CFIUS and the Mandatory Disclosure Requirement for Foreign Investments in Critical Technologies
By: Owen Marks, RBFL Student Editor
Since its creation by President Ford in 1975, the Committee on Foreign Investment in the United States (“CFIUS”) has toed the line between fostering economic growth and ensuring that U.S. national security priorities remain unthreatened by foreign investment. With the enactment of the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), Congress gave CFIUS the ability to require mandatory declarations from foreign investors seeking to invest in firms with certain critical technologies. Before FIRRMA’s enactment, such declarations had generally been made on a purely voluntary basis. Congress added this requirement largely in response to perceived risks from primarily Chinese investors and the fear that investments that granted access to critical technologies threatened the U.S. military’s technological superiority along with U.S. consumer protection initiatives.
Shortly after Congress established the mandatory declaration requirement, the Treasury Department promulgated a metric for determining whether or not an investor had to file the declaration with CFIUS. This rule would require a filing if an investment was with a U.S. firm that “produce, design, test, manufacture, fabricate, or develop one or more critical technologies in connection with any of 27 industries identified by reference to the North American Industry Classification System (NAICS).” Some critics of this rule noted that the wide range of investments that could possibly fall into these categories created an opportunity for false-positives, or investments that were otherwise acceptable under CFIUS’s review were it not for the mandatory declaration.
In October of 2020, the Treasury Department implemented a new Final Rule which deviates from the NAICS code analysis previously applied. Rather than relying on the NAICS classification methodology, the Final Rule asks potential investors to examine the pre-existing export-control mechanisms that govern their prospective transaction. This change was met with a mixed reception, with arguments that the expansive nature of the Final Rule conflicts with Congress’s wish that CFIUS refrain from dictating economic investment clashing with others claiming that the process promote clarity for investors already familiar with their export-controls.
Since the adoption of the mandatory disclosure requirement, filings with CFIUS from potential investors have exploded in number, with 94 deals through that process in 2019 alone. However, not all of the filings have been driven by the implementation of the Final Rule. Under the Biden administration, CFIUS is positioned to take an active and aggressive role. The potential for a CFIUS regulatory takedown has driven some investors to make preliminary filings and seek out approval before finalizing transactions. The Biden administration has also signaled that it will wield CFIUS against smaller transactions that might give too much access to critical technologies with less than a controlling share in the target firm. The White House has also advised that large transactions are still possible targets and, for example, will continue the review of TikTok that began under the Trump administration. In the midst of these changes in CFIUS’ policy and aims, it is clear that the coming years will see an aggressive pursuit of Congress’s dual objectives of both encouraging foreign investment and protecting national security interests.
Sources
31 C.F.R. § 800 (2020)
85 Fed. Reg. 30,893, 30,894 (May 21, 2020)
Provisions Pertaining to Certain Investments in the States by Foreign Persons, 85 Fed. Reg. 57,124 (Sept. 15, 2020) (codified at 31 C.F.R. § 800).
Exec. Order No. 11,858, 40 Fed. Reg. 20,263 (May 7, 1975)
H.R. Rep. No. 115-784, pt. 1 (2018)
H.R. 5841, 115th Cong. (2018)
Jeffery Gerrish et al., Treasury Department Issues Final Rule for Mandatory CFIUS Filing Requirements Based on ‘Critical Technology, Skadden (Sept. 22, 2020), https://www.skadden.com/insights/publications/2020/09/treasury-department-issues-final-rule
James K. Jackson, Cong. Research Serv., The Committee on Foreign Investment in the United States (2020).
Katy Stech Ferek, U.S. Panel Expands Review of Business Deals with Foreign Money, Wall St. J. (July 30, 2020) https://www.wsj.com/articles/u-s-panel-expands-review-of-business-deals-with-foreign-money-11596146350.