White & Case CFIUS FIRRMA Tool

Click here to visit the CFIUS FIRRMA Tool, an online, step-by-footstep analysis platform to help in determining whether a contemplated transaction could be subject to CFIUS's jurisdiction under FIRRMA and if mandatory filing requirements would utilize

The Foreign Investment Risk Review Modernization Act (FIRRMA) was signed into law today by President Trump. FIRRMA reforms and modernizes the Committee on Foreign Investment in the United States (CFIUS) review process and represents the get-go update to the CFIUS statute in more than a decade. Nosotros reported on FIRRMA'south key provisions in July. In this Client Warning, we discuss FIRRMA'south practical implications also as provide useful context relevant to clients and industry.

The Reality of FIRRMA

  • "Modernization" is a euphemism for addressing concerns almost Chinese investments. While the Trump Administration has been business firm in its messaging that FIRRMA is meant to "close gaps" between the transactions that CFIUS is currently able to review and transactions information technology currently cannot review despite them raising similar national security concerns, the reality is that those "gaps" largely pertain to particular Chinese investment trends: (ane) real manor acquisitions in sensitive areas, (2) minority investments (particularly through private equity-type structures) that might non be controlling but that nonetheless provide access to sensitive information or applied science of the target United states business concern, (3) the increasing use of Chinese joint ventures into which The states-origin technology is transferred, and (iv) concerns that Chinese deals are beingness structured to circumvent CFIUS.
  • FIRRMA provides the full general contours for CFIUS reform, but not the specifics. To achieve broad-based support for FIRRMA amongst competing interests in Congress, the various US regime members of CFIUS, and manufacture, many of the novel, difficult, or contentious issues were deferred to the regulation-writing process. Throughout FIRRMA—and particularly in the sections that expand the scope of "covered transactions" (i.e., transactions subject field to CFIUS's jurisdiction)—numerous provisions land that they are "subject to regulations prescribed by the Committee." These references were often the short-term solution when inter-governmental negotiations around certain provisions in FIRRMA were either met with resistance (e.1000., disagreement on which declarations must be mandatory) or were especially challenging (due east.thou., defining "emerging technology"). As a result, the ultimate touch of many of FIRRMA'due south key provisions is not yet known and will not be known until CFIUS promulgates new regulations implementing FIRRMA.
  • In detail, the extent to which covered transactions will aggrandize is unknown. Every bit mentioned higher up, the purpose of the new categories of covered transactions (i.e., (1) sure real estate transactions; (2) non-passive merely non-controlling investments in US businesses involving sensitive personal data, critical infrastructure, or critical applied science; (iii) changes in a foreign investor's governance rights, fifty-fifty in the absence of whatever new investment; and (4) attempts to evade) is largely to enable CFIUS to review additional types of Chinese investments. But the outcome is that, unless these categories are somehow limited, FIRRMA would cover every transaction in these new categories—potentially tens of thousands each twelvemonth. The negotiated solution appears to exist deferring to CFIUS to "prescribe regulations … to limit the awarding of [transactions in (one) and (2) above] to the investments of certain categories of foreign persons." How broad or narrow those "categories of foreign persons" are—and what criteria CFIUS uses to define the categories—will be, in our view, among the most important aspects of the regulations implementing this new legislation.
  • Limitations on FIRRMA'south scope will exist driven in function by resources considerations. As CFIUS develops its regulations, information technology volition meantime have to consider its resource needs, including additional staff, to implement the new constabulary. FIRRMA creates the potential for a well-funded CFIUS by providing for authorized appropriations, a "CFIUS Fund," and filing fees. But whether, and when, these funds will materialize remains to exist seen, equally does how chop-chop funding can translate into additional cleared staff to handle a substantial increase in notified transactions. Thus, as CFIUS writes its regulations, including the all-important limitations on covered transaction categories (1) and (two), it will practise so based on its expected funding and staffing levels. If funding and staffing remain scarce, we expect that past necessity the expansion of "covered transactions"— specially those subject to a mandatory filing—will be more limited.

