A new legislation signed into law in August, the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), will expand vastly the types of foreign investment transactions that the Committee on Foreign Investment in the United States (“CFIUS”) may review. Under the new law, a wide range of foreign investments affecting the U.S. energy sector will be subject to the federal scrutiny.
Overview of the CFIUS Review Process
CFIUS has the authority to review “covered transactions” that might raise national security concern. CFIUS is a US government interagency process, chaired by the Treasury Department. Under the previous law, a “covered transaction” is one that results in foreign control over a U.S. business engaged in interstate commerce, and CFIUS is interested in reviewing a transaction if it raises risk of impairing national security, where the foreign entity is controlled by a foreign government, or if it involves any “critical infrastructure” that could impair the national security.
Critical infrastructure has been defined to mean “systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems and assets would have a debilitating impact on security, national economic security, national public health or safety, or any combination of those matters.” Through a series of directives, the Department of Homeland Security (DHS) has identified 16 sectors of the economy as with assets potentially critical to the U.S. infrastructure, including the energy sector.
For each transaction that it reviews, CFIUS’s analysis considers:
- Threat – whether the foreign acquirer has the capability or intent to exploit or cause harm;
- Vulnerability – whether the nature of the US target asset creates susceptibility to impairment of national security;
- Consequences – to US national security of the combination of the threat and vulnerability
This process may result in transactions being suspended, blocked, or modified.
Expansion of “Covered Transactions”
Previously the CFIUS only had jurisdiction to review foreign investments or acquisitions that could result in foreign control over a U.S. Business. After FIRRMA, the new legislation now calls for CFIUS to review a wide range of non-controlling investments made by foreign persons. Among the expanded categories of “covered transactions,” what is particularly relevant to the energy sector is that FIRRMA directs CFIUS to review all investments in US businesses that own, operate, manufacture, supply, or service “critical infrastructure” such as electricity transmission line, pipelines, oil and gas facilities, nuclear, hygro and other power plants, or US businesses that produces, designs, tests, manufactures, fabricates, or develops “critical technologies.” Such foreign investments, even though non-controlling, are subject to review if they afford the foreign person access to any material non-public technical information, membership or observer rights on the board of directors, or any involvement (other than through voting of shares) in substantive decision-making of the business in connection with critical infrastructure or critical technology.
FIRMMA provides the general contours for CFIUS reform, but not the specifics. To achieve broad-based support among competing interests and various US agency members of CFIUS, many concepts of FIRRMA, and especially key definitions relevant to the expansion of the non-controlling “covered transactions” relevant to the “critical infrastructure” and “critical technologies,” are left subject to the regulations to be prescribed by CFIUS. For example, FIRRMA continues to define “critical technologies” to mean “systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems and asses would have a debilitating impact on national security.” And what type of assets will meet this bar are subject to interpretation in the regulations to be prescribed by the Committee. Congress also deferred to CFIUS to prescribe regulations to limit the application of the expanded “covered transactions” to “certain categories of foreign persons.” How broad or narrow those “categories of foreign persons” are and what criteria CFIUS will use to define the categories, remain to be seen.
FIRRMA contains an important carve-out for indirect investments made by a foreign person into an investment fund. In particular, an indirect investment does not constitute investment subject to CFIUS jurisdiction if the investment fund is managed exclusively by a non-foreign general partner; any advisory board membership associated with the investment does not come with an ability to control the fund’s investments or the activities of any portfolio company; and the indirect investor does not as result of advisory board membership, gain access to “material nonpublic technical information.
Declarations – Fast Track Process
One of the most important procedural reforms of FIRRMA is to allow the more simplified “declaration” process for parties who wish to submit them. These declarations will be shorter than fully written notices (i.e., no more than five pages), and FIRRMA requires that CFIUS provide responses to declarations within 30 days. CFIUS may notify the parties that they should file a compete notice, initiate a full review on its own, or clear the transaction. This could be used as a fast track process for parties with less sensitive transactions to secure a confirmatory declaration with a much shorter process.
Effects on CFIUS Filing Process
While FIRRMA aims at reforms that enhance the protection of national security, it does continue to emphasize on the value of continued attraction of foreign investment into the U.S. To that end FIRRMA pointedly directs, that the CFIUS should continue to review transactions for the purpose of protecting national security, and should not consider commercial purposes, or to advance trade or other industrial policy goals.
Some FIRRMA changes to the review process came into effect immediately upon enactment, but the most significant changes will only take into effect until CFIUS certifies the implementing regulations. For example, the expanded “covered transactions” relating to “critical infrastructure” does not go into effect until the implementing regulation is adopted or a pilot program is put in place.