• Michael Kennedy Esq.*

CFIUS Re-enhanced: The Foreign Investment Risk Review Modernization Act of 2018 & China

On August 13th, 2018 President Trump signed “The Foreign Investment Risk Review Modernization Act of 2018” [1] (FIRRMA) rebalancing foreign investment in the United States with national security, and firmly aiming its sites on the People’s Republic of China. The passage of FIRRMA was based upon concerns that, ‘‘the national security landscape has shifted in recent years, and so has the nature of the investments that pose the greatest potential risk to national security.’’[2] As a result, Congress rebalanced the Committee on Foreign Investment in the United States (CFIUS)[3] as a flexible framework of national security measures and a tool in overall national security policy, rather than as a narrow legal structure.

The most impactful change to the CFIUS process expanded the authority of CFIUS in reviewing additional transactions, which include real estate transactions, critical and emerging technologies, critical infrastructure and noncontrolling investments. This chapter discusses CFIUS’ re-enhanced role to address t evolving trends and national security threats posed by inbound foreign direct investments (FDI), along with the recent rise of China’s economic aggression, which has now prompted calling for greater CFIUS scrutiny of foreign investment transactions.

The Department of Treasury has promulgated interim regulations through FIRMMA, via a pilot program that began on November 10, 2018, that impact certain decisions and information regarding critical technologies; and (2) the ability of such foreign parties to impact the rapid pace of technological change in certain U.S. industries.

Specifically, the pilot program[4] empowers CFIUS to review non-controlling investments involved in critical technologies related to specific industries. The pilot program also makes effective FIRRMA’s mandatory declarations provision[5] for transactions that fall within the scope of the pilot program – which includes 27 industries involved in critical technologies[6]. This program is in effect until no later than March 5, 2020, at which time final regulations will have been instituted.[7]

History of CFIUS: Always Adapting and Now Re-enhanced

Amid growing levels of inbound investment by the Organization of the Petroleum Exporting Countries (OPEC), CFIUS was originally established by President Ford’s Executive Order (EO) in 1975. The Committee members of CFIUS mainly met in secret.[8] Given its limited scope of “national interests,” CFIUS was fairly inactive in its early years, only meeting ten times between 1975 and 1980 and without a clear mandate our strategy as the transactions it should review.

In 1987, CFIUS investigated the Fujitsu-Fairchild merger during a boom in acquisition of U.S. corporations that resulted in a failed acquisition.[9] Fujitsu’s purchase of an 80 percent share of Fairchild, a California semiconductor manufacturer, was criticized by Congress as “selling Mount Vernon to the red coats,”[10] and the Defense Department opposed the acquisition because of Japan’s already significant control over the computer chip industry..[11]

In 1988, following the above concerns of technology, CFIUS’s jurisdiction was codified and significantly expanded.[12] The Exon-Florio amendment gave CFIUS a refocused purpose.[13] Through EO 12661,[14] the amendment stated that CFIUS would conduct reviews and undertake investigations. Thus overnight, CFIUS was transformed from a limited-authority administrative body to a working tool of U.S. foreign investment policy with a firm mandate to advise the President on foreign investment transactions and block them if need be.

On June 13, 2007, Senator Dodd introduced the Foreign Investment and National Security Act of 2007 (FINSA), which President Bush signed[15] and subsequently promulgated EO 13,456 implementing the law. Since FIMSA, there have been narrower proposed amendments to CFIUS, such as Senator Chuck Grassley’s bill placing the Secretary of Agriculture on the Committee over food security.[16] Most of these attempted reforms have been aimed specifically at covered transactions involving Chinese firms.[17] China now tops the list of nations for foreign companies undergoing CFIUS review. Many Chinese companies withdraw from deals before the Committee even reviews them, fearing the blowback from a high-profile rejection.[18]

Chinese Economic Aggression – Current Context of FIRMMA’s Passage

Since the 1970s China has embarked on an ambitious program of reform, Made in China 2025, and it has rapidly transformed itself into the second largest economy in the world. However, this growth has been achieved in significant part through aggressive acts, policies, and practices that fall outside of global norms and rules (collectively, “economic aggression”).[19]

In 2018, the United States announced a series of trade enforcement actions involving China stemming from three investigations conducted by the U.S. government involving, steel, solar panels, and critical technology.[20] In each instance, China retaliated against U.S. enforcement actions with reciprocal tariffs. In total, over $250 billion worth of U.S. imports from China and $110 billion worth of U.S. exports to China are subject to tariffs initiated in 2018.[21] Concerns about a wide range of unfair practices of the Chinese government and the Chinese Communist Party related to technology transfer, intellectual property, and innovation are longstanding.

In regard to CFIUS, all deals which have been formally blocked by the President were China-related, most recently the proposed acquisition of a Lattice Semiconductor by Canyon Bridge Capital and Broadcom’s bid for chipmaker Qualcomm. Many other companies either voluntarily pause or cancel their proposed deal or never consider such acquisition in the first place, in light of CFIUS’ mandates.

