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FIRRMA Will Soon Be a Familiar Name
CHANGES TO THE US PROCESS FOR FOREIGN INVESTMENT REVIEW
Since 2007 the federal government Committee of Foreign Investment in the United States (CFIUS) has been reviewing certain foreign direct investment into the United States. This summer, both houses of Congress have passed new legislation on inbound foreign investment, and the President has signed it into law on August 13, 2018. The new legislation, referred to as the Foreign Investment Risk Review Modernization Act, or FIRRMA for short, gives CFIUS more power and enlarges the range of the transactions that it reviews. In broad terms, the bill will re-charter CFIUS and make it into a full-blown federal agency with enhanced budget and staff, the right to charges fees for its reviews and substantially more meaningful enforcement authority. FIRRMA represents a forthright attempt by Congress to recognize the fundamental importance of inbound investment to the US economy while balancing it with its obligation to protect national security. The Committee’s expanded range of authority may surprise transactional lawyers and their clients at first, as the clearance process will be relevant in many dealings where it was not relevant before. Experienced CFIUS counsel will play an expanded role in navigating those who are not skilled with the Committee’s forms, procedures and intensive request and review process.
Up to now the authority of CFIUS to review and investigate transactions has been limited to acquisitions of control or potential control over US businesses by foreign persons, which typically were M&A deals, in cases where there was a nexus with national security. Under FIRRMA, as expanded by implementing regulations, the Committee's jurisdiction will extend beyond M&A deals to
- purchases or leases of real estate located in the US that also is near a US military installation, an air or a maritime port or other sensitive US Government property;
- minority or non-control investments, other than those that are purely passive, in three types of US businesses (described below) if the foreign investor gains access to material nonpublic technical information, rights as a board member or observer or involvement in substantive decision-making as a component of those investments;
- changes to rights of a foreign person with respect to a US business in which the foreign person has an investment if it results in foreign control;
- any transaction, control or otherwise, that arises as part of a bankruptcy proceeding or default on debt; and
- any other dealings intended to evade or circumvent FIRRMA.
The operating businesses within the scope of concern are those that deal with critical infrastructure, which term will be enumerated in expanded regulations, those that produce or develop critical technologies or those that maintain or collect sensitive personal data of US citizens. FIRRMA defines “critical technologies” and adds to the list “emerging and foundational technologies.”
Foreign persons who are citizens of US allies may be exempt or have less of a compliance burden than investors from countries that raise troubling trade or other issues with the US. In its legislative findings, FIRRMA recites that seven allies that collectively accounted for 72.1% of the value added by foreign-owned affiliates in the US and more than 80% of R&D expenditure by all foreign owned affiliates. Accordingly, the sense of Congress is that the Committee should take steps to maintain foreign direct investment flow from these seven allies.
FIRRMA becomes effective 18 months after its enactment date or 30 days after the Committee determines that the regulations and resources to administer the new regime are in place, whichever is sooner.
THOSE CHANGES WILL HAVE SIGNIFICANT IMPACT ON THE INVESTMENT PROCESS
FIRRMA is based on a bi-partisan recognition that the original 2007 statutory framework of CFIUS was created was not sufficient to meet the threats to US national security that have arisen over the past 11 years. Congress envisions a larger role for the Committee and has used this legislation to increase its staffing and budget for its enhanced jurisdiction and provided for other changes to support the Committee’s enlarged role. Because of the increase in scope, FIRRMA will affect many investment and other investment transaction in a variety of ways.
Primarily, CFIUS clearance now will be a prominent condition to closing of mergers and acquisitions, divestitures, investments, Chapter 11 plans and joint ventures with foreign parties, especially those with real estate transactions. Investment bankers and lawyers who ponder break-up fees and termination rights will have to contend with the timespans of reviews and investigations by the Committee. Recognizing the importance of the Committee review process, FIRRMA adds 15 days to the current 30-day statutory period for review, bringing it to 45 days. The added complexity of these transaction may provide an advantage to US counterparties in auction or other competitive situations.
FIRRMA also provides a new method for filing of notices of transactions filed with the Committee. Unlike filings with the Securities and Exchange Commission or antitrust filings made under Hart Scott Rodino, CFIUS has mandated no specific form for its submissions. Its current regulations detail the content of the form, but the forms of the notices themselves have become matters of practice between counsel who represent clients before the Committee and the Committee’s staff. The forms are long and require significant lawyers’ time to prepare and significant Committee time for the review. In recognition of the anticipated increased volume of filings, FIRRMA allows an abbreviated form of “declaration”--not more than 5 pages in length--which parties may submit to the Committee for an expedited response within 30 days. This form will allow the Committee to weed out those transactions in which it does not have an interest and on which it does not wish to expend its resources.
CFIUS expects to use monitoring as a tool for converting regulation of one-time transactions to continued surveillance of foreign ownership for as long as the ownership remains in place. FIRRMA enacts expansive provisions that address the imposition, use, modification and termination of mitigation agreements. The legislation provides guidance for the use of third party monitors. FIRRMA may well result in an enhanced role for experienced consultants and others who can assist in the enforcement of agreements and structures that permit foreign investment and protect the national security of the US at the same time. It may be that law firms with deep experience in certain industries can act as monitors. More likely, law firms with strong contacts with qualified monitors should be able to work with those monitors to resolve impediments that arise in the CFIUS clearance process.
Given the magnitude of the changes that FIRRMA will effect, counsel experience with CFIUS requirements, policies and procedures can provide effective assistance to clients now coming within the Committee’s enlarged scope of review.