FIRRMA Expands CFIUS Jurisdiction In 2 Major Ways

Ronald A Oleynik is a Partner in our Washington DC office.

Antonia I Tzinova is a Partner in our Washington DC office.

Seth M.M. Stodder is a Partner in our Los Angeles office.

Libby Bloxom is an Associate in our Washington DC office.

HIGHLIGHTS:

President Donald Trump signed the John S. McCain National Defense Authorization Act for Fiscal Year 2019 (NDAA) into law on Aug. 13, 2018. Among other things, the NDAA contains the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), the first major legislative reform impacting reviews of foreign acquisitions by the Committee on Foreign Investment in the United States (CFIUS) since 2007. FIRRMA brings important changes to the law that all involved in foreign investments in U.S. business should be aware of, and it does emphasize the continuing shift of the CFIUS process from a technical exercise toward a more political trade policy decision. These changes boil down to two major expansions of CFIUS jurisdiction: 1) real estate transactions of developed and undeveloped land, and 2) non-controlling foreign interests in critical infrastructure, critical technologies or sensitive personal data. President Donald Trump signed the John S. McCain National Defense Authorization Act for Fiscal Year 20191 (NDAA) into law on Aug. 13, 2018. Among other things, the NDAA contains the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), the first major legislative reform impacting reviews of foreign acquisitions by the Committee on Foreign Investment in the United States (CFIUS) since Congress passed the Foreign Investment and National Security Act of 2007 (FINSA) in the wake of the Dubai Ports World imbroglio.

FIRRMA is an important piece of legislation that expands the reach of CFIUS to cover more types of transactions - but the changes are far less drastic than some of the original proposals. The new law expands CFIUS jurisdiction, especially with respect to real estate transactions and non-controlling interests in businesses involved in critical infrastructure, critical technologies and access to sensitive personal data. It also makes certain filings involving foreign governments mandatory. Most of the changes affect only procedure and funding for the Committee and codify recent CFIUS practice. Nevertheless, FIRRMA brings important changes to the law that all involved in foreign investments in U.S. business should be aware of, and it does emphasize the continuing shift of the CFIUS process from a technical exercise toward a more political trade policy decision.

Expanded CFIUS Jurisdiction

The most important changes brought by FIRRMA involve the significant expansion of CFIUS jurisdiction to review certain real estate transactions that were not previously of interest to CFIUS and transactions not resulting in the foreign control of a U.S. business.

The authority of the President of the United States to suspend or prohibit certain transactions is provided in Section 721 to the Defense Production Act of 1950, as amended (50 U.S.C. § 4565) (the Act).2 The regulations implementing the Act are codified at 31 C.F.R. §800 (CFIUS Regulations).3 Under the Act, the President can suspend or prohibit any "covered transaction" when, in the President's judgment, there is credible evidence to believe that the foreign person exercising control over a U.S. business might take action that threatens to impair the national security of the United States, and the law does not otherwise provide adequate protection against such action.4 FIRRMA modifies the definition of "covered transactions."

Under the old standard, a "covered transaction" was any transaction that was proposed, pending or concluded by, or with, any foreign person, which could result in control of a U.S. business by a foreign person.5 "Critical infrastructure" was addressed within the context of a covered transaction and defined as "a system or asset, whether physical or virtual, so vital to the United States that the incapacity or destruction of the particular system or asset of the entity over which control is acquired pursuant to that covered transaction would have a debilitating impact on national security."6 Thus, CFIUS jurisdiction covered any acquisition of a U.S. business that would result in foreign control and that might threaten U.S. national security. It has long been the practice of the United States to leave the term national security undefined to allow the Committee and the President maximum flexibility in asserting jurisdiction over foreign acquisitions of U.S. businesses.

By enacting FIRRMA, Congress made certain practices explicit and, in the process, expanded the reach of CFIUS. It did this by amending the term "covered transaction" to include:

any non-passive investment by a foreign person in any U.S. business involved in critical infrastructure, the production of critical technologies or that maintains sensitive personal data that, if exploited, could threaten national security any change in a foreign investor's rights regarding a U.S. business the purchase, lease, or concession by or to a foreign person of certain real estate in close proximity to military or other sensitive national security facilities, and any other transaction, transfer, agreement, or arrangement designed to circumvent or evade CFIUS.7 These changes boil down to two major expansions of CFIUS jurisdiction: 1) real estate transactions of developed and undeveloped land, and 2) non-controlling foreign interests in critical infrastructure, critical technologies or sensitive personal data.

1. Real Estate Transactions - the Close Proximity Test

   Until FIRRMA, CFIUS had jurisdiction over transactions that involved a "U.S. business," i.e., a going concern. While assets of a business that comprised most of the business would qualify...