CFIUS in a Nutshell
The Committee on Foreign Investment in the United States (“CFIUS”) was established in 1975 by Executive Order of then-President Gerald Ford for the purpose of helping the president oversee the national security implications that may arise from foreign direct investment in the U.S. economy.
CFIUS operates as an interagency committee, chaired by the U.S. Department of the Treasury. CFIUS is authorized to make recommendations to the President to block certain transactions involving foreign investments in U.S. businesses if the committee determines that the transactions raise national security risks.
Since CFIUS’ inception, the U.S. Congress has introduced several laws and amendments and several Administrations have promulgated additional regulations intended to strengthen the president’s ability to evaluate and block certain mergers, acquisitions, or takeovers of U.S. businesses by foreign entities. These changes to CFIUS have tended to correlate with concerns over certain countries’ attempts to increase their investments in the U.S. in a way that was perceived as a threat, such as fears over Japanese takeovers in the 1980s and Chinese takeovers more recently.
Blocked Deals Under CFIUS
Over the years, presidents have blocked several transactions following a CFIUS review and numerous other deals have fallen through under threat of a protracted or adverse CFIUS review.
President Obama, for example, blocked two deals during his presidency. In 2012, President Obama blocked a transaction involving the Ralls Corporation, an American company owned by Chinese nationals which had acquired wind farms in Oregon. President Obama ordered the Ralls Corporation to divest itself of the wind farm project because of its proximity to a U.S. Navy installation and facility. In 2016, President Obama exercised his powers under CFIUS again, by blocking the acquisition of Aixtron, a German semiconductor company with assets in the U.S., by a Chinese investment fund.
In 2017, President Trump, blocked the acquisition of U.S.-based Lattice Semiconductor Corp. by a Chinese investment firm on national security grounds. More recently, in 2018, President Trump blocked a mega deal involving Singapore-based Broadcom’s attempt to acquire U.S.-based semiconductor manufacturer Qualcomm in a $117 billion takeover bid, again due to national security concerns.
Recent Legislation and Regulation
In August 2018, the President signed into law the Foreign Investment Risk Review Modernization Act (“FIRRMA”) which further broadened the scope of transactions that can be considered under CFIUS and amended the process under which CFIUS filings are made. FIRRMA authorizes CFIUS to conduct pilot programs to implement provisions of the law that were not made effective at the time that the legislation was enacted.
The Pilot Program
In October 2018, the Treasury Department released interim regulations governing a new CFIUS pilot program (the “Pilot Program”). The Pilot Program entered into effect on November 10, 2018. Under the Pilot Program, CFIUS’ jurisdiction was expanded to cover non-controlling transactions involving investments by foreign persons in certain U.S. businesses that produce, design, test, manufacture, fabricate, or develop critical technologies that are utilized in connection with or designed by a U.S. business in one or more Pilot Program industry (a “Pilot Program U.S. Business”). The list of industries that are covered under the Pilot Program is provided as an annex to the regulation and is available here.
Additionally, the Pilot Program changed the longstanding voluntary nature of CFIUS filings and implemented a requirement to make mandatory declarations or filing of notices with CFIUS in certain circumstances.
Types of Non-Controlling Transactions Under the Pilot Program
Under the Pilot Program, non-controlling investments in a Pilot Program U.S. Business will fall under the purview of CFIUS if the investment provides the foreign investor:
- Access to any material nonpublic technical information in the possession of the Pilot Program U.S. Business;
- Membership or observer rights on the board of directors or equivalent governing body of the Pilot Program U.S. business or the right to nominate an individual to a position on the board of directors or equivalent governing body of the Pilot Program U.S. Business; or
- Any involvement, other than through voting of shares, in substantive decision-making of the Pilot Program U.S. Business regarding the use, development, acquisition, or release of critical technology.
Critical Technologies Under the Pilot Program
The Pilot Program regulation provides a list of what constitutes “Critical Technologies” that are subject to the regulation:
- Defense articles or services as set forth in the International Traffic in Arms Regulations (ITAR);
- Items included on the Commerce Control List under the Export Administration Regulations (EAR), for reasons relating to national security, chemical and biological weapons proliferation, nuclear nonproliferation, or missile technology; or relating to regional stability or surreptitious listening;
- Specially designed and prepared nuclear equipment, parts and components, materials, software, and technology and nuclear facilities;
- Select agents and toxins; and
- Emerging and foundational technologies
This last category of emerging and foundational technologies has yet to be defined, although the U.S. Department of Commerce has recently completed the first step of requesting public comment as part of the regulatory process, which will define these technologies. The reach of the Pilot Program will be greatly affected by whether “emerging and foundational technologies” comes to be defined broadly or narrowly. If defined broadly, many more foreign investors looking to make non-controlling investments in the United States can expect to have to go through the CFIUS process under the Pilot Program prior to completing a transaction.
Mandatory Filings Under the Pilot Program
The Pilot Program under FIRRMA has also instituted a mandatory filing requirement for all parties to a Pilot Program covered transaction. Parties may file a short-form “declaration” or a longer “notice,” which is subject to CFIUS’ standard procedures.
Declarations must be filed at least 45 days prior to a transaction’s expected completion date. CFIUS then has 30 days to approve or reject the transaction, request additional information from the parties, or require the parties file the more detailed notice.
Failure to make the mandatory filings with CFIUS for Pilot Program covered transactions could lead to the imposition of civil monetary penalties by CFIUS of up to the value of the transaction.
Effect on Foreign Investors and Foreign Companies
Foreign investors, including venture capital firms, angel investors, and private equity funds considering making an investment in a U.S. business should evaluate whether the target company is considered a Pilot Program U.S. Business, whether it operates in an industry covered by the Pilot Program, and whether it produces, designs, tests, manufactures, fabricates, or develops critical technologies. If the answer is yes, then the parties to the transaction will have to follow the mandatory filing requirements under the Pilot Program to obtain approval for the transaction.
A foreign company considering establishing a presence in the United States should evaluate whether it might be covered under the Pilot Program due to its industry affiliation and technology focus, as this may affect its ability to raise capital in the future from non-U.S. investors.