The Foreign Investment Risk Review Modernization Act of 2018

Although FIRRMA doesn’t specifically identify China, the focus of the bill stems from two urgent and compelling circumstances that are ancillary to China’s robust development of its technology and military economy: (1) the ability and willingness of some foreign parties to obtain equity interests in U.S. businesses in order to affect certain decisions regarding, or to obtain certain information relating to, critical technologies; and (2) the rapid pace of technological change in certain U.S. industries.[22] CFIUS was previously authorized to review only transactions (mergers, acquisitions, or takeovers) that resulted in foreign “control”[23] over a U.S. business that threatens to impair the national security, or when the foreign entity is controlled by a foreign government, or it would result in control of any “critical infrastructure that could impair the national security.” FIRRMA modified and broadened the authorities by expanding the scope of foreign investments in the U.S. subject to national security review.

Prior to FIRRMA, CFIUS’s authorities did not sufficiently address the new and emerging risks that foreign direct investment can pose to U.S. technological superiority. For example, it overlooked the fact that foreign investors do not need a controlling interest in order to affect certain decisions with respect to the use, development, acquisition, or release of critical technology. CFIUS’s authorities, however, only applied to transactions that could result in foreign control of a U.S. business. Consequently, CFIUS had no authority to prevent a foreign entity from acquiring a non-controlling interest in a U.S. business that produces, designs, tests, manufactures, fabricates, or develops critical technologies. FIRRMA now provides CFIUS new authorities to address the national security concerns that may arise from these investments, but those authorities were not immediately effective upon FIRRMA’s enactment.[24]

Covered Transactions – Expanded Jurisdiction

Expansion of Covered Transactions

In response to growing concerns that other types of cross-border transactions could present national security risks, and that parties were increasingly using those other transaction types to avoid CFIUS review, FIRRMA expands “covered transactions” to include foreign non-controlling investments in: (1) U.S. critical technology or infrastructure and (2) real estate near U.S. military or other national security-related sites. As discussed above, the interim regulations now in place covers transactions in 27 defined industries involved in critical technologies. The pilot program also makes effective FIRRMA’s mandatory declarations provision for transactions that fall within the scope of the pilot program which FIRRMA describes as “abbreviated notifications that would not generally exceed 5 pages in length” — for all transactions covered by the pilot program.[25] Mandatory declarations, authorized under FIRRMA, are a key change to the CFIUS process, which has historically been ostensibly voluntary. Moreover, failure to submit a mandatory declaration when required under the pilot program can result in potentially significant penalties - up to the value of the transaction.

Real Estate Transactions - Close Proximity to Military or Sensitive Sites Investments in Critical Infrastructure or Critical Technology Companies

CFIUS has raised concerns about a number of transactions in which U.S. businesses had facilities or assets in close proximity to sensitive government installations. Although Chinese companies invest in a broad range of U.S. industries, Chinese deals are mainly focused on high-value acquisitions in technology, agriculture, modern services, and commercial real estate.[26] In 2012, President Obama blocked a Chinese acquisition of Oregon wind farms because they were located too close to a naval weapons station.[27] As a result, CFIUS’s current authority was silent on reviewing real estate transactions such as short-term leases, or transactions that lack a “US business,” even if such transactions pose similar proximity concerns. CFIUS now has the authority to review the purchase or lease by, or concessions to, a foreign person of private or public real estate in the United States that is: (i) located within or will function as part of, an air or maritime port; or (ii) in close proximity to a U.S. military installation or another facility or property of the United States government that is: (a) sensitive for reasons relating to national security; (b) could reasonably provide the foreign person the ability to collect intelligence on activities being conducted at such an installation, facility, or property; or (c) could otherwise expose national security activities at such an installation, facility, or property to the risk of foreign surveillance.[28]

Non-controlling investments -Critical Infrastructure, Technologies and Sensitive Data

Additionally, CFIUS now has expressed jurisdiction to review any “other investments” by a foreign person in any unaffiliated U.S. business that: (ii) produces, designs, tests, manufactures, fabricates, or develops critical technologies; or [29] such “other investment” will be covered only if it affords the foreign person: (i) access to any material nonpublic technical information possessed by the U.S. business; (ii) membership, observer, or nomination rights for the board (or equivalent body) of the U.S. business; or (iii) any involvement, other than through voting of shares, in substantive decision-making related to sensitive personal data, critical technologies, or critical infrastructure.[30]

To adapt to the global applicability of transactions, the definition of “U.S. business” is intentionally broadened to include “a person engaged in interstate commerce in the United States..” This exceeds the current regulatory definition, which includes “but only to the extent of its activities in interstate commerce in the United States.” Now, the bill gives the Committee the authority to review an acquisition of any business anywhere in the world as long as that business provides goods or services into the United States.

