Changes Coming for U.S. Foreign Investment Review Process

The U.S. government is expected within the next few weeks to enact the first comprehensive amendments to its foreign investment review process since 2007. The Foreign Investment Risk Review Modernization Act (FIRRMA) addresses the scope, procedures and timing by which transactions involving non-U.S. persons are reviewed by the Committee on Foreign Investment in the United States (CFIUS). Several features of FIRRMA warrant particular attention for private equity investors and certain government-affiliated organizations, including pension plans.

What You Need To Know

Key changes of FIRRMA include:

• broadening the scope of "covered transactions" over which CFIUS has jurisdiction to review, and the President to block, which will now include:
  • real estate acquisitions, leases and concessions involving airports, maritime ports, and property that is within close proximity to U.S. military or other sensitive facilities;
  • so-called "other investments": less than a controlling interest in U.S. businesses that deal with critical technologies, critical infrastructure or sensitive personal data of U.S. citizens;
  • certain changes in a non-U.S. person's rights with respect to its investment in a U.S. business; and
  • any agreement or arrangement intended to evade or circumvent a CFIUS review.
• instituting a new "declaration" process by which an abbreviated filing for certain transactions is mandatory and for other transactions may expedite CFIUS action without a full submission;
• lengthening the time period of the formal CFIUS process by increasing the initial review period from 30 to 45 calendar days and permitting CFIUS to extend an investigation for an additional 15 calendar days, but limiting the pre-filing period to 10 business days when the parties stipulate that the transaction is a covered transaction;
• allowing for a limited judicial review of CFIUS determinations;
• authorizing CFIUS to impose filing fees of up to US$300,000 (subject to an annual inflation adjustment); and
• empowering CFIUS to conduct pilot programs in the course of implementing FIRRMA.

Other Investments

Within the new scope of covered transactions is the "other investment" category which captures a wide range of minority investments not previously subject to CFIUS review, specifically non-controlling investments that afford a non-U.S. person the following.

• Access to any material non-public technical information in the possession of a U.S. business.
• Membership or observer rights on the board of directors or equivalent governing body of a U.S. business or the right to nominate an individual to a position on the board of directors or equivalent governing body.
• Any involvement, other than through voting of shares, in substantive decision making of the U.S. business regarding sensitive personal data of U.S. citizens maintained or collected by the U.S. business, critical technologies or critical infrastructure.

An important limitation on the other investment category, however, is significant for private equity investors. FIRRMA excludes indirect investments by a non-U.S. person made through an investment fund—even if the non-U.S. person is a member of the fund's advisory board or a committee of the fund—so long as:

• the fund is managed exclusively by a U.S. general partner;
• the advisory board or committee does not have the ability to control investment decisions of the fund or decisions made by the general partner, managing member, or equivalent related entities in which the fund is invested;
• the non-U.S. person does not otherwise have the ability to control the fund; and
• the non-U.S. person does not have access to material non-public technical information as a result of their participation on the advisory board or committee.

Another potential limitation is that the amendments delegate to CFIUS the task of defining a "foreign person" in connection with "other investments," which could exempt certain categories of non-U.S. investors or investors from specified countries.

Mandatory Declarations for Foreign Government Affiliated Transactions

Under FIRRMA, certain entities related to foreign governments will be required to file a declaration with CFIUS for an acquisition of a "substantial interest" in a U.S. business that involves critical technologies, critical infrastructure or sensitive personal data of U.S. citizens.

The amendments state the definition of "substantial interest" shall exclude interests exempted from the definition of "other investment," (e.g., investments through certain funds and any interest less than a 10% voting interest).

FIRRMA also authorizes CFIUS to waive a mandatory declaration from a government-affiliated non-U.S. person who demonstrates their investments are not directed by a foreign government and who has a history of cooperation with CFIUS.

Expected Timing

The new timeframes for the CFIUS review will take immediate effect upon FIRRMA's expected August enactment, except for the pre-filing changes. The real estate and other investment categories of covered transactions, the pre-filing provision, and the declaration process will take effect upon the earlier of 18 months after FIRRMA's enactment or 30 days after publication of CFIUS regulations implementing those provisions.

Before regulations are published, CFIUS is allowed to implement a pilot program for FIRRMA provisions 30 days after the publication of the scope and procedures of such pilot program.