The Foreign Investment Regulation Review: USA
The United States has long favoured foreign investment and, historically, the US government has imposed few restrictions on foreign investment inflows.2 Skepticism of investment from China continues to be a notable – and bipartisan – exception to this general policy of openness to foreign investment.3 Such investment is subject to review and remedial action on national security grounds by the Committee on Foreign Investment in the United States (CFIUS). CFIUS's most recent piece of authorising legislation is the Foreign Investment Risk Review Modernisation Act of 2018 (FIRRMA). While notifying a transaction to CFIUS remains voluntary in most circumstances, FIRRMA has created mandatory filing requirements for transactions involving certain types of US businesses and foreign investors. In addition to this general national security screening regime, the United States has some sector-specific limitations and review procedures that govern foreign investment in regulated industries.
Year in review
We highlight three important developments in the past year in this section. First, modifications to the rule governing CFIUS's mandatory filing requirements were adopted. Second, President Trump issued an order – not yet executed – requiring Bytedance, a Chinese company, to divest its interest in the US business of TikTok, the popular video sharing app, at least in part because TikTok collects data regarding a vast number of US persons. Third, CFIUS staffing continued to increase, leading to a continuing and active CFIUS effort to consider completed Chinese transactions previously reviewed by CFIUS.
i Adoption of final rule on critical technology mandatory filings
On 15 September 2020, the US Department of the Treasury (Treasury) published a final rule that modified CFIUS's mandatory filing requirement for transactions involving so-defined 'critical technologies.' The updated regulations discussed infra Section III replaced the existing industry-based prong of the test (using North American Industry Classification System codes) with a test based on the export control licensing requirements applicable to the US business's technology. The final rule also clarified how certain export licence exceptions can be used to overcome a mandatory requirement. The new regulations came into force on 15 October 2020.
ii ByteDance review underscores CFIUS concerns with data
At the recommendation of CFIUS, President Trump signed a Presidential Order on 14 August 2020 requiring ByteDance, the Chinese owner of popular video sharing app TikTok, to divest its interest in Musical.ly, a Chinese company it acquired in 2017.4 In a separate Executive Order, based on the International Emergency Economic Powers Act (IEEPA) rather than CFIUS authorities, targeting TikTok more generally by prohibiting US persons from doing business with ByteDance, the Trump administration cited concerns that the user data collected by the app:
. . . threatens to allow the Chinese Communist Party access to Americans' personal and proprietary information – potentially allowing China to track the locations of Federal employees and contractors, build dossiers of personal information for blackmail, and conduct corporate espionage.5
President Biden recently rescinded the IEEPA-based order but, in doing so, made clear that connected apps, including those that collect sensitive personal data, are a source of national security vulnerability.6 The CFIUS-related divestment order remains in place but has not been enforced. As at the date of this chapter's publication, CFIUS reportedly is still discussing options with the parties, presumably falling short of full divestment.
iii Increased resourcing of CFIUS is resulting in greater monitoring and enforcement activity
The financial year 2021 budget provided funds to allow Treasury to increase its full-time CFIUS staff.7 These additional resources enhanced CFIUS's ability to review transactions filed pre-closing by parties but also enhanced CFIUS's monitoring and enforcement capacity. Monitoring and enforcement include identification of transactions that have not been filed with CFIUS but may be within CFIUS's jurisdiction and may present national security considerations. Over the course of the past year, CFIUS has aggressively pursued such 'non-notified transactions', principally focusing on transactions involving Chinese investors.8 This outreach often involves extensive questioning, in some cases results in a request for filing of a notice and, in some cases, ultimately results in a requirement that the foreign person divest its interest in the US business.
Foreign investment regime
This section sets out the main details of the US national security review regime administered by CFIUS.
US policy favours an open investment environment. Indeed, the Sense of the Congress in CFIUS's authorising legislation states as follows:
foreign investment provides substantial economic benefits to the United States . . . [and] it should continue to be the policy of the United States to enthusiastically welcome and support foreign investment, consistent with the protection of national security.9
While President Trump's FIRRMA signing statement offered tepid support for foreign investment,10 there were loud and influential voices within the administration that were decidedly anti-foreign investment. President Biden has offered a more full-throated endorsement of the open investment environment that, while qualified by a reference to CFIUS reviewing transactions to ensure the protection of national security, pledged his 'administration's commitment to ensuring that the United States remains the most attractive place in the world for businesses to invest and grow'.11
The restrictions that the United States has imposed on foreign investment have been tailored to achieve primarily non-economic policy objectives, generally related to national security. Significantly, the US foreign investment regime does not subject investments to an economic benefit test and, with limited exception, does not predicate jurisdiction on the national origin of the foreign investor. However, growing policy concerns over US innovation, economic competitiveness, and supply chain security have led to a blurring of the lines between the concepts of economic security and national security.12 Thus, the Trump administration took the view that economic security was national security, a view that appears largely to be shared by the Biden administration.
