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The Growing Authority of CFIUS: Major Changes for a Key Player

By Robert Appleton

Major changes are afoot with the Committee on Foreign Investment in the United States
(CFIUS), a US government interagency group with authority to suspend, impose conditions
upon, or reject foreign investment transactions into the United States that meet certain
criteria. CFIUS, which first came into being during President Ford’s tenure in the White
House, typically handled purchases of US companies by foreigners that posed a possible
risk to US national security, and its authority has been systematically strengthened over
the years, becoming more significant with each passing administration. CFIUS — whose
decisions are final and cannot be appealed — has recently become much stronger, and
had its reach extended, with ramifications that are potentially quite profound. RANE Expert
Robert Appleton, who had the opportunity to support CFIUS on occasion during his tenure
at the US Department of Justice, where he also handled many of the major international
trade cases for the DOJ at the time, and an export control expert, highlights the newly
enhanced authority of the committee.

On October 10, the Congress passed the Foreign Investment Risk Review
Modernization Act (FIRMMA), which broadly expands CFIUS’s jurisdiction to include any
transaction by a foreign investor of “critical technology” in any one of 27 pilot program
industries. These terms are broadly defined to include the purchase or investment
not only of the company but the technology that fits the definitions as well, and “any
US businesses that produce, trade in, design, test, manufacture, service, or develop
‘critical technologies.’”
Critical technologies include defense articles or defense services controlled under the
International Trafficking in Arms Regulations (ITAR); certain items controlled under
the Export Administration Regulations (EAR); certain nuclear facilities, and software
and technology as defined in 10 CFR Parts 810. The 27 pilot industries cover a broad
range of businesses, including manufacturers of munitions and space vehicles, aircraft,
telecommunications, electronics, broadcasting and wireless equipment, computers
and semiconductors, power generation, optics and lenses, and businesses that
conduct research and development in biotech and nanotech.

This represents a significant break from past practice and a potential tremendous
expansion in CFIUS’s reach. Importantly, FIRMMA could potentially expand CFIUS’s
jurisdiction beyond the typical M&A transactions to broadly also include IP transfers
to foreign persons by US technology companies. Many of the definitions of “critical
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technologies” are drawn from the US Munitions List (USML) controlled by the State
Department’s Directorate of Defense Trade Controls (DDTC), and Commerce Control
List (CCL), issued and governed by the Commerce Department. The overlap between
export control and CFIUS now becomes greater, the connection is deeper, and the
number of agencies one may need approval from is less clear.

Additionally, FIRMMA extends CFIUS’s jurisdiction to purchase or leases of private
or public real estate in the United States if that real estate is in “close proximity” to a
sensitive US government property or facility, regardless of whether the transaction
involved control over a US business. FIRMMA also authorizes CFIUS to enact
regulations exempting some transactions otherwise covered by these new categories
based on the identity of the host country. In determining which foreign countries
may be eligible for exemption, FIRMMA would direct CFIUS to consider factors such
as whether the country has a mutual defense treaty with the United States (in effect,
whether they are an ally).

A More Proactive Approach
This new act comes at a time of unprecedented proactivity by CFIUS, and a significant
change from the agency that existed 10 years ago. Certainly, trade issues with China
and others have partially motivated these changes. In 2006, CFIUS handled just 95
cases. In 2017, it was 240, and this year, the numbers are expected to be far greater.
CFIUS has also shown a level of proactivity rarely before seen. Typically, in the past,
the private parties voluntarily notified CFIUS of a transaction with potential CFIUS
implications. It was rare for CFIUS to initiate the inquiry or investigation, which it may
under the relevant statutes.

However, in 2017, President Trump instructed Treasury Secretary Steven Mnuchin to
propose restrictions on “Chinese investment in industries or technologies deemed
important to the United States using any available authority.” Since then, CFIUS staff
have reviewed thousands of transactions in technology sensitive sectors, such as
aviation, integrated circuits, information technology, biotech, and industrial machinery.
As a result, CFIUS initiated several, including preventing the Broadcom takeover of
Qualcomm. Since January 1, 2017, CFIUS has blocked six transactions involving efforts
of Chinese companies to acquire US businesses or technology, approved eight, and
16 have been withdrawn after CFIUS inquiry and discussions with CFIUS staff. (CFIUS
recently approved AKRION Systems LLC purchase of Naura Microelectronics.)
The new CFIUS regulations under FIRMMA also reaches “investments,” and they have a
catch-all provision that covers “other investments.” This expressly includes investments
that could afford a foreign person access to material nonpublic technical information
of an unaffiliated pilot program that allows the foreign person certain management
rights with the US business with regard to the “critical technology.” This is perhaps the
most far reaching development. As arguably, a board position occupied by a “foreign”
person in such a business that has connection with “critical technology” would need to
be reported.

For purchases and sales, the level of ownership and control is not entirely clear, as
it covers any “substantial interest” in the US technology or business. Examining the
history of the act and the preceding regulations, any ownership interest that creates
control in the management functions of the company would be covered.

Importantly, in a substantial break from past practice, providing notice to CFIUS of
a transaction in any one of the 27 pilot programs and covered transactions is now
mandatory under FIRMMA. No longer is it left to the company to disclose. Companies
now are required to file a “Declaration,” and must do so “promptly.” Penalties for
failure to file are severe, and can be as much as the full value of the transaction.
The statute and CFIUS regulations provide for strict timelines on the process. The
process is also typically initiated by an informal outreach to CFIUS staff, and not by a
formal filing – which triggers timelines. A draft JVN (joint voluntary notice) is typically
submitted prior to the transaction closing, and discussions with CFIUS staff ensue
before the formal submission.
It is now more important than ever to consult experienced counsel in this area
concerning whether a transaction is covered by CFIUS and needs to be reported, the
process itself, and engagement with CFIUS staff. The likelihood that CFIUS will inject
itself in a transaction is far more likely than ever before, and the penalties of failing to
report, or doing so without the help of experienced counsel, is far greater than ever

Robert Appleton, Global Chair, Government Enforcement and White Collar Practice Group,

Robert Appleton is the Global Chair of the Government Enforcement and White Collar Practice
Group at CKR Law, where he concentrates on Anti-Corruption Compliance, Government
investigations, Internal Investigations, monitorships, global asset tracing and recovery; securities,
insider trading, and representing whistleblowers. Appleton provides strategic counsel in DOJ/
SEC investigations, all types of enforcement actions; (OFAC) sanctions; and Compliance matters,
with special focus on the FCPA. The CKR White Collar Group is experienced in this area and
has assisted many companies in this process. The firm is also well experienced in China based
transactions and US investments, with four offices in China.

This article originally appeared in the RANE (Risk Assistance Network + Exchange) Advisory November 2018 publication.