If your company is thinking about selling any assets to a foreign buyer or forming some type of foreign partnership (e.g., joint venture), things are about to change on the U.S. regulatory landscape that may have significant impact.
Established in 1975, The Committee on Foreign Investment in the United States (CFIUS) is an interagency body that assists the President of the United States in overseeing the national security aspects of foreign investment in the U.S. Before 9/11, most transactions reviewed by CFIUS were ultimately approved under some mutually-agreed risk mitigation structure. In recent years, however, this Committee has gotten a lot more challenging and complex. CFIUS is receiving heightened attention as several high-profile deals (such as the recent attempt by Singapore-based Broadcom’s to purchase Qualcomm) are being blocked due to national security concerns.
As a former CFIUS regulator and the CEO of a security risk management advisory firm, I believe that it does have room for improvement. There are loopholes that need to be closed. Interestingly, at a time in Washington when hyper partisanship has stymied most legislative initiatives, it appears that members of both parties are surprisingly agreeing on something—that CFIUS could use some tightening up. This real and growing bipartisan support for CFIUS reform has led to a bill that is designed to do just that.
The bill is called the Foreign Investment Risk Review Modernization Act (FIRRMA). If passed in its current form, FIRRMA will fundamentally alter the scope of CFIUS reviews and the transactions it covers. This will have significant implications for U.S. management teams and their boards. To help board directors and senior executives make more informed decisions, in preparation for these coming changes, I offer below the following insights.
Tougher Scrutiny Includes Joint Ventures & Greater Weighting of Economic Security Factors
Republicans in Congress have been trying for years to alter the scope of CFIUS. Since they control both houses of Congress and the White House, they could potentially pass CFIUS reform legislation on their own. That said, they are wisely not pursuing the partisan lone ranger route. Instead, Senator John Cornyn (the lead Senate sponsor) is courting and has received support from Democrats to enhance the likelihood of the FIRRMA bill passing. While the bill has many facets, items in legislative play that could affect your business include the following:
- Expands to Cover Joint Ventures & Other Tech Transfer Deals — if your company is thinking about doing a foreign joint venture or other type of agreement that involves the outbound transfer of intellectual property, it may now need to be approved by CFIUS.
Greater Weighting of Economic Security Factors – CFIUS’s mandate is primarily focused on “national security” as distinct from “economic security.” While in practice CFIUS does consider some economic factors, the new legislation would require that CFIUS consider whether the proposed transaction either:
- Reduces the U.S. technological or industrial dimension relative to “countries of special concern”; or
- Increases the cost to the U.S. government of acquiring or maintaining defense systems.
- Personally Identifiable Information (PII) Trigger — Both for national security and for economic security reasons any transaction (even a joint venture) involving PII is likely to trigger CFIUS review.
- Mandatory Review for Transactions with State-Owned Enterprises — The new bill imposes a new, mandatory “light filing” for certain transactions, including ones involving foreign governments or state-owned enterprises. While these “mandatory filings” are undoubtedly aimed at China, they will cover other sovereign wealth funds and other enterprises owned by other states.
- Oversight of Passive Investments — Under the current CFIUS law, transactions “solely for the purpose of investment,” or where the foreign investor has “no intention of determining or directing the basic business decisions of the issuer,” are exempt from review. Given the many ways foreign owners can guide investment decisions behind the scenes, the current bill looks to eliminate those loopholes.
As companies expand their businesses in this increasingly interdependent global economy, management and boards need to remain vigilant of potential CFIUS regulatory issues.