ii Laws and regulations
The US national security review process for foreign investment is governed by Section 721 of the Defense Production Act and is generally referred to as 'the CFIUS process' after the interagency body that administers it. CFIUS is composed of nine voting members: Treasury (its chair), the White House's Office of Science and Technology Policy, the US Trade Representative, and the Departments of Commerce (Commerce), Defense, Energy, Homeland Security, Justice, and State. The Department of Labor and the Office of the Director of National Intelligence are ex officio non-voting members. Other executive branch agencies may be temporarily added as voting members on a case-by-case basis (e.g., the US Department of Agriculture might be added in an agribusiness transaction).13
Transaction parties will interact mostly with Treasury before and during a review as Treasury manages the overall process, maintains the web portal parties use to submit filing documents (the Case Management System or (CMS)), and communicates CFIUS's findings and decisions to the transaction parties on behalf of CFIUS. However, the lead agencies – namely, those with the strongest equities – will co-lead on substance, including negotiation of mitigation terms if warranted.
CFIUS reviews foreign investment in the United States for risks to national security. Its authorising legislation provides examples of national security issues that CFIUS may consider, but it does not provide a statutory definition of national security except to clarify that it includes homeland security and critical infrastructure.14 CFIUS has the authority to review three types of transactions (collectively referred to 'covered transactions'):
- covered control transactions;
- covered investments; and
- covered real estate transactions.
Pure greenfield investments are excluded from CFIUS's jurisdiction. In foreign-to-foreign transactions, CFIUS can assert jurisdiction over any US businesses involved in the transaction, but its ability to require mitigation remedies or recommend prohibition will be limited, at least practically, to US businesses.
A key concept for understanding CFIUS's jurisdiction is the definition of a 'TID US Business'. Under CFIUS's regulations, a TID US business is one that:
- produces, designs, tests, manufactures, fabricates or develops one or more critical technologies;
- performs certain functions related to critical infrastructure products or services; or
- maintains or collects, directly or indirectly, sensitive personal data (SPD) of US citizens.15
Critical technology is defined as any technology that is controlled for export under specified provisions of law and regulation or designated by Commerce as an emerging or foundational technology.16 CFIUS defines critical infrastructure through reference to specific functions related to enumerated categories of products and services that are so vital that their incapacity or destruction would have a debilitating impact on national security.17 SPD is any:
- identifiable data maintained or collected by a US business that (1) targets or tailors products or services to any executive branch agency or military department with intelligence, national security or homeland security responsibilities; or (2) has maintained or collected, or has a demonstrated business purpose to collect, specified types of data from more than one million individuals; or
- genetic data.18
iv Covered control transaction
A covered control transaction is any transaction that results in a foreign person obtaining direct or indirect control over a US business. CFIUS eschews bright line definitions of control, instead defining it as:
. . .the power, direct or indirect, whether or not exercised, through the ownership of a majority or a dominant minority of the total outstanding voting interest in an entity. . .to determine, direct, or decide important matters affecting an entity.19
Consequently, CFIUS may find that a minority shareholder has 'control' if it possesses certain negative rights (e.g., the ability to veto board decisions). Control jurisdiction is not dependent on the industry or other characteristics of the US business, only that the transaction results in foreign control of the US business.
v Covered investments
A covered investment is a non-controlling direct or indirect investment by a foreign person, other than an excepted investor,20 in an unaffiliated TID US business that affords the foreign person:
- access to any material non-public technical information;
- board membership or observer rights; or
- any involvement, other than through voting of shares, in substantive decision making of the TID US business regarding its critical technology, critical infrastructure products and services or SPD.21
Thus, whereas control jurisdiction is not dependent on the nature of the US business, covered investment jurisdiction can only apply where the US business is a TID US business.
vi Covered real estate transactions
A covered real estate transaction is the purchase, lease or concession to a foreign party of 'covered real estate' whether proposed or completed. Covered real estate is as follows:
- real estate that 'is located within, or will function as part of, a covered port'; and
- real estate in close proximity to a US military installation or other property owned by the US government that 'is sensitive for reasons relating to national security'.22
For some installations, this latter proximity-based jurisdiction is triggered if the real estate is within 1 mile of the installation. In other instances, it is triggered if it is within 100 miles of the installation. Real estate within US census-designated 'urban clusters' and 'urban areas' is exempt from this proximity-based jurisdiction. Covered real estate transactions are distinguished from CFIUS's other two prongs of jurisdiction in that the real estate need not constitute a US business to be covered. Thus, a greenfield business may not trigger covered control or covered investment jurisdiction, but it could trigger real estate jurisdiction.