Curt-Term Furnishings on the CFIUS Filing Process

  • No significant immediate change to the requirements for the contents of a CFIUS detect. While many of FIRRMA's provisions come into effect immediately upon enactment, the most significant changes to CFIUS's scope and structure will only take consequence in one case the Secretarial assistant of the Treasury certifies that the regulations, systems, and resources are in identify to implement them (or xviii months from the engagement of enactment, whichever is sooner). Therefore, in the brusk term, we do non look whatever significant changes to the types of data that is required for a CFIUS notice.
  • Of the provisions that will come into effect immediately upon enactment, most merely formulate or clarify CFIUS's electric current internal practices. Only a few will straight bear on the review procedure or the preparation of a CFIUS filing:
    • Potentially longer timelines. FIRRMA lengthens the initial review period by 15 calendar days (to 45 calendar days) and permits the Secretary of the Treasury, at the request of a lead agency, to add 15 calendar days at the dorsum end of an investigation in "boggling circumstances." This will potentially add up to thirty agenda days to a single CFIUS cycle (from 75 calendar days to 105).
    • Disclosure of more agreements with the notice. FIRRMA formalizes CFIUS'southward increasing trend to request all material agreements related to the transaction under review. Then, for example, in add-on to providing a re-create of the stock purchase agreement, CFIUS may also require the parties to provide copies of whatsoever other side agreements (including partnership agreements) related to the transaction.
    • Stipulations as to whether a transaction is "covered" or "foreign government controlled." Under FIRRMA, parties may stipulate in their notices that their transaction is "covered" (i.east., subject to CFIUS review) and/or "foreign regime controlled."

Long-Term Furnishings on the CFIUS Filing Process

  • Expansion of covered transactions will spur new filing requirements and systems. As discussed in a higher place, a fundamental change to CFIUS's telescopic is the expansion of covered transactions to include (ane) certain real estate transactions and (2) not-passive, not-controlling investments in U.s.a. businesses involving sensitive personal data, critical infrastructure, or critical technology (discipline to the limitations on these new categories that CFIUS will impose through regulation). The roll out of these new categories of covered transactions will probable involve an overhaul of the information that CFIUS requires in the notices and the electronic systems that CFIUS uses to receive and communicate with parties on their notices. We empathise that discussions are already underway within the Treasury Section as to what information should be provided in the filings and what electronic systems could exist utilized to handle the expected increase in filings.
  • Mandatory declarations represent a large change. Some other key modify to CFIUS'south scope is FIRRMA's creation of "declarations"—essentially, abbreviated notices—and the requirement that sure declarations exist mandatory. FIRRMA requires that declarations exist filed for certain transactions in which a strange government has a "substantial involvement", and it permits CFIUS to constitute mandatory declarations for other "disquisitional engineering" transactions (field of study to sure exceptions for investment funds and potential waivers for some strange-government investors). This is a notable change from the current process, which is generally voluntary. Given the potential commercial disadvantage to an investor subject field to mandatory declarations, we expect that the criteria for exceptions and waivers will exist highly important and, in certain transactions, will influence the transaction structures.
  • Potentially faster feedback from Treasury staff (and fees for expedited comments). One time the Secretarial assistant of the Treasury certifies that sufficient regulations, systems, and resource are in place, Treasury Department staff will be required to provide comments on draft and formal filings, or have the filings for review, within 10 business days (for those cases in which the parties stipulate that the transaction is a covered transaction). This is intended to expedite the process at the commencement, but depending on how it is implemented, it may not take that effect (if, for example, multiple rounds of comments and responses ensue). FIRRMA also requires a study on the merits of "prioritization fees" (i.e., payments of fees to go comments faster).