Other Provisions

FIRRMA includes notable CFIUS changes from its predecessor, with a clear focus on China. First, FIRRMA requires aa list of countries of ‘special concern” that targeting certain countries [31], a biennial report to Congress on FDI transactions by Chinese entities.[32] The report must include detailed breakdowns of those foreign direct investments, a list of US companies purchased through Chinese government investment, and an analysis of Chinese investment practices in the United States.[33] Additionally, Congress calls for the President to conduct a more robust international outreach effort to urge and help allies to establish processes similar to [CIFIUS].”]”[34] FIRRMA also clarified that civil action challenges against the CFIUS actions and findings may only be brought in the United States Court of Appeals for the District of Columbia Circuit.[35]


[1] Congress passed The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), Subtitle A of Title XVII of Public Law 115–232 (Aug. 13, 2018), amended section 721 of the Defense Production Act of 1950 (DPA).

[2] The Foreign Investment Risk Review Modernization Act of 2018, §1702(b)(4)

[3] CFIUS is an inter-agency committee that reviews the national security implications of foreign investments in U.S. companies or operations. It is chaired by the United States Secretary of the Treasury and includes representatives from 16 U.S. departments and agencies.

[4] 83 Fed. Reg. 51324 (October 11, 2018).

[5] Id.

[6] See 83 Fed. Reg. 197 (Oct. 11, 2018).

[7] 83 Fed. Reg. 51324 (October 11, 2018).

[8] Executive Order No. 11858 (b), May 7, 1975, 40 F.R. 20263.

[9] David E. Sanger, Japanese purchase of chip maker cancelled after objections in U.S., N.Y. Times, March 17, 1987 available at https://www.nytimes.com/1987/03/17/business/japanese-purchase-of-chip-maker-canceled-after-objections-in-us.html


[11]Stuart Auerbach, Cabinet to Weigh Sale of Chip Firm,” The Washington Post, March 12, 1987. p. E1.

[12] Omnibus Trade and Competitiveness Act of 1988, Pub. L. No. 100-418, § 5021, 102 Stat. 1107, 1425 (codified as amended at 50 U.S.C. § 4565 (2012)).

[13] However, some of the issues raised in the debate still plague CFIUS today. The Exon-Florio proposal debate focused on three issues and a host of opinions: (1) what constitutes foreign control of a U.S. firm; (2) how should national security be defined; and (3) which types of economic activities should be targeted for a CFIUS review.

[14] Executive Order 12661 of December 27, 1988, 54 F.R. 779.

[15] The law is designated as P.L. 110-49.

[16] See Securing American Food Equity Act of 2016, S. 3161,114thCong . § 2(2016).

[17] The Shuanghui-Smithfield merger and the break between Congress and CFIUS that it caused was the specific trigger of attempted CFIUS reform.

[18] Xie Yu, China Overtakes US as World’s Largest Assets Acquirer, S. China Morning Post,Oct. 5, 2016, available at http://www.scmp.com/business/banking-finance/article/ 2025385/china-overtakes-us-worlds-largest-assets-acquirer

[19]United States Trade Representative, 2017 Report to Congress on China’s WTO Compliance, January 2018, available at https://ustr.gov/sites/default/files/files/Press/Reports/China%202017%20WTO%20Report.pdf

[20] (1) Section 201 investigations into a surge of washing machines and solar panel imports, (2) Section 232 investigations into the national security risks posed by imports of steel and aluminum, and (3) the Office of the U.S. Trade Representative’s Section 301 investigation into “whether acts, policies, and practices of the Government of China related to technology transfer, intellectual property, and innovation are unreasonable or discriminatory and burden or restrict U.S. commerce.”

[21]U.S.-China Economic and Security Review Commission, November 2018 Report to Congress, available at https://www.uscc.gov/sites/default/files/annual_reports/Executive%20Summary%202018%20Annual%20Report%20to%20Congress.pdf

[22] Determination and Temporary Provisions Pertaining to a Pilot Program to Review Certain Transactions Involving Foreign Persons and Critical Technologies, 83 Fed. Reg. 51324 (October 11, 2018) (to be codified at 31 C.F.R. pt. 801).

[23] Id at 51328, citing 31 C.F.R. 800.204 Control

[24] Id at 51324.

[25] See https://home.treasury.gov/system/files/206/FR-2018-22182_1786904.pdf

[26] Michael Hiltzik, Chinese Investments in U.S. Hotel Companies Spur National Security Scrutiny, Los Angeles Times, March 18, 2016.

[27] Rachelle Younglai, Obama blocks Chinese wind farms in Oregon over security, Reuters, September 29, 2012

[28] See 3, at §1703

[29] The Foreign Investment Risk Review Modernization Act of 2018, §1703(b)(iii)

[30] Id at §1719

[31] “The Secretary of Defense shall establish and maintain a list of acquisition programs, technologies, manufacturing capabilities, and research areas that are critical for maintaining the national security technological advantage of the United States over foreign countries of special concern.”

[32] Id

[33] Id

[34] Id at §1706(a)(6)

[35] Id at §1715

#CFIUS #China #FIRRMA #Huawei #Trump

© 2020 Michael Kennedy All Rights Reserved.