vii Mandatory versus voluntary screening
Filing with CFIUS remains voluntary for most transactions. However, FIRRMA created two categories of mandatory filings (excepted investors, however, are not subject to mandatory filing requirements).23 The first is a covered transaction, whether a covered control transaction or a covered investment, that results in the acquisition of a substantial interest in a TID US business by a foreign person in which the national or subnational governments of a single non-excepted foreign state have a substantial interest.24 The second is a covered transaction – irrespective of government ownership – involving a TID US business that produces, designs, tests, manufactures, fabricates or develops one or more critical technologies for which a US regulatory authorisation (i.e., an export licence) would be required to export the subject critical technology to the foreign investors, including certain entities in the ownership chain.25 Eligibility for any of three enumerated export licence exceptions, prior to consummating the transaction for items controlled under the Export Administration Regulations, provides an exemption to the critical technology mandatory regime.26 Failure to make a mandatory filing can result in a fine up to the value of the transaction with buyer, seller and target bearing liability.27
If a transaction is not subject to a mandatory filing requirement, the parties must decide whether to voluntarily notify the transaction to CFIUS. The carrot for filing voluntarily is that, if CFIUS reviews and clears the transaction with 'no unresolved national security concerns', the transaction receives 'safe harbour' and cannot be rereviewed by the CFIUS except under limited circumstances related to misstatements or omissions, or failure to comply with clearance conditions. The stick is CFIUS's indefinite authority to use its call-in powers to review any covered transaction that it has not cleared with safe harbour ('non-notified transactions') and take the full range of mitigative actions, including the recommendation that the President suspend or prohibit the transaction.28
The decision to file voluntarily is thus a matter of risk tolerance that is generally informed by whether CFIUS is likely to use its call-in powers and, if it does, whether it is likely to take remedial action that might threaten to undermine the parties' commercial objectives for the transaction. The likelihood of CFIUS using its call-in powers and taking remedial action is inextricably linked to how it understands and assesses national security risk. CFIUS analyses national security risk using three variables:
- threat is the intent and capability of a foreign person to take action to impair national security;
- vulnerability is the extent to which the nature of the US business presents susceptibility to impairment of national security; and
- consequence is the effect on national security that could reasonably result from exploitation of identified vulnerabilities by a threat actor.29
A threat does not require or imply a vulnerability and vice versa. For example, a deal involving a non-threatening investor may pose a risk if the US business is a highly vulnerable supplier of a critical defence component, whereas a transaction involving an investor that is not seen as entirely trustworthy may pose little to no risk because the US business has no exploitable vulnerabilities.
Considerations other than national security risk sometimes also factor into transaction parties' decision to file, including:
- the size of a transaction and amount of publicity that it is likely to attract;
- whether the parties are making other regulatory filings with individual committee members that might result in the eight transactions being identified;
- eliminating the risk of a call-in of a large or particularly significant deal; and
- building or maintaining a positive reputation with CFIUS.
There are two types of CFIUS filings: a long-form 'notice' and a short-form 'declaration'. Parties may elect either regardless of whether filing voluntarily or on a mandatory basis. The mandatory filing obligation is satisfied by the submission of a filing not later than 30 days before closing.
Both types of filing are submitted to CFIUS using Treasury's CMS web portal and, once in process, CFIUS has the authority to submit supplemental requests for information that must be answered within the regulatory deadline at the risk of the filing being rejected. CFIUS can also reject a filing if it identifies material misstatements or omissions during its review. Once submitted, parties may only withdraw a filing with CFIUS's permission. The type of filing impacts the timing of the review, the range of possible administrative outcomes and the filing fee assessed by CFIUS. Parties should consider the benefits and drawbacks of each type of filing in the context of the timing and complexity of the transaction.
