On 10 October 2018, the US Treasury Department, which chairs the Committee on Foreign Investment in the United States (CFIUS), issued an interim rule to implement portions of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). The newly implemented interim rule brings big changes to CFIUS reviews by:
(1) Making the CFIUS process mandatory for covered foreign investments; and
(2) Broadening the definition of “covered transaction” under CFIUS.
The CFIUS is a federal multi-agency committee chaired by the treasury secretary and its members include secretaries of homeland security, commerce, defence, state, energy and labour, the attorney general, the directors of national intelligence, the US trade representative, and the director of the office of science and technology policy. The multi-agency committee is charged with protecting US national security by reviewing economic transactions initiated by foreign entities. However, prior to enacting FIRRMA, the CFIUS was only a voluntary process to review the transactions that could result in foreign control of a US business.
FIRRMA, which was signed into law by the Trump administration on 13 August 2018, implements significant changes to the CFIUS process, including: (1) expanding CFIUS jurisdiction and the scope of its review process; (2) making notification of certain transactions mandatory; (3) lengthening the time period of the review process from 30 to 45 days; (4) expanding the factors that CFIUS shall consider in its analysis; and (5) broadening the authority for the CFIUS and the president.
However, many significant changes are still subject to rulemaking by the treasury. On 10 October 2018, the treasury released two interim rules announcing new regulations that implement some of the most fundamental and transformational aspects of FIRRMA, especially the new pilot programme. Authorized by FIRRMA, this represents a substantial broadening of covered transaction, and makes filing certain notifications mandatory.
The pilot programme, which became effective on 10 November 2018, covers in particular new transactions that were made after 10 November 2018, and ongoing transactions that would close after 10 November 2018, subject to the broadened definition of covered transaction under FIRRMA. The key changes of covered transaction are subject to the nature of the business and the rights that the foreign investor will receive from the transaction.
First, the pilot programme only applies to US businesses that are perceived as critical technologies, together with certain specified industries. The interim rule defines critical technologies conforming with the FIRRMA’s definition, which includes emerging and foundational technologies controlled under the Export Control Act of 2018.
The pilot programme only applies to the 27 industries specified in the North American Industry Classification System code, which considers that “certain strategically motivated foreign investments” in these industries could pose a threat to “US technological superiority” and national interest.
When comparing these 27 industries to the 10 high-tech manufacturing sectors that were highlighted in the “Made in China 2025” plan, we have reasonable grounds to believe that the reform of the CFIUS, at least partially, is targeting Chinese investment trends.
Historically, the CFIUS only retains jurisdiction over transactions that result in foreign investors having a controlling interest in a US business, and this causes some foreign investors to structure their investments to technically avoid having any controlling interest, but still to have the right over certain sensitive information and technologies that could affect US national security.
To address such concerns, under the pilot programme, the CFIUS shall retain jurisdiction over certain non-controlling investments that involve critical technologies under particular industries, if such investments provide a foreign person or foreign entity access to non-public US businesses’ technical information, board membership or observer rights, or involvement in material decision making.
A mandatory declaration is required for all transactions under the pilot programme. Although the CFIUS retains the right to review whether a transaction is in line with US national security, whether the parties filed the transaction with the CFIUS or not, the CFIUS will still ostensibly be a voluntary process.
The interim rule, however, requires the parties to submit declarations for all transactions that are subject to the pilot programme at least 45 days prior to close, otherwise the parties shall face penalties up to the transaction value.
The pilot programme answers the question of whether the treasury would let the regulatory process follow the strict rules initiated by FIRRMA. Under such a trend, foreign investors, especially Chinese investors, will face unprecedented hurdles due to an unseen and powerful gatekeeper, CFIUS.
The authors suggest that Chinese investors seek professional advice to structure their transaction, smooth the CFIUS review process, and try to avoid the adverse influence of CFIUS reform at an early stage of a potential investment project.
Wang Jihong is a senior partner and Zhao Huiqi is an associate at Zhong Lun Law Firm
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