CFIUS and the Increasing Regulation of Foreign Investment: The Expanding Oversight of Foreign Investments in the U.S. and Europe

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In recent months the Trump administration has been exercising U.S. import tariffs on the basis of national defense. On Monday, August 13, the administration signed the defense budget for 2019, and in doing so, also significantly expanded the regulation of foreign investment in the U.S.

What many might not know is that the EU, Germany and the UK have also been increasing their ability to review and regulate foreign investment into their respective jurisdictions.

Heightened European Focus

In July 2017, Germany amended its Foreign Trade and Payments Ordinance (GFTPO) to require notification of investment in certain critical industries and extend applicable review periods for approval of such. The amendment was in part triggered by increasing Chinese investments. On August 1, 2018, the German government took its first action to block a foreign investment under the new screening rules, which resulted in the Chinese investor withdrawing from the deal.

In September 2017, the European Commission issued a proposal to establish a framework for screening of foreign direct investments in the European Union, which also permits member states to adopt measures to control foreign investments that may affect security or public order.

While the UK currently only reviews mergers and acquisitions under its Competition and Markets Authority, the May administration is proposing regulations to review and control foreign investment in the UK, consistent with the EU proposal, to protect the economic and national security interests of the UK.

Reform of foreign investment in the U.S.

The Foreign Investment Risk Review Modernization Act (FIRRMA) was attached to the 2019 Defense Authorization Act (DAA) and is intended to modernize the review, oversight and authority of the Committee on Foreign Investment in the U.S. (CFIUS). CFIUS is an interagency committee that reviews foreign investment in the U.S. for potential national security issues.

Historically, CFIUS only applied to a specific set of industries, technologies and capabilities that were determined to have involved national security. It was also a voluntary filing. 

FIRRMA expands covered technologies to include emerging and foundational technologies and expands CFIUS review to “non-controlling” investments by foreign entities that involve critical technologies, infrastructure or personal data of U.S. citizens – which also includes real estate located proximate to sensitive U.S. government installations.

FIRRMA is also intended to close certain ownership and control loopholes utilized by foreign investors to avoid and evade CFIUS scrutiny in the past.

Significantly, CFIUS will no longer be voluntary, with mandatory reporting of certain transactions. FIRRMA also provides for a new short form filing, while extending the timeline for a full CFIUS review.

While not yet codified, the new short form filing is expected to be more concise and intended to permit a party to provide sufficient notice to the CFIUS committee to permit it to determine whether a party would need to make a full filing.

Under FIRRMA, the historic initial 30-day investigation period will be extended to 45 days, and CFIUS will also have the ability to extend the historic 45-day investigation period by an additional 15 days.

For the first time, FIRRMA provides for an appeal of a CFIUS committee determination to the D.C. Circuit Court of Appeals – but notably excludes appeals for presidential determinations.

FIRMMA Effective Date

Some of FIRRMA’s changes were effective immediately upon President Trump’s signature, while others will be implemented following proposed regulations and public comment.

The changes to the review periods will take effect immediately. The expansion of covered transactions to include real estate and other investments involving critical infrastructures, technologies or sensitive personal data of U.S. citizens will be delayed pending regulation and comment.

As a result, if you have a process, merger or acquisition underway, be mindful of how FIRRMA may affect your negotiations, contract documents and closing.