Monitoring proposed and newly enacted legislation is often a great way to flush out attorney job and business opportunities that your competitors either don’t know about or are slow to learn about. The John S. McCain National Defense Authorization Act, https://gpo.gov/fdsys/pkg/BILLS-115hr5515enr/pdf/BILLS-115hr5515enr.pdf a massive piece of legislation (788 pages), contains just such a potential bonanza for attorneys. It greatly expands the jurisdiction of an obscure U.S. government committee that reviews and approves or rejects foreign investments in the U.S.
The Committee on Foreign Investment in the United States (CFIUS) https://treasury.gov/resource-center/international/Pages/Committee-on-Foreign-Investment-in-US.aspx has been around since 1950, buried deeply under the bureaucratic radar. Foreign acquisitions of U.S. companies can pose challenges for the U.S. government as it balances the economic benefits of foreign direct investment with the need to protect national security. CFIUS is an interagency group, led by Treasury, that reviews certain transactions—foreign acquisitions or mergers of U.S. businesses—to determine their effect on U.S. national security and whether the transaction may proceed. In addition to its authority to allow or disallow these transactions to go forward, it can also mitigate risks.
The members of CFIUS include the heads of the following departments and offices:
Department of the Treasury (chair)
Department of Justice
Department of Homeland Security
Department of Commerce
Department of Defense
Department of State
Department of Energy
Office of the U.S. Trade Representative
Office of Science & Technology Policy
The following offices also observe and, as appropriate, participate in CFIUS’s activities:
Office of Management & Budget
Council of Economic Advisors
National Security Council
National Economic Council
Homeland Security Council
The Director of National Intelligence and the Secretary of Labor are non-voting, ex-officio members of CFIUS.
Each of the nine CFIUS member organizations vests committee responsibilities in a specific departmental or office unit. The two most important ones with the largest number of employees involved in CFIUS activities are:
- Department of Treasury, Office of Investment Security https://treasury.gov/about/organizational-structure/offices/Pages/-Investment-Security.aspx
- Department of Defense, Office of Manufacturing and Industrial Base Policy https://businessdefense.gov/
It is expected that these as well as other agency CFIUS offices will have to hire additional staff in order to manage their expanded responsibilities.
CFIUS Expanded Authority
The $716 billion authorization act vastly expands CFIUS’ portfolio, the most comprehensive reform in its history. While the bill does not single out any particular country, it is clearly directed primarily at Chinese acquisitions of sensitive U.S. technologies.
Sen. John Cornyn (R-X), one of the bill’s sponsors, said that the current review process “has allowed bad actors to exploit gaps in our safeguards to gain a competitive edge on the United States. We can no longer allow dual-use military technology to be vacuumed up by countries like China.”
The new law is going to capture many investments not previously subject to CFIUS review, including venture capital and private equity transactions. It also redirects CFIUS reviews from focusing solely on whether a foreign investor could ‘control’ a U.S. business to whether the foreign investor is ‘non-passive.’ CFIUS’s jurisdiction will now include foreign minority position equity investments in U.S. companies.
CFIUS’ jurisdiction will now also encompass “foundational and emerging technologies.” The broad language in the legislation could open up the range of biotech inventions that could be scrutinized by CFIUS. CFIUS may also recommend technologies for the review process and set reporting requirements on these recommendations under the new law.
The new law will go into effect once the Treasury Department provides guidance on terms, including definitions of what “critical” technologies might be.
The section of the Defense Authorization Act addressing CFIUS is the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA).
Who Benefits?
A few law firms already have CFIUS practices based in their Washington, DC offices. Look for many more firms as well as sole practitioners to get into the practice now that the number of potential clients is about to expand exponentially.
The Numbers
In calendar year 2015 (the last year for which complete data is available), CFIUS examined 143 transactions. The number of transactions has been growing at a rate of around 10 percent per year since 2010. In 2017, 99 such matters related to issues concerning the Defense Department, a 57 percent increase in just five years. From this, we can extrapolate that more than 200 matters were considered by CFIUS last year.
It is anticipated that CFIUS’ expanded authority will dramatically increase the number of cases CFIUS will have to consider.
More Information
- CFIUS Regulations, 31 C.F.R. Part 800 https://law.cornell.edu/cfr/text/31/part-800
- CFIUS Annual Report to Congress (2015) https://treasury.gov/resource-center/international/foreign-investment/Documents/Unclassified%20CFIUS%20Annual%20Report%20-%20(report%20period%20CY%202015).pdf
- Mario Mancuso. A Dealmaker’s Guide to CFIUS. To request a copy, contact: Skyler Ellis at ellis@kirkland.com.
- Government Accountability Office. Committee on Foreign Investment in the United States: Action Needed to Address Evolving National Security Concerns Facing the Department of Defense. GAO-18-494, July 10, 2018. https://gao.gov/assets/700/693010.pdf