New challenges for investors in the US – CFIUS

By Dennis Unkovic, Meyer, Unkovic & Scott

As the world economy appears poised to contract, the US economy continues to grow, albeit at a slowing pace. For this reason, the US remains an attractive target for global investors. They are finding, though, that investing in the US is becoming more challenging. The reason behind this is the activities of the Committee on Foreign Investment in the US (“CFIUS”). CFIUS is a multi-agency task force within the US government which is responsible for regulating business transactions involving foreign investors and US companies. The purpose of CFIUS is to determine whether such transactions pose a threat to US national security interests or involve critical emerging technologies. It is crucial for foreign legal counsel to understand how CFIUS operates when representing clients or employers pursuing business opportunities within the US or with American companies.

Last summer, the authority of CFIUS was strengthened when the Foreign Investment Risk Review Modernisation Act (“FIRRMA”) became law. FIRRMA is investment regulatory legislation endorsed by the Trump Administration which enhances the ways CFIUS can review foreign investment coming into the US. In short, FIRRMA expanded the power of CFIUS to permit, or in some cases prohibit, foreign deals which might threaten US national security interests or otherwise negatively impact US commerce.

Over the last twelve months, the CFIUS review process has taken a particularly close look at deals involving the US and China, even though CFIUS’s jurisdiction applies across the board to all non-US companies, regardless of where they are based.

After the passage of FIRRMA, one important change was the extension of time for the CFIUS review process from 30 to 45 days. However, the formal process of rulemaking required for regulating the future activities of CFIUS is not yet complete. It is projected that the new CFIUS regulations will be approved and in effect for companies by February 2020.

A number of outstanding issues will need to be addressed in the anticipated new CFIUS regulations and will be debated over the next several months. First, some observers question whether CFIUS will create a “black list”; that is, a list of countries that will either be prohibited or at least more closely scrutinised by the CFIUS regulators. Some have suggested that China might be a candidate for such a “black list”. I personally doubt that will occur, but it is a possibility.

A second area under discussion is whether CFIUS will offer a limited — and less expensive — filing option for proposed projects which investors believe would have little or no chance of threatening US national security or key emerging technologies. In theory, this route could speed up the review process for non-controversial deals. However, my view is that most investors will in the end avoid this option if it is made available. The reason is that investors and their counsel want certainty that any proposed investment will not be challenged, and a “shortcut” option might not provide enough assurance. For deals of any significant size, a full CFIUS review is preferable to risking the project being denied or forced to unwind at a later point.

We all recognise how personal data privacy protection is an increasingly important issue worldwide. The FIRRMA legislation was intended to expand the scope of CFIUS review to include transactions which involve companies that are in the business of collecting and/or otherwise handling the personal data of private citizens. How the new regulations will ultimately define what type and how much data is included and what factors are necessary to mandate a CFIUS review of such transactions will be closely monitored when released.

So far, one aspect of FIRRMA has not received much attention, but it should. FIRRMA expanded the future scope of CFIUS review to include certain types of real estate transactions. This gives CFIUS regulators the authority to closely look into land acquisitions, and even leases, if the real estate involved is in close proximity to a US government facility or military base.

Finally, certain investment funds will come under the purview of CFIUS because of FIRRMA. This will occur when a foreign (non-US) individual is a limited partner in an investment fund. How this complex area is to be handled will be clarified in the regulations.

While I have listed just some of the important issues that the CFIUS/FIRRMA regulations will cover, there will be others. Counsel needs to understand that the power of CFIUS is growing because of FIRRMA. CFIUS will become clearer when the final regulations are officially put into place in early 2020. It would be a mistake to underestimate the growing power of CFIUS to regulate foreign investors in US companies. Counsel should keep a close watch on the draft regulations which are expected to come out within the next month and will indicate the future scope and authority of CFIUS reviews.