Parties are encouraged to submit a draft notice and engage in a pre-notification period prior to submission of a final notice. This is why this form is used most often for complex transactions. Once a notice is accepted as complete, a 45-day review period begins. At the end of this period, CFIUS must either issue a clearance letter or initiate the 45-day investigation. In 2020, slightly less than half of covered transactions that were filed as notices required investigation.30 If CFIUS cannot conclude action by the end of the investigation period, by operation of law, the case enters a 15-day presidential review period after which the President must make a final decision.31 A complete, properly filed notice results in one of three outcomes:
- CFIUS concludes action (with or without mitigation) and grants the transaction safe harbour;
- CFIUS makes a recommendation to the President to suspend or prohibit the transaction; or
- the parties withdraw their notice and abandon the transaction. If time is running out in the 45-day investigation period and the transaction parties need additional time to continue discussions with CFIUS (e.g., regarding mitigation remedies), the parties can seek CFIUS's permission to voluntarily withdraw and refile the transaction to restart the process.
Filing a notice is most likely to be beneficial for parties that need a safe harbour to satisfy a contractual term or anticipate that a transaction will require mitigation. Additionally, if a transaction is particularly complex or the foreign investor is unfamiliar to CFIUS, a notice is generally more suitable than a declaration. A notice also requires a filing fee calculated based on the overall transaction value.32
Submitting a declaration initiates a 30 day review period, after which CFIUS can:
- request the parties submit a full notice so it can continue its review;
- issue a 'no action letter' informing the parties that it was unable to conclude action and, while it is not requesting a full notice, it reserves the right to do so in the future;
- unilaterally initiate a review; or
- clear the transaction with safe harbour.
Declarations are generally more suitable for transactions where: (1) the foreign investor is known to CFIUS and has a successful filing record and (2) the transaction is not overly complex either in terms of structure (e.g., one direct acquirer versus a multi-fund consortium), subject matter (e.g., an established technology versus an emerging technology) or national security considerations (e.g., few or no defence contracts).
There are three main benefits of filing a declaration. The first is timing. In addition to the shorter review timeline, declarations generally require less pre-filing coordination with CFIUS (e.g., no draft). Second, declarations generally require less information than a full notice. Finally, declarations do not incur a filing fee. The main risk of a declaration is CFIUS requesting a full notice at the end of its review. In such a case, the parties will have added an additional 30 days on to what might be a 90-day notice process. In the event of a no-action letter, transaction parties will have to determine whether they are comfortable closing with the possibility of CFIUS requesting a filing or if they want to voluntarily file a notice to get the assurance of safe harbour.
xi Prohibition and mitigation
Negotiated mitigation agreements and imposed orders are CFIUS's primary tools for mitigating national security risks. In 2020, approximately 8 per cent of transactions that CFIUS reviewed required mitigation measures.33 CFIUS has broad discretion to implement whatever mitigation measures that it deems necessary so long as they are supported by its risk-based analysis and do not duplicate the parties' obligations under otherwise already applicable law. Additionally, if CFIUS preliminarily identifies an ongoing risk to national security, it can impose an interim mitigation order that remains in effect until it concludes action, including through an order precluding closing pending completion of the CFIUS review.34 Potential mitigation terms include, for example, limiting transfer of certain intellectual property, establishing guidelines related to US customer information, providing that only US citizens will conduct certain activities, notifying customers of the change in ownership composition, erecting firewalls or other security protocols, or requiring divestiture of select assets or businesses.35 In high-risk transactions that do not rise to the level of a prohibition, CFIUS may require passivity measures and limitations on governance, such as a proxy board. Violation of a CFIUS mitigation order or agreement can result in civil monetary penalties of up to the value of the transaction, damages or reopening of the review and imposition of further remedies.
If CFIUS identifies a risk requiring mitigation remedies, transaction parties should expect to receive a written communication from Treasury specifying the contours of measures that would resolve CFIUS's concerns. CFIUS may or may not provide insight into the specific nature of or basis for its concerns. CFIUS is generally willing to negotiate with parties over mitigation terms to ensure that the agreement will be effective over the long term and will not undermine the transaction. If CFIUS and the transaction parties are unable to reach a negotiated agreement, CFIUS can impose mitigation terms or recommend that the President suspend or prohibit the transaction.
Prohibiting or suspending a transaction is the sole, non-delegable authority of the President.36 If CFIUS concludes that it is unable to mitigate a risk arising from a transaction, it will inform the transaction parties of its conclusion in writing and state that it is prepared to make a recommendation to the President. At this stage, many parties will request CFIUS's permission to withdraw and abandon the transaction rather than have it be sent to the President for a decision. The President's decision is publicly announced, whereas the government is otherwise generally prohibited from disclosing information about proceedings before CFIUS. To suspend or prohibit a transaction, the President must find credible evidence that a foreign interest might take action that threatens to impair the national security, and that other laws do not, in the President's judgement, 'provide adequate and appropriate authority' to protect that national security.37 Only seven transactions have been prohibited by presidential order, although many more have been withdrawn and abandoned in lieu of a prohibition.38
CFIUS has no administrative appeals process, and the President's findings and decision to suspend or prohibit a transaction are statutorily exempt from judicial review.39 The US Court of Appeals for the District of Columbia has held, however, that that the statutory bar on judicial review of the President's findings did not preclude a challenge on due process grounds.40
i Prohibited sectors
Foreign investors generally are not prohibited from investing in any sectors of the US economy, although there are some sector-specific restrictions discussed below.
