CFIUS and the Increasing Regulation of Foreign Investment: Part 2

First FIRRMA Implementation, Impact and Insights

The Foreign Investment Risk Review Modernization Act (FIRRMA) was signed into law on August 13, 2018, increasing the 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. 

Per authority included in FIRRMA, the U.S. Treasury Department announced a “Pilot Program” on October 10, 2018, which created the first mandatory filing requirement imposed by CFIUS. Significantly, the Pilot Program will apply to investments involving any non-US person in a U.S. business not contractually agreed to before October 11, 2018, or closed by November 10, 2018.

Equally significant, per the Pilot Program, CFIUS will no longer be voluntary for covered transactions. The Pilot Program requires the filing of a CFIUS notice or a new short form declaration; the failure to do so can result in a civil penalty up to the value of the transaction. CFIUS will have 30 days following the filing of a Pilot Program declaration to either clear the transaction, request a written notice, initiate a CFIUS review, or inform the parties that CFIUS did not have enough time to complete its review and that the parties may submit a formal notice.

The Pilot Program covers any foreign investment that provides a non-U.S. investor with the following rights in U.S. businesses that “produce, design, test, manufacture, fabricate, or develop one or more critical technologies:”

• Access to nonpublic technical information – presumably export controlled.
• Membership, participation, observation or nomination rights to boards of directors (or the governance equivalent).
• The ability to make substantive decisions regarding the use, development, acquisition, or release of critical technology -- other than through the exercise of common voting rights.

The Treasury Department adopted the North American Industry Classification System (NAICS) to identify the industries covered by the Pilot Program. The Pilot Program currently specifies the following 27 NAICS industries:

• Aircraft Manufacturing: NAICS Code 336411
• Aircraft Engine and Engine Parts Manufacturing: NAICS Code 336412
• Alumina Refining and Primary Aluminum Production: NAICS Code 331313
• Ball and Roller Bearing Manufacturing: NAICS Code 332991
• Computer Storage Device Manufacturing: NAICS Code 334112
• Electronic Computer Manufacturing: NAICS Code 334111
• Guided Missile and Space Vehicle Manufacturing: NAICS Code 336414
• Guided Missile and Space Vehicle Propulsion Unit and Propulsion Unit Parts Manufacturing: NAICS Code 336415
• Military Armored Vehicle, Tank, and Tank Component Manufacturing: NAICS Code 336992
• Nuclear Electric Power Generation: NAICS Code 221113
• Optical Instrument and Lens Manufacturing: NAICS Code 333314
• Other Basic Inorganic Chemical Manufacturing: NAICS Code 325180
• Other Guided Missile and Space Vehicle Parts and Auxiliary Equipment Manufacturing: NAICS Code 336419
• Petrochemical Manufacturing: NAICS Code 325110
• Powder Metallurgy Part Manufacturing: NAICS Code 332117
• Power, Distribution, and Specialty Transformer Manufacturing: NAICS Code 335311
• Primary Battery Manufacturing: NAICS Code 335912
• Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing: NAICS Code 334220
• Research and Development in Nanotechnology: NAICS Code 541713
• Research and Development in Biotechnology (except Nanobiotechnology): NAICS Code 541714
• Secondary Smelting and Alloying of Aluminum: NAICS Code 331314
• Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing: NAICS Code 334511
• Semiconductor and Related Device Manufacturing: NAICS Code 334413
• Semiconductor Machinery Manufacturing: NAICS Code 333242
• Storage Battery Manufacturing: NAICS Code 335911
• Telephone Apparatus Manufacturing: NAICS Code 334210
• Turbine and Turbine Generator Set Units Manufacturing: NAICS Code 333611

The list of covered industries is notably much more expansive than the historic limited scope of CFIUS – which included national security, military and controlled technologies.

The Pilot Program is an initial temporary implementation of FIRRMA, but likely foreshadows the intent for FIRRMA’s final regulations. Under FIRRMA, the final regulations must be enacted by February 2020. Accordingly, the Pilot Program will end no later than the implementation of the final FIRRMA regulations. In the interim, the Treasury Department is expected to begin the public rule making and comment process, which will likely be significantly influenced by lessons learned from the Pilot Program.

As a result, if you have a process, merger or acquisition underway, be mindful of how FIRRMA and the current Pilot Program may affect your transaction, including but not limited to diligence regarding export controlled or critical technologies, and the determination of the correct and defendable NAICS classification of your business.