THE FOREIGN INVESTMENT RISK REVIEW MODERNIZATION ACT OF 2018 (FIRRMA)

In August, a new Act was passed that expanded the Committee on Foreign Investment in the United States (“CFIUS”)’s jurisdiction so they can protect Americans from National Security concerns.

Key Provisions of FIRRMA:

1. Expands the scope of covered transactions — they now include: (1) a purchase, lease, or concession by or to a foreign person of real estate located in proximity to sensitive government facilities; (2) “other investments” in certain U.S. businesses that afford a foreign person access to material nonpublic technical information in the possession of the U.S. business, membership on the board of directors, or other decision-making rights, other than through voting of shares; (3) any change in a foreign investor’s rights resulting in foreign control of a U.S. business or an “other investment” in certain U.S. businesses; and (4) any other transaction, transfer, agreement, or arrangement designed to circumvent CFIUS jurisdiction.

2. Declarations — Provides for an abbreviated filing or “light filing” process through a new “declarations” procedure that could result in shorter review timelines. It also allows CFIUS some discretion to require parties to file with CFIUS before closing a transaction.

3. Expands CFIUS’s timelines — Expands CFIUS’s review period from 30 to 45 days and allows an investigation to be extended for an additional 15-day period under extraordinary circumstances.

4. Mitigation — Strengthens requirements on the use of mitigation agreements, including the addition of compliance plans to inform the use of such agreements.

5. Special hiring authority and funding — Grants special hiring authority for CFIUS and establishes a fund for collection of new CFIUS filing fees.

6. Delayed effective date and pilot programs — Delays the applicability of some of the bill’s most significant provisions until 18 months following enactment of FIRRMA or 30 days after the Secretary of the Treasury publishes in the Federal Register a determination that the necessary regulations, organizational structure, personnel, and other resources are in place to administer those provisions, whichever is sooner. This section also authorizes CFIUS to conduct pilot programs to implement any authority provided under this bill.[1]

A Pilot Program that came into effect on November 10, 2018, and continues until March 5, 2020.[3] This program further expanded the scope of the transactions subject to review by CFIUS to include certain investments involving foreign persons and critical technologies. It is mandatory to declare these transactions. The parties to a “pilot program covered transaction” must submit a five-page “declaration” that outlines the transaction. It must be submitted at least 45 days before the transaction closing date.[4]

For an investment to be covered under the pilot program, it would have to give the foreign investor:

1. Access to any material nonpublic technical information in the possession of the target U.S. business;

2. Membership or observer rights on the board of directors or equivalent governing body of the U.S. business, or the right to nominate an individual to a position on the board of directors or equivalent governing body of the U.S. business; or

3. Any involvement, other than through voting of shares, in substantive decision-making of the U.S. business regarding the use, development, acquisition, or release of critical technology.

Foreign persons covered: The pilot program covers all foreign persons and is not country-specific.

U.S. businesses covered: The pilot program covers any U.S. business that produces, designs, tests, manufactures, fabricates, or develops a critical technology that is:

1. Utilized in connection with the U.S. business’s activity in one or more Pilot Program Industries; or

2. Designed by the U.S. business specifically for use in one or more Pilot Program Industries (“Pilot Program U.S. Businesses”).

Critical technologies covered: The pilot program covers all critical technologies, as defined by FIRRMA, including emerging and foundational technologies controlled pursuant to the Export Control Reform Act of 2018.

Industries covered: The pilot program covers 27 industries; identified by their respective North American Industry Classification System (NAICS) code (“Pilot Program Industries”). The U.S. Government carefully developed the list of pilot program industries for which certain strategically motivated foreign investment could pose a threat to U.S. technological superiority and national security.

Mandatory declarations: The pilot program establishes mandatory declarations (i.e., abbreviated notices that generally should not exceed five pages in length) for foreign transactions involving Pilot Program U.S. Businesses that are within the purview of CFIUS (i.e., both controlling investments and “other investments”).

· Declarations must be filed at least 45 days prior to a transaction’s expected completion date.

· The Committee will have 30 days to take action.

· Parties may choose to file a notice under CFIUS’s standard procedures rather than a declaration.

· Parties that are required to file with CFIUS and do not do so can be assessed a civil monetary penalty up to the value of the transaction.

