Regulation, tension, and security continue to heighten regarding foreign investment in and foreign influence on the United States. Specifically, the Committee on Foreign Investment in the United States (CFIUS) is about to see a major revamp under the Foreign Investment Risk Review Modernization Act (FIRRMA) update scheduled to take place in February 2020. Foreign businesses operating in the United States and third-party professionals assisting those operations need to be hyper aware of these updates.
Some quick background: CFIUS is an interagency committee authorized to review certain transactions involving foreign investments in the United States to determine the effect of those transactions on US national security. FIRRMA aims to expand CFIUS jurisdiction to address growing national security concerns over foreign exploitation of certain investment structures that have traditionally fallen outside of CFIUS jurisdiction. Additionally, FIRRMA is designed to modernize CFIUS processes to enable more timely, effective reviews of covered transactions.
According to the US Department of the Treasury, the following changes to CFIUS will be included in FIRRMA:
New Covered Transactions
A covered transaction is any transaction that, regardless of the actual arrangements for control written in the transaction terms, results or could result in control of a US business by a foreign individual or entity.
The following transactions will be added under the “covered” category:
(1) Real estate transactions located in proximity to sensitive government facilities
(2) “Other investments” that give a foreign individual access to material, non-public technical information
(3) Any change in a foreign investor’s rights that results in foreign control of a US business
(4) Any other transaction designed to circumvent CFIUS jurisdiction
Reporting a covered transaction to CFIUS is, at least initially, voluntary. A voluntary CFIUS submission requires extensive disclosure, and the investigation period can take up to 90 days. However, if CFIUS classifies a transaction as covered and a business did not voluntarily submit it for review, CFIUS may initiate a review to determines whether or not the transaction is a national security threat.
If a transaction is voluntarily submitted for review and CFIUS deems it acceptable, the transaction is protected from further review. If CFIUS determines the transaction is a national security threat, however, it will either recommend mitigation measures or a complete divestiture of the deal. CFIUS decisions are exempt from judicial intervention, and the businesses involved are responsible for all costs of complying with any mitigation agreements or imposed conditions. Additionally, any business that, intentionally or through gross negligence, violates the mitigation agreements or imposed conditions can be fined up to $250,000 per violation.
Declarations Procedure
The addition of a new “declarations” procedure will allow for an abbreviated, or “light,” filing process that can result in shorter review timelines. It also gives CFIUS discretion to require businesses to file with it before closing a transaction. This procedure may lessen the initial burden on entities choosing to submit voluntarily.
Review Period Expansion
CFIUS’s review period will be expanded from 30 to 45 days, and the update also allows investigations to be extended for an additional 15 days under extraordinary circumstances. An already lengthy process seems to be getting longer, likely due to submission overload.
Mitigation Agreement Requirements
The update includes the addition of compliance plans to inform the use of mitigation agreements. Previously, businesses were often left to follow CFIUS rulings without direction. Compliance plans may allow for simpler conformity to mitigation measures imposed by CFIUS.
Hiring Authority and Filing Fees
The update will grant special hiring authority for CFIUS and will establish a collection fund for new CFIUS filing fees.
In light of these approaching updates, if your company is considering giving any control to a foreign individual or entity, whether by appointing a new director, allowing debt or equity investment, or some other method of granting authority or control, you may want to contact an attorney to discuss the potential implications of a CFIUS review for your business.