CFIUS Reform Legislation Introduced

Expanded Scope of Transactions Falling Within Scope of CFIUS Authority
FIRRMA would preserve CFIUS authority to review transactions that result in control of a U.S. business by a foreign person but would expand the scope of “covered transactions” to include, among other things:

• Real Estate: The purchase or lease of U.S. real estate located close to U.S. military installations or sensitive U.S. Government properties. CFIUS already considers proximity of a U.S. business to sensitive installations in assessing national security risks, but FIRRMA would give CFIUS authority to review real estate transactions even if the real estate is unimproved or does not host an existing U.S. business.
• Critical Technology or Critical Infrastructure: Any non-passive investment by a foreign person in a U.S. critical technology or U.S. critical infrastructure company. Such an investment would be covered, regardless of the size of the transaction and even if the foreign investor does not obtain control over the U.S. business.
• IP Licensing and Associated Support: Contributions by a U.S. critical technology company of both intellectual property and associated support to a foreign person through arrangements such as a joint venture. Such a transaction would be a “covered transaction,” even if it does not give a foreign investor control over a U.S. business.

In certain cases, CFIUS may treat these three types of transactions as not “covered transactions,” based on criteria such as whether the investor’s country has entered into a mutual defense treaty with the United States or a mutual agreement with the United States to safeguard national security as it pertains to foreign investment, and the national security review process of the investor’s home country.

Narrow Scope of Passive Investments
Current CFIUS regulations create a safe harbor for investments of 10 percent or less of the voting equity in a U.S. business, provided that the investment is “solely for purpose of passive investment.”

FIRRMA specifies that the following circumstances would render an investment not passive:

• The foreign investor has access to nonpublic technical information in the possession of the U.S. business, including certain information regarding the design, development, testing, production or manufacture of critical technology.The foreign investor has access to any nontechnical information (to be described by regulation) in the possession of the U.S. business that is not available to all investors.
• The foreign investor has membership or observer rights on the board of directors or equivalent body of the U.S. business, or the right to nominate an individual to such a position.
• The foreign investor is involved in substantive decision-making (other than through voting of shares) pertaining to any matter involving the U.S. business.
• The foreign investor and the U.S. business have a parallel strategic partnership or other material financial relationship.

While any of these features render a transaction not passive, the transaction will only be a covered transaction if it falls within the scope of covered transactions discussed above. Through regulation, CFIUS may identify other features that render an investment not passive.

The narrow definition of passive investment would have a particularly significant impact on investments in a U.S. critical technology or critical infrastructure company. As noted, any non-passive investment by a foreign person in such a business would be a covered transaction. Thus, even if a foreign person acquired a small stake (e.g., less than 10 percent) in such a business, the investment would be a covered transaction if any of the features specified above were present.

Factors for Consideration
The proposed legislation expands the list of national security factors CFIUS should take into account, including potential cybersecurity vulnerabilities; exposure of personally identifiable information or genetic information of U.S. citizens; the potential effect on U.S. technological and industrial leadership, including the potential reduction of technological or industrial advantage over countries of special concern; and the potential for loss of, or other adverse effects on, technologies that provide the United States a strategic national security advantage.

Declarations and Mandatory Filings
FIRRMA would allow the filing of short “declarations” (approximately five pages) in lieu of a full written notice that could result in an expedited determination. Under the legislation, CFIUS must endeavor to determine, within 30 days of receiving the declaration, whether to: (1) require a formal notice; (2) initiate a review; or (3) clear the transaction.

Declarations or full written notices would be required for transactions involving the acquisition of a voting interest of at least 25 percent in a U.S. business by a foreign person in which a foreign government owns, directly or indirectly, at least a 25 percent voting interest. Regulations could specify other instances where a declaration or written notice would be mandatory.

Mandatory declarations must be submitted not later than 45 days before the completion of the transaction (or, if a written notice is filed in lieu of a mandatory declaration, the notice must be filed not later than 90 days before the completion of the transaction). Failure to submit a mandatory notice/declaration would result in penalties to be determined by regulations.

Extended Time Frames and New Filing Fees
CFIUS reviews consist of a 30-day review followed by (if necessary) a 45-day investigation. FIRRMA would extend the initial CFIUS review to 45 days, and would authorize CFIUS to extend the 45-day investigation—once, and only in an “extraordinary circumstance”—by an additional 30 days.
FIRRMA would require a filing fee for a written notice. The amount would be set by regulation but capped at the lower of 1 percent of the value of the transaction or $300,000 (indexed for inflation).

Other Points
The legislation would clarify a number of procedural points. For example, it would make clear that CFIUS may order suspension of a transaction while a review or investigation is pending. It also specifies the procedures for appealing CFIUS actions alleged to be contrary to a constitutional right, power, privilege or immunity. Only parties that submitted a declaration or written notice may submit a petition to appeal.