• In accordance with FIRRMA, the pilot program will commence on November 10, 2018, 30 days following publication of the regulations in the Federal Register. It will end no later than the date on which the final FIRRMA regulations are implemented.[5]

A “pilot program covered investment” includes an investment that offers the foreign person “[a]ny involvement, other than through voting of shares, in substantive decision-making of the pilot program U.S. business regarding the use, development, acquisition, or release of critical technology.”[6] The “pilot program covered investment” includes any non-controlling investment, direct or indirect, by a foreign person in an unaffiliated pilot program U.S. business that affords the foreign person any involvement, other than through voting of shares, in substantive decision-making of the pilot program U.S. business regarding the use, development, acquisition, or release of critical technology.[7] The foreign person doesn’t need final decision-making power, just “any involvement” in the decision. As a general matter, substantive decision-making for purposes of does not include strictly administrative decisions.[8]

The phrase “substantive decision-making” refers to decisions around the development, acquisition, or release of a “critical technology.” (Administrative decisions are not included).

These include,

1. Licensing;

2. Pricing, sales, and specific contracts;

3. Supply arrangements;

4. Corporate strategy and business development;

5. Research and product development, including budget allocation;

6. Manufacturing locations;

7. Access to such technology;

8. The storage or protection of such technology;

9. Appointment or removal of personnel or management with operational oversight; or

10. Strategic partnerships.

It also captures situations where the investment gives the foreign person ability regarding:

1. The use, development, acquisition, or release of critical technology:
2. The right to consult with or provide advice to a decision maker;
3. Special approval or veto rights;
4. The right or ability to participate on a committee with decision-making authority;
5. The right to have direct access to directors, officers, managers, and other employees engaged in or with the ability to make decisions; or
6. The right to appoint officers or employees who have involvement of the type listed above

A U.S. business meets the definition of a pilot program U.S. business if it produces, designs, tests, manufactures, fabricates, or develops a critical technology that is (a) utilized in connection with the U.S. business’s activity in one or more pilot program industries; or (b) designed by the U.S. business specifically for use in one or more pilot program industries.

Critical technologies are:

1. Defense articles or defense services included on the United States Munitions List set forth in the International Traffic in Arms Regulations (ITAR) (22 C.F.R. parts 120–130). Items included on the Commerce Control List set forth in Supplement №1 to part 774 of the Export Administration Regulations (EAR) (15 CF.R. parts 730–774) and controlled:

• Pursuant to multilateral regimes, including for reasons relating to national security, chemical and biological weapons proliferation, nuclear nonproliferation, or missile technology; or
• For reasons relating to regional stability or surreptitious listening.

1. Specially designed and prepared nuclear equipment, parts and components, materials, software, and technology covered by 10 C.F.R. part 810 (relating to assistance to foreign atomic energy activities).
2. Nuclear facilities, equipment, and material covered by 10 C.F.R. part 110 (relating to export and import of nuclear equipment and material).
3. Select agents and toxins covered by 7 C.F.R. part 331, 9 C.F.R. part 121, or 42 C.F.R. part 73.
4. Emerging and foundational technologies controlled pursuant to Section 1758 of the Export Control Reform Act of 2018.

Pilot program industries are defined by the North American Industry Classification System (NAICS) Codes.[9] They include manufacturing of airplanes, airplane parts, missiles, space vehicles, armored vehicles, computers and computer storage devices, semiconductors, ball bearings, chemicals and petrochemicals, and telecommunications equipment, as well as nuclear power generation and television and radio broadcasting.

Notably, the list includes industries not typically referred to as national security-related, such as: Optical Instrument and Lens Manufacturing (NAICS Code: 333314), Other Basic Inorganic Chemical Manufacturing (NAICS Code: 325180) and Research and Development in Biotechnology (except Nanobiotechnology) (NAICS Code: 541714).

[1] https://www.treasury.gov/resource-center/international/Documents/Summary-of-FIRRMA.pdf

[2] https://www.law.cornell.edu/cfr/text/2/180.200

[3] https://home.treasury.gov/system/files/206/FR-2018-22182_1786904.pdf

[4] https://home.treasury.gov/system/files/206/Fact-Sheet-FIRRMA-Pilot-Program.pdf

[5] https://home.treasury.gov/system/files/206/Fact-Sheet-FIRRMA-Pilot-Program.pdf

[6] https://home.treasury.gov/system/files/291/Pilot-Program-FAQs.pdf

[7] See 31 CFR 801.209

[8] 31 CFR 801.209(c)

[9] https://www.census.gov/econ/www/naics.html