ii Restricted sectors
Separate from the CFIUS process, there are a few sector-specific regulatory regimes with oversight or restrictions on foreign investment. In many cases, these sectors also subject domestic investors to similar restrictions; for example, requiring a licence to operate. Federal limitations and restrictions on foreign investment focus on sectors that involve public interest and public services.
Foreign investment in the US airline industry is heavily restricted and is subject to control by the US Department of Transportation (DOT). There are domestic requirements with respect to the issuance of aircraft registrations41 and air carrier certificates of public convenience and necessity.42 Overall foreign ownership is capped at 25 per cent of the voting interests.43 Furthermore, when evaluating whether a corporation is under the 'actual control' of US citizens, the DOT considers factors such as the foreign entity's involvement in management and business decisions, and its influence and control over the board of directors.
The US banking industry is heavily regulated at both federal and state level.44 Federal laws generally do not restrict foreign ownership or control of US banks, but the establishment or acquisition of a bank, branch, agency or commercial lending subsidiary in the United States by a foreign entity may be subject to review by federal or state regulators including the Federal Reserve Board (FRB).45 Furthermore, under the Bank Holding Company Act (BHCA),46 FRB approval is also needed to operate as a bank holding company (BHC)47 or to acquire more than 5 per cent of the voting securities of a US bank or BHC.48 The FRB evaluates several factors when reviewing a foreign bank's application under the BHCA, including financial stability, competition, public convenience and whether the authorities in the foreign bank's home country exercise comprehensive consolidated supervision.49
The Federal Communications Commission (FCC) is tasked with reviewing and authorising all radio and television broadcasting licences. The Telecommunications Act of 1996 restricts foreign governments and government representatives from holding various licences, including broadcast and common carrier licences.50 Furthermore, foreign ownership of FCC licensees is capped in certain instances or may result in a licence being withheld or revoked (or both capped and withheld or revoked).51 Team Telecom – formally known as the Committee for the Assessment of Foreign Participation in the United States Telecommunications Services Sector – provides input on the national security implications of foreign ownership and investment.52
Federal and state law heavily regulates energy resources in the United States. Under the federal Mineral Lands Leasing Act (and other laws), only US citizens and corporations that are organised under US law may obtain particular mineral, gas and oil leases, although there are exceptions if the investor's home country extends similar privileges to US citizens and companies.53
Under the Atomic Energy Act, a nuclear facility licence may not be acquired by an alien or corporation owned, controlled or dominated by an alien, foreign government or foreign corporation.54 The Nuclear Regulatory Commission has issued guidelines for determining whether an alien, foreign government or foreign corporation owns, controls or dominates a licence applicant.55 According to these guidelines, an applicant that is partially owned by a foreign entity may be eligible for a licence if it imposes certain conditions on the foreign investor, such as limiting nuclear material handling to US citizens.56
Shipping between ports in the United States is limited to US-built, owned and registered vessels, with few exceptions.57 Only statutorily eligible entities can obtain a registration from the US Coast Guard to engage in this activity58 and a registration generally is limited to US citizens or entities in which US citizens hold at least 75 per cent of the interests.59
Typical transactional structures
Briefly set out below are typical corporate structures and transactions pursuant to which a foreign investor may enter the US market. A series of state and federal laws govern investment of this kind. Generally, foreign investors are subject to the same corporate legal requirements and are required to follow the same corporate formalities as domestic investors.
i Choice of structure for new entities
Regulation on the formation, operation, or dissolution of any structure is governed by state law, so foreign investors should be familiar with the law of their respective jurisdiction. Foreign investors typically choose to incorporate in Delaware because its law is straightforward and well established. The choice of structure (e.g., corporation, partnership and limited liability company) is generally driven by tax and liability consequences, and does not turn on whether the investor is foreign or domestic.
ii Acquisition of a majority or minority stake
Generally, there are no restrictions prohibiting a foreign investor from taking a majority or minority stake in, or acquiring 100 per cent of, a US private corporation or other legal entity, other than with respect to those entities operating in specific regulated sectors, as discussed in Section IV. Foreign investors need only comply with the laws that would be applicable to acquisitions by domestic investors (e.g., merger control laws).
