New CFIUS process could change export control requirements

In recent weeks, we’ve seen significant activity from both the legislative and executive branches that could change the way foreign investment occurs in U.S. companies. These changes could also affect the export control compliance requirements of many companies who are targets of foreign investors. Keep reading for a brief history of CFIUS reviews, and the proposed new legislation – FIRRMA.

CFIUS: A brief history

The Committee on Foreign Investment in the United States (CFIUS) was established in 1975 by an Executive Order issued by President Gerald Ford. The Executive Order established “primary continuing responsibility within the Executive Branch for monitoring the impact of foreign investment in the United States, both direct and portfolio, and for coordinating the implementation of United States policy on such investment.”

The initial responsibilities were:

1. To arrange for the preparation of analyses of trends and significant developments in foreign investments in the United States;
2. To provide guidance on arrangements with foreign governments for advance consultations on prospective major foreign governmental investments in the United States;
3. To review investments in the United States which, in the judgment of the Committee, might have major implications for United States national interests; and
4. To consider proposals for new legislation or regulations relating to foreign investment as may appear necessary.

In 1988, following the Fairchild Semiconductor acquisition by Fujitsu, CFIUS was amended to give the President the authority to block proposed mergers, acquisitions, and takeovers that could threaten national security. Since then, CFIUS has pretty much continued without any major changes. Over the years, CFIUS has had its share of critics – including those who claim that the committee barely gave any review to proposed mergers and that CFIUS was just a “rubber stamp” approval. These critics pointed to the fact that notifications to CFIUS were voluntary and a notification could be withdrawn by the acquisition party before, or during, the investigative stage.

Tightening controls through FIRRMA

In March 2017, the U.S. House of Representatives introduced the Foreign Investment Risk Review Modernization Act of 2017 (FIRRMA). The stated goal of FIRRMA was to reform CFIUS reviews with greater scrutiny of acquisitions that would not be in the best interest of the United States for reasons of national security. The original draft of FIRRMA greatly expanded the role and objectives of the CFIUS process to include any contribution “of both intellectual property and associated support” to a foreign person as part of “any type of arrangement” if the U.S. business “produces, trades in, designs, tests, manufactures, services, or develops one or more critical technologies, or a subset of such technologies” (i.e., a “Critical Technology Company”). Under FIRRMA, the review authority of CFIUS would have been extended to export transactions (including license applications) involving critical technologies, regardless of the fact that such transactions were already reviewed, and either approved or denied, under the Export Administration Regulations (EAR) or the International Traffic in Arms Regulations (ITAR). Basically, it would have created a brand-new “Export Control Agency” to review transactions – in addition to those roles already played by BIS and DDTC – and added an extra layer to the review/approval process. Subsequent proposed legislation also sought to change the definition of “critical technologies” to include “emerging technologies.”

While the House advanced its proposed reform, the U.S. Senate was also busy considering its own version of FIRRMA. Within the past few weeks, President Trump was prepared to invoke emergency powers to restrict Chinese investment in the United States, but the president withdrew this step when – on June 18 – the Senate passed its own version of FIRRMA. A few days later (on June 26), the House passed a revised version of the law.

What’s changed with the latest FIRRMA proposals?

Both the House and Senate have toned down the original language with respect to reviews of export transactions. Instead, they now propose that national security concerns be reviewed through a new export control process administered by the U.S. Commerce Department to protect “emerging and foundational technologies.” Nevertheless, there still remain a number of issues to be reconciled between the House and Senate versions. For example, the Senate version gives CFIUS jurisdiction to review any foreign investment (even if it does not rise to the level of control)—other than a “passive investment”—in a U.S. critical technology or critical infrastructure company. The House version, on the other hand, would limit such “covered transactions” to those “sensitive transactions involving countries of special concern.”

Both versions desire to have CFIUS review the purchase or lease of real estate located in close proximity to U.S. military installations, as well as any real estate that includes, or is located in, an airport or maritime port. The Senate version goes a step further by including land border crossings and government facilities that are considered sensitive for national security purposes.

Another change is the cost to companies subject to CFIUS reviews. In years past, these filings have always been free. Now, both versions of the law envision fees that companies will pay for the review. The House version would require a fee equal to one percent (1%) of the transaction value or $300,000 (adjusted for inflation), whichever is less. The Senate version proposes a sliding-scale fee based on established criteria. In either case, the end result will be CFIUS filings that are no longer “free.”

Foreign investment and export controls

There are many more areas that both legislative entities need to reach agreement on, but work is progressing and (for the moment) President Trump is holding back from instituting measures under emergency powers until he sees a final product. Export Solutions will continue to provide updates on this topic, as export controls are still a factor and could affect the way compliance is currently undertaken.

Meanwhile, President Trump has already directed the Commerce Department to review its export control regime to consider issues pertaining to transfers of critical technologies and make any changes needed to defend U.S. national security and technological leadership. He has also gone further and stated explicitly that that if Congress fails to pass “strong FIRRMA legislation that better protects the crown jewels of American technology and intellectual property from transfers and acquisitions that threaten our national security,” then he will direct the “Administration to deploy new tools, developed under existing authorities, that will do so globally.” It’s safe to say that things in the export control arena could be changing rapidly – either through new Congressional legislation or new Executive-branch directives.

Also, don’t forget the Export Control Reform Act of 2018, which was introduced in February of this year. On April 17, a House Committee voted to move this bill forward with a full report to the House for further consideration. Historically, only one in four reports reviewed by committee are sent forward. So, there will be more to come in the months and years ahead.

If you have questions or need help understanding how these changing regulations affect your business, please schedule a No-Charge Consultation with us today.