CFIUS Legislation and Chinese Foreign Investment Restrictions:
Status Update and Practical Implications

May 29, 2018

Over the last week, multiple U.S. government measures to revisit the national security implications of foreign investment have picked up speed. Last week, the Senate Armed Services Committee voted to append CFIUS reform legislation—the Foreign Investment Risk Review Modernization Act (FIRRMA)—to the National Defense Authorization Act (NDAA). Because the NDAA is considered "must pass" legislation, as it funds the Department of Defense, FIRRMA enactment by the end of 2018 now seems likely.

Meanwhile, earlier today, the Trump administration announced the near-term imposition of specific foreign investment and export controls for Chinese acquirers of industrially significant technology. While the Trump administration states that the proposed restrictions will be made public by June 30, 2018, and take effect soon thereafter, it remains possible that those restrictions merely represent another bargaining chip in ongoing trade negotiations with China.

FIRRMA Takes Shape

FIRRMA would expand the jurisdiction and reform the process of the Committee on Foreign Investment in the United States (CFIUS), which conducts national security reviews of certain inbound investments. WSGR summarized the original November 2017 draft of FIRRMA here and provided a description of CFIUS activities in 2017 here.

The Senate and House versions of FIRRMA currently differ significantly and will need to be reconciled. The Senate has been exercising leadership to drive FIRRMA to enactment, but agreement by the House will be necessary and the outcome still is uncertain.

Guided by the current Senate version of FIRRMA, here are six key points to keep in mind as the legislation continues to develop:

  • FIRRMA's impact will depend not only on the final legislative text, but also on the implementing regulations, which will take months to develop, at a minimum.
    • It may take over a year before there is clarity regarding the new regulatory framework and accepted practices for companies and investors involved in cross-border transactions.
  • Immediate changes for deal parties will be limited.
    • FIRRMA's most prominent immediate change is the alteration of the timetable for CFIUS decisions on filed cases—extending from 75 days to 90 days the standard period for CFIUS decisions, but potentially compressing the "pre-filing" period during which parties work to obtain official CFIUS acceptance of the filing.
    • In the near term, companies should continue to accept foreign investment as they have in the recent past, with the understanding of the shifts in prevailing CFIUS conditions under the Trump administration laid out in our 2017 CFIUS year-in-review discussion.
  • CFIUS is expected to obtain more resources to monitor for non-filed transactions and to compel filings for some of these transactions.
    • Parties that voluntarily file with CFIUS obtain safe harbor against future CFIUS investigations; those that do not can be investigated at any time, even after closing. However, CFIUS has faced resource constraints in recent years in searching for these non-filed transactions, given its extensive caseload.
    • Companies and investors should consider filing transactions with CFIUS in the near term to obtain safe harbor against future CFIUS investigations that occur after CFIUS monitoring resources are expanded.
  • Following the implementation of regulations, CFIUS’s jurisdiction over foreign investments will expand significantly.
    • Many small foreign investments that do not fall into a narrowly defined set of "passive" investments would give rise to CFIUS jurisdiction under FIRRMA. For example, foreign investments that provide access to non-public technical information likely will not be considered passive investments and accordingly will be subject to CFIUS jurisdiction. Investment funds with foreign limited partners likely will need to meet strict criteria to avoid potential CFIUS jurisdiction.
    • Prior to the anticipated CFIUS regulations being finalized, companies and investment funds should review their partnerships with foreign entities to understand where these relationships might create CFIUS jurisdiction.
  • CFIUS is expected to implement a short-form "declaration" process that may simplify the process for some filers.
    • Companies and investors that historically have not filed with CFIUS because of deal-timing considerations may find this new process more consistent with their business needs; however, the specifics of the process have been left for definition in the regulations.
  • Certain categories of transactions involving foreign persons are expected to trigger mandatory CFIUS declarations and penalties for noncompliance.
    • The Senate bill prescribes two categories of mandatory declarations: (i) those featuring significant direct or indirect foreign government involvement; and (ii) additional types of transactions to be defined in the regulations.
    • In the long term, companies and investors will need to confirm whether their future deals fall within the set of "must declare" transactions in order to avoid a government penalty and/or a potential lawsuit from the counterparty premised on a failure to make a mandatory declaration.

Some of the more troubling potential results of the Senate bill as currently drafted—e.g., the likelihood of delays in investments by U.S. funds because of uncertainty about whether foreign limited partners of those funds trigger mandatory filing obligations—will be minimized if CFIUS drafts implementing regulations with an understanding of industry concerns. To circle back to the first key takeaway above: if FIRRMA passes in close to its current Senate form, the regulatory drafting process will be at least as consequential as the legislation itself.

Chinese Investment Restrictions Remain Vague

The Trump administration also announced today its intention to impose "specific investment restrictions and enhanced export controls for Chinese persons and entities related to the acquisition of industrially significant technology." The nature of the covered technologies and the identities of the Chinese persons and entities targeted is expected to be revealed on June 30, 2018, when the proposed restrictions will be announced. According to the White House, the restrictions will be implemented "shortly thereafter."

These actions are the result of the White House announcement in March 2018 stating that as a result of its seven-month investigation under Section 301 of the Trade Act of 1974 into Chinese acts, policies, and practices related to technology transfer, intellectual property, and innovation, it would be preparing a series of remedial steps to address those Chinese actions. Alongside the investment restrictions, the announcement also states that the president expects to continue to pursue litigation at the World Trade Organization and to impose a 25 percent tariff on $50 billion of imported Chinese goods.

At the moment, we have one core takeaway:

  • Final enactment of Chinese investment restrictions remains uncertain; if enacted, however, it appears that only a subset of sensitive technologies will be covered.
    • The U.S. is engaged in ongoing high-level trade talks with China, and both the proposed restrictions and the other actions described above may be intended to serve as additional leverage in those negotiations. In addition, the White House has taken multiple positions on Chinese foreign investment, with the only near-universal point of agreement being support for FIRRMA. Accordingly, despite the timeline laid out in the announcement, the restrictions may never be enacted.
    • Enactment remains a real possibility, however. Accordingly, once the June 30, 2018, announcement is made, parties should determine whether their products and services fall within the set of "industrially significant technologies" to be covered by the rules.
    • As the scope of the proposed investment restrictions remains vague and their enactment uncertain, U.S. and Chinese parties should proceed for now with plans for Chinese investment in the U.S., but should continue to monitor closely for further developments.

The national security practice at Wilson Sonsini Goodrich & Rosati expects to provide further updates on FIRRMA at the conclusion of the legislative process and on the Chinese investment restrictions upon their announcement.

For more information about FIRRMA or any other CFIUS-related matter, please contact Stephen Heifetz (sheifetz@wsgr.com); Joshua Gruenspecht (jgruenspecht@wsgr.com); Melissa Mannino (mmannino@wsgr.com); Beth George (bgeorge@wsgr.com); or any member of the national security practice at Wilson Sonsini Goodrich & Rosati.

 

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