There are two primary methods of acquiring a company in the United States available to domestic and foreign investor alike: a stock acquisition directly from the stockholders or a merger. For public company acquisitions (and some private companies) where the stock is widely held by a disparate group of stockholders, an acquirer typically will use one of two methods: a tender offer followed by a squeeze-out merger (a 'two-step' process) or calling a stockholder vote to approve a merger (a 'one-step' process).
iv Asset acquisition
If an investor seeks to acquire certain or all the assets of a US target, in most cases, the law governing that acquisition generally will be the law of the contract and the law of the state in which the assets reside. Certain acquisitions of material assets, or all or substantially all a company's assets, may require stockholders' approval (and therefore be governed by the federal securities law and proxy rules) for certain public companies. No unique legal requirements govern the acquisition of assets by foreign investors, and generally there are no restrictions on ownership by foreigners of US real property (except for certain restrictions on agricultural land and mineral lease rights).
Other strategic considerations
US policy has been focused in the recent term on addressing the perceived threat presented by Chinese technologic advancement. That policy consideration, in particular, resulted during the Trump administration in a government-wide approach to shoring up laws, and aggressively using existing authorities to block Chinese access to US technology, markets and money, and to ween critical US supply chains off their reliance on Chinese inputs. This effort reached far beyond the US national security review process to include restrictions on Chinese company access to US capital markets and restrictions on deploying certain Chinese components in the United States, in particular in the telecommunications industry. However, this policy has had a number of implications for the national security review process as well. For example, CFIUS often scrutinises the national security risks that China can pose as a third-party threat actor in transactions that do not directly involve a Chinese company; that is, by exploring the commercial links that the non-Chinese acquiring person has with China and its vulnerabilities to China. As a result, not only has direct Chinese investment in the United States come under greater scrutiny but so have the ties that companies have to China. Additionally, the US government has sought greater cooperation and convergence with certain allied governments on the common threats they face (including China) and how to use foreign investment screening tools effectively to address such threats. This has allowed CFIUS to effectively extend its authority by tapping into enforcement mechanisms outside its jurisdiction; for example, by working with an allied nation that might have a greater equity, jurisdictional basis or enforcement mechanism.
The current US administration will almost certainly adopt a more measured policy towards foreign investment than the last administration. However, there are two areas related to foreign investment where there is likely to be significant continuity between the Trump, Biden and future administrations.
The first is the drive to secure and strengthen US supply chains. Supply chain security is grounded in two interrelated concepts: supply integrity (making sure inputs are of sufficient quality and not compromised) and supply assurance (making sure inputs are available when needed and in sufficient quantity). President Trump's May 2019 supply chain Executive Order was primarily focused on supply integrity whereas President Biden's February 2021 Executive Order was primarily focused on supply assurance.60 However, by allowing a Trump-era rule giving Commerce the authority to block or impose conditions on certain information and communications technology or services transactions with so-defined foreign adversaries, the Biden administration sent a clear signal that it will continue with certain aspects of the Trump administration's aggressive approach to ensuring supply integrity in key industrial sectors. While supply integrity measures will likely continue to be targeted primarily at Chinese and Russian companies, foreign investors from US allies may experience an increase in the US government's willingness to use CFIUS as means of shoring up US supply chains through mitigation agreements related to supply assurance and onshoring requirements for critical inputs and technologies.
Second, China will remain a significant focus for national security and foreign policy makers. For US businesses that produce advanced technology or have access to sensitive personal data, CFIUS will almost certainly continue to serve as a significant impediment to deal-making with Chinese companies. There may be changes around the margins where CFIUS may be willing to approve some transactions with heavy mitigation as opposed to blocking them outright, or where the government opts for what it calls a 'run faster' (domestic investment) strategy to bolster US technological competitiveness rather than seeking to deny China capabilities. However, the focus on China will continue to impact not just foreign investment from China, but also non-Chinese foreign companies that either engage in business in China or that rely upon goods made in China, where the US government sees those activities as posing national security risks.
1 Aimen Mir is a partner, Christine Laciak is special counsel and Colin Costello is a CFIUS client advisor at Freshfields Bruckhaus Deringer US LLP, with thanks to Emily Strickland, who is a summer associate.
2 The Organisation for Economic Co-operation and Development (OECD) ranked the US slightly above the OECD average on its Foreign Direct Investment Regulatory Restrictiveness Index. The index measures four types of statutory restrictions on foreign direct investment: (1) foreign equity restrictions; (2) screening and prior approval requirements; (3) rules for key personnel; and (4) other restrictions on the operation of foreign enterprises. See OECD, Foreign Direct Investment Regulatory Restrictiveness Index, available at http://goingdigital.oecd.org/en/indicator/74.
