the change may result in foreign control of the U.S. business or a non-controlling investment involving "critical technology," "critical infrastructure," or "sensitive personal data" of U.S. citizens; and
- Evasion and circumvention: Any transaction intended to evade or circumvent CFIUS's review.
- Notification via "Declarations": FIRRMA creates an expedited notification process wherein parties may submit a brief "Declaration," instead of a complete joint voluntary notice as currently required. CFIUS will have 30 days to take action on the Declaration and may respond by, inter alia, requesting a full written notice or clearing the transaction without further action. In most instances, Declarations can be filed at the parties' discretion and would generally be less than five pages. However, in certain cases, Declarations will be mandatory unless waived by CFIUS, including for investments resulting in the acquisition of a "substantial interest" by a foreign government in a U.S. business relating to "critical infrastructure," "critical technology," or "sensitive personal data" on U.S. citizens.
- Changes to review period: The initial review period will be extended from 30 days to 45 days. The 45-day investigation time frame, however, will remain unchanged, but can be extended for an additional 15 days under "extraordinary circumstances." Furthermore, CFIUS will be required to provide comments on or accept a prefiling or formal notice within ten business days of its submission, provided the parties have stipulated to the transaction being a "covered transaction."
- Filing fees: CFIUS is authorized to charge filing fees based on the value of the transaction, not to exceed costs of administration, and establish a prioritization fee to prioritize the timing of the response of the Committee. The filing fee cannot exceed the lesser of one percent (1%) of the transaction value or $300,000 (to be adjusted annually for inflation).
- Challenges to CFIUS Decisions: FIRRMA makes certain other significant changes to the CFIUS process, including requiring challenges to CFIUS decisions to be brought before the U.S. Court of Appeals for the District of Columbia Circuit and allowing CFIUS to share information with other agencies and allies at the direction of the Secretary of Treasury.
Changes to Export Controls under the ECA
The ECA, also part of the NDAA, makes critical changes to U.S. export controls by expanding the restrictions to now cover "emerging and foundational technologies," which are not currently listed on either the Commerce Control List (CCL) or the U.S. Munitions List (USML). Namely, under the ECA, the U.S. Department of Commerce ("Commerce") is required to establish a system of export controls on "emerging and foundational technologies" identified pursuant to an interagency process as being "essential to the national security of the United States." Commerce is required to establish controls on such technology based on the particular technology's potential end use and end users and in consideration of the countries subject to U.S. export restrictions. At a minimum, a license will be required to export "emerging and foundational technologies" to any country subject to an embargo, including an arms embargo (e.g., China). Meanwhile, license applications for certain exports of "emerging and foundational technologies," including applications on behalf of a joint venture, may require the applicant to disclose the identity of the foreign party and/or the foreign ownership. Finally, among other changes, the ECA repeals and replaces the Export Administration Act of 1979, and codifies the authorities and practices under which Commerce has administered export controls.
Conclusion
In the coming months, CFIUS and Commerce will implement FIRRMA and ECA via regulations that define key terms and processes provided for in the legislation. We will continue to monitor these developments and provide updates as needed.