House Passes CFIUS Reform as Trump Administration Reiterates Support

The U.S. House of Representatives (the House) on June 26, 2018, passed legislation designed to reform and strengthen the authority of the Committee on Foreign Investment in the United States (CFIUS or the Committee), the interagency committee responsible for assessing threats to U.S. national security posed by significant investments in U.S. businesses by non-U.S. investors. The House’s version of the Foreign Investment Risk Review Modernization Act (FIRRMA) passed by a vote of 400-2 a week after the U.S. Senate passed companion legislation of the same name as a part of its annual National Defense Authorization Act (NDAA). The President has signaled his support for FIRRMA, and a conference committee will likely reconcile the two bills before final passage.

Like the Senate’s legislation, the House’s FIRRMA would expand CFIUS’s jurisdiction beyond its current mandate to review deals involving the transfer of control of U.S. businesses to non-U.S. persons. Under FIRRMA, CFIUS could review far more transactions with implications for U.S. national security, including transfers of minority interests in companies that do business in the critical infrastructure or critical technology sectors. For more on FIRRMA’s most important changes to CFIUS, please consult our prior updates on the early reform effort, the Senate bill, and the potential impacts of reform on private equity markets.

Differences Between House and Senate Bills

While the House and Senate bills are similar, certain differences will require reconciliation before a final vote in each chamber. For example, the definition of “critical technology” differs between the two bills. While the House bill specifically lists the items considered critical technology (such as items on the U.S. Munitions List or Commerce Control List, certain nuclear equipment, and other technologies specified in export control regulations), the Senate bill leaves it up to the Committee to decide which technologies “are essential or could be essential to national security.” In addition, the bills diverge on the following notable issues: 

• Export Controls
  
  The House bill offers more significant reform to U.S. export controls than the Senate’s version. Both bills require the Department of Commerce, in conjunction with other agencies, to evaluate “emerging and foundational” technologies and develop export controls that complement CFIUS’s authority. But the House bill goes further by including the “Export Control Reform Act of 2018,” which would establish a permanent statutory basis for export control of dual-use items. While the U.S. government currently implements export controls for these items, it does so under executive orders rather than through statute. The provisions passed in the House bill would expand the Commerce Department’s jurisdiction to allow export controls over a broader swath of items.   
  
  
• Country-Based Risk Assessments 
  
  The House bill also differs from the Senate legislation in its use of country-specific risk determinations. Both bills provide for more scrutiny of investments coming from “countries of special concern,” with the House bill defining this category to include all countries that are subject to certain military end-use or end-user export restrictions or arms embargoes or are designated as state sponsors of terrorism. Based on the House bill’s criteria, CFIUS would consider approximately 20 countries to be “of special concern.” The Senate bill is less specific in this respect, authorizing CFIUS to identify countries that pose a “significant threat” to U.S national security. 
  
  On the other hand, the Senate bill takes a more nuanced approach in offering exemptions for investments, including covered real estate transactions, from low-risk countries. Under the Senate’s plan, CFIUS would weigh several factors to assess whether a country may be exempted from review requirements, including whether the country is a member of NATO and adheres to nonproliferation control regimes. The Committee would also consider the country’s use of a foreign investment review mechanism similar to the CFIUS review process. The House bill does not extend similar authority to CFIUS, instead allowing the President to apply exemptions of up to one year after delivering certain explanatory reports to Congress.  
  
  
• Treatment of Passive Investments 
  
  After early drafts of the Senate bill suggested that CFIUS’ authority might extend to “passive investments,” the final version specified that CFIUS would generally not have jurisdiction over transactions where the non-U.S. investor does not control the U.S. business or investment fund decisions or have access to non-public technical information. The Senate’s FIRRMA draft provides that investments in U.S. critical infrastructure or critical technology companies by U.S. private equity investment funds with one or more non-U.S. limited partners should be considered passive investments. If the U.S. fund met certain requirements demonstrating that the non-U.S. limited partner does not have significant decision-making authorities and that the fund’s general partner or equivalent is not a non-U.S. person, the investment would fall outside of CFIUS’ jurisdiction. 
  
  The House bill does not explicitly exempt limited partners and does not carve out passive investments from its definition of covered transactions subject to review. This leaves open the possibility that passive investments in critical technology or critical infrastructure companies by non-U.S. limited partners could be subject to review. While concerns raised by certain industries led the Senate to include its passive investment language, it is unclear which language legislators will adopt in their final bill.  
  
  
• Timing of Review 
  
  Both bills adjust the timeline of CFIUS reform. After an initial 45-day review (current law provides for 30 days) and an additional 45 days for a possible investigation, the Senate provides CFIUS the possibility of one 30-day extension before the President reviews the transaction. The House provides for only a 15-day extension. While this difference is not particularly significant, it is emblematic of the many provisions that will have to be reconciled between the two bills.  

The House and Senate bills differ in a variety of other ways, including the size of filing fees and the treatment of real estate (among others).

Trump Administration Support

The Trump Administration has been supportive of Congress’s efforts to reform CFIUS over the past several months and reiterated that support in a Statement of Administration Policy. Commenting specifically on the Senate’s passage of the NDAA, the White House statement said that FIRRMA “would achieve the twin aims of protecting national security and preserving the longstanding United States open investment policy.”

The policy statement directly indicates the President’s support of the Senate’s NDAA, though it adds a critique of the Senate’s approach to Chinese telecommunications company ZTE. The Senate’s FIRRMA would restore penalties that the U.S. government initially imposed against ZTE in April 2018 after the Commerce Department found that the company had lied to regulators about apparent U.S. sanctions violations. The House bill, like the House NDAA passed earlier this year, does not include similar provisions.

The White House also released a statement warning Congress that, if it fails to pass CFIUS reform, the Administration would “deploy new tools, developed under existing authorities,” that protect “the crown jewels of American technology and intellectual property from transfers and acquisitions that threaten our national security.”

How Dechert Can Help

Parties to transactions involving foreign acquisitions of stakes in U.S. critical technology or critical infrastructure businesses (including those operating in the technology and manufacturing sectors) or the acquisition of certain U.S. real estate will be impacted by CFIUS reform. In addition, investors from “countries of special concern” will be subject to more intense scrutiny by regulators. Dechert has represented many clients through CFIUS reviews, including major players in the energy, telecommunications, high technology, defense and infrastructure industries. Dechert regularly advises U.S. and non-U.S. entities (“buyers” and “sellers,” as well as other interested third parties) through the CFIUS review process, helping them to: determine whether or not to bring a transaction before the Committee, assemble the required information and materials for a voluntary filing and then (as necessary) negotiate national security agreements with CFIUS in a manner that minimizes both delay and the imposition of conditions that might threaten the transaction. The firm also gives counsel on strategies for identifying and addressing political and policy considerations that may arise.