On August 13, 2018, the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) became law, radically expanding the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS). CFIUS is an interagency committee chaired by the Department of the Treasury that is authorized to review transactions involving foreign investment in the United States in order to determine the effect of such transactions on national security.
FIRRMA’s Pilot Program, which became effective November 10, 2018, outlines 27 industries on which critical technology reviews will be focused. These industries include defense-related technologies, such as aircraft and missiles, as well as high-tech fields like computer and semiconductor manufacturing, telecommunications, batteries, and nanotechnology. The Pilot Program will remain in effect until the issuance of the official implementing regulations for FIRRMA, likely in February 2020.
Historically, CFIUS review primarily covered mergers, acquisitions or takeovers that could result in foreign control of a U.S. entity and where notifying CFIUS of foreign investment was optional. Now any amount of investment (even non-controlling investment) in industries covered by the Pilot Program have required filings and civil penalties—the amount of which could approximate the entire value of the transaction.
Additionally, FIRRMA expanded CFIUS review to include U.S. real estate transactions. Although Chinese investment in U.S. real estate has dropped dramatically since China enacted tighter regulations on outbound investments, expanded CFIUS review serves as another lever in limiting Chinese control of assets in the United States.
This enhanced CFIUS review represents one of the strongest tools in the U.S. arsenal against China in the ongoing U.S.-China trade war. FIRRMA received bipartisan support in both houses of Congress, indicating a rare unifying concern in an era of inter-party conflict. Given the focus of the pilot program on investments in high-tech industries and related mandatory disclosures, FIRRMA seems to primarily be a technology protectionist policy.
Armed with FIRRMA, CFIUS has already taken its protectionist mandate to heart by pressuring companies with ties to China. CFIUS review even played an early role in what could potentially be one of the largest U.S. telecommunications transactions in history by forcing T-Mobile’s parent company Deutsche Telekom and Sprint’s parent company SoftBank to agree to curb their use of Huawei’s network and telecommunications gear across the world, including both companies’ major markets in the U.S. and Europe. The U.S. government has expressed concerns that Huawei’s equipment may contain “back doors” for the Chinese government to exploit, citing close ties between Huawei’s and the Chinese military. This is especially important when Huawei is a leader in cutting-edge 5G mobile network technologies, a newer, faster network that the U.S., Canada, and Europe are hoping to deploy in the near future.
Similarly, in an unprecedented move against an unannounced and unagreed-upon deal, CFIUS preemptively issued a letter in early March 2018 outlining concerns surrounding Broadcom’s attempt to buy Qualcomm. This could have quashed the deal in its infancy. Ultimately, President Trump himself blocked the Broadcom-Qualcomm deal, but other technology-related companies and investors took note of CFIUS’s increasing role. Again, the government was worried about Chinese-related investments.
Expanded CFIUS review is likely to continue to be a concern for foreign investment, especially investment originating from China. It will also be a concern for U.S. high-tech industries and startups that seek investment from foreign sources or seek to be acquired.
There are exceptions to this expanded CFIUS review. Many foreign companies have been advised to seek greenfield investments, where the company will build up their own infrastructure and subsidiaries in the U.S. instead of acquiring or merging with local entities. These transactions are beyond the reach of CFIUS. However, if the foreign-owned U.S. subsidiary seeks to invest or conduct a merger or similar transaction, those will fall under CFIUS review. Some U.S.-controlled private equity and venture capital may be exempt, serving to keep capital investment flowing into U.S. startups, especially in the San Francisco Bay Area.
FIRRMA has brought expanded CFIUS review into the limelight and it will be a tool in the federal government’s regulatory arsenal against foreign investors and rival countries for years to come.*
*Ben Black is a Contributing Editor on the Michigan Technology Law Review. He can be reached at blblack@umich.edu.