3 Chinese investment in the United States increased modestly in 2020 reaching $7.2 billion but remained a fraction of its $49 billion highwater mark in 2016. See Rhodium Group, Two-Way Street 2021,
https://rhg.com/research/twowaystreet-2021. Investment from Russia also continues to receive significant scrutiny from CFIUS, though the overall volume of investment from Russia has remained relatively low on an absolute and relative basis.
4 See Executive Order Regarding the Acquisition of Musical.ly by ByteDance, Ltd. (19 August 2020), available at https://home.treasury.gov/system/files/136/EO-on-TikTok-8-14-20.pdf.
5 Executive Order Addressing the Threat Posed by TikTok, and Taking Additional Steps To Address the National Emergency With Respect to the Information and Communications Technology and Services Supply Chain, available at https://www.govinfo.gov/content/pkg/FR-2020-08-11/pdf/2020-17699.pdf.
6 See Executive Order on Protecting Americans' Sensitive Data from Foreign Adversaries (9 June 2021), available at https://www.whitehouse.gov/briefing-room/presidential-actions/2021/06/09/executive-order-on-protecting-americans-sensitive-data-from-foreign-adversaries.
7 See H. Rept. 116-456, p. 14 (17 July 2020).
8 For additional discussion of this trend, see https://blog.freshfields.us/post/102gq61/expansion-
9 Public Law 115–232 (13 August 2018).
10 Statement on Congressional Action on Legislation To Reduce the National Security Risks Posed by Certain Types of Foreign Investment (27 June 2018), available at https://www.govinfo.gov/content/pkg/DCPD-201800459/pdf/DCPD-201800459.pdf.
11 Statement by President Joe Biden on the United States' Commitment to Open Investment (8 June 2021), available at https://www.whitehouse.gov/briefing-room/statements-releases/2021/06/08/statement-
12 To wit, according to President Biden 'the principle that economic security is national security…[is] gospel in 2021.' See Remarks by President Biden at United States Coast Guard Academy's 140th Commencement Exercises (19 May 2021), available at https://www.whitehouse.gov/briefing-room/statements-releases/2021/05/19/remarks-by-president-biden-at-united-states-coast-guard-academys-140th-commencement-exercises/.
13 50 USC App. 4565(k)(2) (2018).
14 50 USC App. 4565(f) (2018).
15 31 CFR Section 800.248 (2020).
16 The provisions of law and regulation include, among others: (1) the United States Munitions List (USML) set forth in the International Traffic in Arms Regulations (ITAR) and (2) the Commerce Control List (CCL), items controlled for reasons other than anti-terrorism, set forth in Supplement No. 1 to Part 774 of the Export Administration Regulations (EAR). Id. at Section 800.215.
17 For example, owning or operating (function) any internet protocol network that has access to every other internet protocol network solely via settlement-free peering (product or service). Id. at Section 800.214 and Appendix A.
18 The types of SPD are financial data, consumer report data, insurance data, non-public electronic communications of non-employees, geolocational data, biometric enrolment data, data used to process government identification cards or US Government personnel security clearance data (other than that of employees). Id. at Section 800.241.
19 Id. at Section 800.208.
20 An 'excepted investor' is one from an 'excepted foreign state' as designated by Treasury. These currently are Australia, Canada and the United Kingdom. See 31 CFR Sections 800.218 and 800.219 (2020) and Department of the Treasury, CFIUS Excepted Foreign States (13 February 2020), https://home.treasury.gov/policy-issues/international/the-committee-on-foreign-investment-in-the-united-states-cfius/cfius-excepted-foreign-states.
21 31 CFR Section 800.211 (2020).
23 See excepted investor definition above at note 20.
24 The 'substantial interest' element of this prong requires that the foreign investor acquire a voting interest of at least 25 per cent and the foreign government own a voting interest of at least 49 per cent in the foreign investor. See 31 CFR Section 800.244.
25 Id. at Section 800.401.
26 These licence exceptions are Technology and Software Unrestricted (TSU); Encryption Commodities, Software, and Technology (ENC); Strategic Trade Authorization (STA). See id. at Section 800.401.
27 50 USC App. 4565(h)(3) and (l)((6)(D) (2018).
28 31 CFR, Section 800.301.
29 Id. at Section 800.801.
30 US Department of the Treasury, Committee on Foreign Investment in the United States Annual Report to Congress CY 2020, available at
https://home.treasury.gov/system/files/206/CFIUS-Public-Annual-Report-CY-2020.pdf (CFIUS Annual Report 2020).