General Trends—CFIUS Moving Forward

  • China. As mentioned above, a cardinal impetus for FIRRMA is to enable CFIUS to review additional types of Chinese investment. This impacts both investments directly past Chinese entities and investments past non- Chinese entities that might have meaning ties to Mainland china (such equally through supplier, customer, partnership, joint venture, research and development, or funding relationships). FIRRMA highlights key areas of concern: proximity to sensitive The states government facilities, sensitive personal data, critical infrastructure, critical engineering science, and (while now addressed in export-control reform initiatives) engineering science transfers to Mainland china. We expect that land-directed and -funded investment in these areas volition be particularly highly scrutinized. That said, CFIUS's analytical methodology is a case-past-case assay of the threat, vulnerability, and consequences of the particular transaction under review, and FIRRMA does not modify that. We look that CFIUS will proceed to clear Chinese transactions that practise not present unresolvable national security concerns.
  • Individual Equity. In recent years, as the number and complexity of private disinterestedness investments has grown, also as the diverseness of limited partners in such investments, CFIUS has increased its focus on these investment structures. There are several aspects of FIRRMA that may exist of particular interest to individual equity funds and investors.
    • Certain exemptions from the expansion of covered transactions involving non-controlling, non-passive investments. FIRRMA contains a "clarification" for investment funds in the new "non-passive, not-decision-making" category of covered transactions. Generally, indirect investment whereby a foreign person obtains a seat or observer rights on the board of the United states of america business concern (where such business concern involves sensitive personal data, critical technology, or disquisitional infrastructure) could fall nether this new category of covered transactions. FIRRMA clarifies, however, that indirect investment through an investment fund in which the foreign person has a seat on an advisory lath or committee of the fund would non fall under this new category, so long every bit (1) the fund is managed exclusively by a US general partner or equivalent; (2) the advisory board or committee does not have the ability to control investment decisions of the fund or decisions made by the general partner or equivalent; (3) the foreign person does non otherwise have the ability to control the fund; and (4) the foreign person does not have access to material nonpublic technical data as a result of its participation on the informational board or commission.
    • Exclusions from sure mandatory declarations. There are two potential carve-outs from mandatory declarations for certain private disinterestedness structures. Each is premised upon exclusive management of the fund by a US general partner and the inability of limited partners to command investment decisions or otherwise command the fund. The regulations will need to more than precisely define these carve-outs.
    • Change in rights as a covered transaction. A feature of FIRRMA that has not attracted much attention, but that could have far-reaching effects, is the new category of covered transactions involving changes in the rights that a foreign person has with respect to a The states business organization. These changes could now be covered transactions if they result in foreign "command" (the current CFIUS standard) or meet the new "non-passive" standard with respect to US businesses involving critical engineering, critical infrastructure, or sensitive personal data. This could impact investment funds if a change in the rights of limited partners—even absent any new investments in or by the fund—causes a foreign express partner to obtain command of, or a non-passive interest in, the underlying US business.
    • Factors relevant to "control" and "non-passive" in the individual disinterestedness context. Split from FIRRMA, CFIUS has been closely scrutinizing individual equity structures in contempo years. Some of the factors that CFIUS at present considers in its analyses, and that funds and investors may wish to consider going forward, include:
      • How did the fund come about? Who initiated information technology?
      • Who were the anchor investors? How did such investors steer the investment strategy/focus of the fund?
      • Who are all of the express partners?
      • What are all of the rights of the limited partners?
      • Which express partners sit down on informational boards/investment committees, and what input exercise they have on such boards/committees? What powers do such boards/committees take?
      • To what extent can a limited partner suggest, review/opine on, and/or veto particular investments?
      • Beyond the detail fund involved in a transaction, what other funds does the private equity grouping accept, how did those funds come about, and who are the anchor investors in them?
      • Who is the fund'south general partner? How is it selected? How tin can it be removed/replaced?
      • Exercise any of the express partners have interests in the general partner or in any other managers/advisors to the fund?
      • Will any of the limited partners take connections to the portfolio companies other than through the fund?
  • More resource for, and attention to, mitigation monitoring. We wait that there will be more attending to mitigation monitoring. FIRRMA requires significantly more reporting to Congress on mitigation compliance and remediation, and this will likely increment the Committee's attention to these matters. Nosotros understand that already the Treasury Department—under its own initiative, likewise equally based on FIRRMA'due south directive to consider centralizing certain Committee functions within Treasury—is internally reorganizing to strengthen its oversight over CFIUS mitigation agreements. Where non-compliance is found, FIRRMA provides the Committee with new forms of remediation and eases CFIUS's ability to reopen its review of the transaction.
  • More robust non-notified process. We understand that the Commission in general, and the Treasury Department in particular, is likewise strengthening its non-notified processes to more quickly and effectively identify transactions of concern that have non been filed for review. FIRRMA endorses the centralization of these functions within Treasury. This could increase the risk that CFIUS will asking or self-initiate reviews of transactions that accept not been voluntarily filed or declared.
  • Potential filing fees. FIRRMA authorizes CFIUS to impose filing fees (there were none previously). Under FIRRMA, the fees—or the formula for determining the fees—will exist set by the forthcoming regulations, but the fees may not exceed the lesser of i percent of the value of the transaction or $300,000 (adjusted for inflation). CFIUS must base the fees on the value of the transaction, taking into consideration factors such equally the expenses of the Committee and the furnishings of the fee on small concern concerns and foreign investment.
  • Allied engagement. While the CFIUS procedure remains confidential nether FIRRMA, FIRRMA does allow for greater data sharing with US state and local governments and foreign allied governments. The permission to share information with foreign centrolineal governments, and FIRRMA'southward educational activity that CFIUS should found a formal procedure to practise and then, reflect a broader US authorities initiative to assistance and incentivize partner countries to strengthen their own investment review mechanisms and pursue reviews of transactions of involvement to the US government. Reforms have recently been enacted, or are being actively considered, in the European union, United kingdom of great britain and northern ireland, Canada, Australia, and Nihon, among others, and there is growing awareness and involvement in investment-security issues worldwide. Already, the The states, EU, and Nippon have formally agreed to engage on investment security with a view to cooperation, data exchange, and potential coordination. With respect to specific transactions, the increasingly close collaboration on investment -security matters amid governments means that in the future certain transactions could face (somewhat) coordinated review across multiple jurisdictions. The potential harmonization of investment security review processes is an area to sentry.

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