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.

The announcement of the Office of the U.S. Trade Representative (“USTR”) on January 22, 2018, that the Trump Administration is granting relief for the domestic solar panels and modules industry under section 201 of the Trade Act of 1974, confirmed the fears of many consumers that substantial additional duties would be imposed on those products. USTR announced that the relief would come in the form of a tariff increase of 30% in the first year, decreasing to 25% in year two, 20% in year three, and then to 15% in year four. On January 23, 2018, President Trump signed the Proclamation implementing the relief. The relief will go into effect on February 7, 2018.

Despite the above tariffs, the relief announced provides that the first 2.5 gigawatts of imported cells are excluded from the additional tariffs. The use of the exemption for the first 2.5 gigawatts makes the relief a form of a “tariff rate quota,” meaning that tariffs only apply if imports rise above a certain quota amount. This type of relief has been imposed in the past, including on certain steel products. The ITC Commissioners made various recommendations to the President in this case, some of which included types of tariff rate quotas.

The nature of the relief will mean that exporters now are likely want to rush to import their products in order to be within the 2.5 gigawatt exclusion. The Proclamation states that the quota of 2.5 gigawatts “shall be allocated among all countries except those countries the product of which are excluded from such tariff rate quotas…” While this statement seems to imply that there will be a base time period used to determine different market shares within the total quota for different countries, our discussions with government officials indicate that this was not what was intended. Instead, the intention was to have one worldwide quota of 2.5 gigawatts that will apply to all countries, without any allocation among countries. Regardless of whether allocations are made among countries or there is just one overall quota, if shipments are made in the hope that they will fall within the exclusion but the 2.5 gigawatt quota already is filled at the time of entry, the 30% tariff that then will be applied may change the economics of a deal if the possibility of a tariff has not been taken into account. It is not clear at this time whether there will be some kind of pre-clearance for such imports before the time of exportation, or whether there will be a free-for-all at the time of entry. Continue Reading Solar Panels and Modules Trade Decision Creates New Uncertainty for Purchasers

president_of_us_seal

Fulfilling repeated campaign pledges to roll back the Obama administration’s climate change initiatives, President Trump signed a sweeping executive order yesterday targeting key Obama-era regulations, including the Clean Power Plan and emission standards for the oil and gas industry. The executive order states that it is in the interest of the nation to promote development of energy resources “while at the same time avoiding regulatory burdens that unnecessarily encumber energy production, constrain economic growth, and prevent job creation.” The multi-faceted approach taken by the order makes it clear that this Administration views any regulation of climate change or carbon pollution as “unnecessary.”  Continue Reading Trump’s Executive Order Takes a Multi-Faceted Approach to Eliminating Climate Change Regulation

Horn_Robert
Robert Horn
Adam Sachs
Adam Sachs

During his confirmation hearing to become Secretary of Energy, former Texas Governor Rick Perry sensibly walked back his 2011 recommendation that the Department of Energy (DOE) be eliminated. After a few weeks on the job, it is now apparent that the secretary not only thinks the DOE should continue to exist but recognizes it’s an essential element of our national security.

President Trump’s inaugural address called for an “America First Energy Plan.”  Although admittedly short on details, the Trump plan seems to Continue Reading Around the Horn: Perry, Policy & Politics

No RegulationsAs we reported in a previous blog post, President Trump’s Chief of Staff Reince Priebus issued a memorandum entitled “Regulatory Freeze Pending Review” to all federal executive departments and agencies implementing a regulatory freeze on new and pending regulations.  This post provides some further information and insight into the freeze and the specific impacts it has had and will have on final and proposed environmental, health, safety, and pipeline regulations.

Technically speaking, the directive is not an executive order and does not have the effect of law.  Thus, federal agencies are left with considerable discretion regarding how to implement it.  The directive was issued with the intent of Continue Reading Trump Administration’s Regulatory Freeze Impacts Environmental, Health, Safety, and Pipeline Regulations

Horn_Robert
Bob Horn
Adam Sachs
Adam Sachs

I’m Adam Sachs, a partner in Husch Blackwell’s energy practice and a registered DC lobbyist. I will be joined in these semi-regular blog posts by my colleague and longtime Washington lawyer, Bob Horn.  Bob served in the Ford administration, ran Detroit Edison’s federal affairs operations, co-founded the Republican National Lawyers Association, and most recently served as a member of the Trump transition team.  I have extensive Capitol Hill experience, having served in senior policy and legal positions since the mid-1980’s.  My most recent Hill gig was serving as committee counsel to now assistant Democratic leader James Clyburn of South Carolina. Continue Reading Around the Horn: Trump DOE/EPA Nominations and Energy Policy Initiatives

logo-cop21Last Tuesday, the European Union ratified the Paris Agreement, the landmark international agreement dealing with the mitigation, financing and adaptation of greenhouse gas emissions. With the EU ratification, enough nations have ratified the Agreement, representing a sufficient percentage of the worldwide production of greenhouse gases, for the Agreement to take effect on November 4, 2016. Presently, more than 190 nations have signed the Agreement, of which around 76 have ratified it. In September, the U.S. and China mutually announced that the world’s two largest economies – and the two largest emitters of greenhouse gases – were ratifying the Agreement. Continue Reading Paris Agreement Climate Change Accord to Take Effect