An Eight-Part Introduction to the Foreign Investment Risk Review Modernization Act
Part 2: CFIUS' Expanded Jurisdiction
Last week, in anticipation of The Foreign Investment Risk Review Modernization Act’s (“FIRRMA”) impending passage, we provided a comprehensive overview of the Committee on Foreign Investment in the United States (“CFIUS”) and the regulations on which it relies.
This week, we will examine the manner in which FIRRMA expands CFIUS’ jurisdiction, and will focus on the five new types of acquisition/investment that will be considered “covered transactions” under the legislation.
Increasingly, CFIUS is concerned over foreign acquisitions of real estate that is in close proximity to military installations and offer the acquirers an opportunity to surveil, or interfere with, such installations. It was precisely this type of acquisition that was at issue in the now infamous Ralls review.
At present, though, CFIUS’ jurisdiction over such transactions is limited to circumstances in which a business, as opposed to the underlying property, is being acquired, where the business has a physical presence in close proximity to sensitive installations.
FIRRMA seeks to close this loophole by expanding CFIUS’ jurisdiction to transactions resulting in “the purchase or lease by a foreign person of, or a concession offered to a foreign person with respect to, private or public real estate that—
a) is located in the United States;
b) is, is located at, or will function as a part of a land, air, or maritime port;
c) is in close proximity to a United States military installation or another facility or property of the United States Government that is sensitive for reasons relating to national security; could reasonably provide the foreign person the ability to collect information on activities being conducted at such an installation, facility, or property; or could otherwise expose national security activities at such an installation, facility, or property to the risk of foreign surveillance; and
d) meets such other criteria as the Committee prescribes by regulation, as long as such criteria do not expand the categories of real estate to which this clause applies beyond the categories [described above].
Notably, FIRRMA contains an exception for leases or purchases of “a single ‘housing unit’, as defined by the Census Bureau; or real estate in ‘urbanized areas’, as defined by the Census Bureau in the most recent census, except as otherwise prescribed by the Committee in consultation with the Secretary of Defense.”
Nonetheless, this new category of covered transactions is a remarkable expansion of CFIUS’ jurisdiction and necessitates that real estate firms and investors/acquirers familiarize themselves with the updated CFIUS regulations given that their sales and investments/acquisitions may now be subject to CFIUS review.
It would also be prudent for parties to U.S. real estate transactions to, under certain circumstances, engage security consultants to advise them on whether their sales/acquisitions are in close proximity to not only conspicuous military installations but also the more discrete real estate tracts across the country that are reserved for military training and testing.
Critical Technology Companies
Another vulnerability on which CFIUS has recently been focused is the strategic acquisition by foreign entities (and foreign governments, specifically) of advanced U.S. technology.
FIRRMA addresses this threat by expanding CFIUS’ jurisdiction to investments in a “United States critical technology company” with which the investor is unaffiliated.
FIRRMA defines a “United States critical technology company” as “a United States business that produces, designs, tests, manufactures, or develops one or more critical technologies…” and, importantly, defines “critical technologies” as “technology, components, or technology items that are essential or could be essential to national security…”
So as to avoid any doubt, FIRRMA affirmatively includes under the definition of “critical technologies” defense articles or defense services controlled under the International Traffic in Arms Regulations; items controlled for certain purposes under the Export Administration Regulations; certain specially designed and prepared nuclear equipment, parts and components, materials, software, and technology; and select agents and toxins.
FIRRMA also includes under the definition of “critical technologies” certain “emerging and foundational technologies” that shall be determined as such through a new interagency process lead by the Departments of Commerce, Defense, and State, and other federal agencies.
Critical Infrastructure Companies
CFIUS has made no secret of its concern over the susceptibility of U.S. critical infrastructure to foreign interference and, presumably, this concern has only increased as foreign actors have targeted the U.S. energy grid, and other critical infrastructure, with malicious cyber attacks.
It is thus no surprise that FIRRMA also expands CFIUS’ jurisdiction to investments in a “United States critical infrastructure company” with which the investor is unaffiliated.
FIRRMA defines a “critical infrastructure company” as “a United States business that is, owns, operates, or primarily provides services to, an entity or entities that operate within a critical infrastructure sector or subsector, as defined by regulations prescribed by the Committee[,]” and includes in the definition of “critical infrastructure” all “systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems or assets would have a debilitating impact on national security.”
One of the principal objectives of FIRRMA is to close loopholes exploited by foreign adversaries.
Accordingly, the proposed legislation also expressly expands CFIUS’ jurisdiction to “[a]ny other transaction, transfer, agreement, or arrangement the structure of which is designed or intended to evade or circumvent the application of this section, subject to regulations prescribed by the Committee.”
At present, it is unclear how CFIUS will determine whether a transaction is designed or intended to evade or circumvent CFIUS’ controls and, presumably, the resulting implementing regulations will shed light on the symptoms of such foreign evasion or circumvention.
It is reasonably certain, though, that CFIUS will preserve the breadth of this authority so as to aggressively pursue foreign acquirers and investors seeking to leverage perceived loopholes in the CFIUS regulations.
Changes in Rights
Foreign investors are frequently confused over whether additional investments, or the restructuring of their initial investments, will trigger a CFIUS review.
Accordingly, FIRRMA makes clear that CFIUS shall have jurisdiction over “[a]ny change in the rights that a foreign person has with respect to a United States business in which the foreign person has an investment, if that change could result in—
(I) foreign control of the United States business; or
(II) an investment [by a foreign person in any United States critical technology company or United States critical infrastructure company that is unaffiliated with the foreign person].
This expansion of CFIUS’ jurisdiction is notable for two reasons. First, foreign investors that have already successfully endured a CFIUS review will have to work with their counsel to ensure that additional review is not triggered by changes in their rights that arise over time. Second, foreign investors that were not required to initially file a notice with CFIUS will have to remain attuned to whether the restructuring of their original investment will expose them to CFIUS’ oversight for the first time.
FIRRMA’s expansion of CFIUS’ jurisdiction has already been adjusted since its initial introduction in the Senate, and it is certainly possible that it will be further adjusted between now and when the bill passes. We will be sure to keep you updated if such modifications are made. In the meantime, be sure to check back in with us next week as we examine the manner in which FIRRMA exempts acquisitions/investments by certain foreign nationals from CFIUS review.
Up Next: We will examine the manner in which FIRRMA exempts acquisitions/investments by certain foreign nationals from CFIUS review.
About the Authors
Jennifer S. Huber and Adam Munitz are Partners in FH+H's International Trade & Transactions Practice. Focusing primarily on the defense, security, and intelligence sectors, Jennifer and Adam position U.S. businesses for overseas growth and help foreign investors/acquirers and U.S. sellers navigate the CFIUS review process.
FH+H Of Counsel Mary Beth Long is the first-ever Senate confirmed female Assistant Secretary of Defense and worked directly with Secretaries of Defense Rumsfeld and Gates on the Department’s highest priority issues. As the Defense Secretary’s principle advisor on the Middle East, Europe and Africa, including Iraq and Afghanistan, Ms. Long represented the Department of Defense at the National Security Council, the White House, and with foreign Ministers of Defense. She has expertise in export compliance, regulatory regimes, and securities regulations.
Additional information regarding the FH+H International Trade & Transactions Practice and previous representations can be found here.