31 CFIUS timelines are measured in calendar days.
32 CFIUS filing fees range from $750 to $300,000 depending on the overall size of the transaction. See https://home.treasury.gov/system/files/206/Fact-Sheet-for-Interim-Rule-on-CFIUS-Filing-Fees.pdf.
33 See CFIUS Annual Report 2020 supra Note 20.
34 50 USC App. 4565(l)(3) (2018).
35 CFIUS Monitoring and Enforcement Guidance, at https://home.treasury.gov/policy-issues/international/the-committee-on-foreign-investment-in-the-united-states-cfius/cfius-monitoring-and-enforcement.
36 50 USC App. Section 4565(b)(1)(G).
37 50 USC Section 4565(d).
38 The seven presidential prohibitions are: (1) China National Aero-Technology and Export Corp's acquisition of Mamco Manufacturing Inc (a US aerospace parts manufacturer) in 1990; (2) Ralls Corp's acquisition of a US wind farm operator in 2012; (3) Fujian Grand Chip Investment Fund LP's attempted acquisition of the US business of German semiconductor manufacturer Aixtron SE in 2016; (4) China Venture Capital Fund Corporation Limited's US affiliate Canyon Bridge Capital Investment Limited's proposed acquisition of US semiconductor manufacturer Lattice Semiconductor Corporation in 2017; (5) Broadcom's proposed 2018 acquisition of US 5G provider Qualcomm was prohibited before Broadcom could re-domicile from Singapore to the United States; (6) Beijing Shiji Information Technology Co, Ltd's acquisition of StayNTouch, Inc, a Delaware company (2019); and (7) ByteDance Ltd.'s acquisition of Musical.ly (2020) (although the status of this presidential order remains unclear as of the date of publication).
39 50 USC App. Section 4565(e)(1).
40 Ralls Corp. v. Comm. on Foreign Inv. in the U.S., 758 F.3d 296, 311 (D.C. Cir. 2014) (remanding Administrative Procedures Act claims against CFIUS for consideration in the first instance after finding that they were not moot).
41 49 USC Section 44102(a).
42 49 USC Section 41102
43 49 USC Section 41102(a).
44 Some states impose citizenship and residency requirements on state-chartered banks. In addition, the directors of national banks chartered at the federal level must be US citizens. 12 USC Section 72.
45 12 USC Section 3105(d).
46 12 USC Sections 1841–1852.
47 A BHC is an entity that controls one or more banks but does not itself engage in banking. BHCs exist in the United States because the United States limits the activities in which US banks can be involved; a BHC permits a US bank to be owned by a company that engages in activities in which the US bank is not permitted to engage.
48 12 USC Section 1842(a). Foreign companies that acquire an interest in a BHC or US bank under certain circumstances are exempt from these limitations (e.g., with respect to operations outside the United States, see 12 USC Section 1841(h)(2) and (3); 12 USC Section 1843(c)(9)). Other regulations are applicable to the merger of certain banking institutions not regulated under the BHCA.
49 12 USC Section 1842(c).
50 47 USC Section 310(a).
51 47 USC Section 310(b)(4). The FCC has clarified that it will approach each application involving foreign investment in the controlling US parents of broadcast licensees on a case-by-case basis. See Commission Policies and Procedures Under Section 310(b)(4) of the Communications Act, Foreign Investment in Broadcast Licensees, MB Docket Nos. 13–50, 'Declaratory Ruling', 28 FCC Rcd 16244 (2013), available at www.fcc.gov/document/fcc-clarifies-policy-foreign-investment-broadcast-licensees-0, paragraph 11.
53 30 USC Section 181.
54 42 USC Section 2133(d).
55 Final Standard Review Plan on Foreign Control Ownership, Control or Domination, 64 Fed Reg 52,355 (28 September 1999), available at www.govinfo.gov/content/pkg/FR-1999-09-28/pdf/FR-1999-09-28.pdf.
56 id. at 52,358.
57 46 USC App. 883; 46 CFR Section 68.5.
58 46 USC Section 12103(a).
59 46 USC Section 50501.
60 Compare: Securing the Information and Communications Technology and Services Supply Chain (15 May 2019), available at https://www.federalregister.gov/documents/2019/05/17/2019-10538/securing-the-information-and-communications-technology-and-services-supply-chain, with Executive Order on America's Supply Chains (24 February 2021), available at https://www.whitehouse.gov/briefing-room/presidential-actions/2021/02/24/executive-order-on-americas-supply-chains/.