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National Security Review of Foreign Investments to Escalate

Albert E. Dotson, Jr.

With its roots in the Exon-Florio Amendment to the Defense Production Act, the Committee on Foreign Investment in the United States (CFIUS), is an inter-agency committee that reviews certain foreign investments in the United States that implicate national security concerns. CFIUS generally determines its own jurisdiction within the parameters of regulatory framework ascribed to it by the federal government. Historically, CFIUS has reviewed transactions where a foreign person acquires control of a U.S. business and  the acquisition poses a threat to national security. For example, in 2012,  Former President Barack H. Obama, following CFIUS’s recommendation, required a Chinese company to divest its acquisition of a wind farm in Texas because the wind farm was located in restricted airspace. This represented the first time since 1990 that a U.S. president blocked or ordered the divestiture of an investment based on CFIUS’s recommendations.

The John S. McCain National Defense Authorization Act for Fiscal Year 2019 was signed into law on August 13, 2018. The omnibus bill, which aims at authorizing defense spending, also includes provisions that expand the scope of CFIUS’s review of foreign investments.  In particular, real estate transactions (including the purchase of U.S. real estate by a foreign person, and the concession or lease of U.S. real estate by a foreign person) that involve air or maritime ports, or that are in close proximity to U.S. government facilities or properties, can now fall within CFIUS’s preview. Additionally, other investments in critical infrastructure, technologies, or businesses that maintain or collect sensitive personal data of U.S. citizens are also subject to CFIUS’s review. It is important to note that we expect future guidance and implementing regulations to explain both the scope of transactions that are subject to review, as well as the type of foreign investors that raise the risk of review.

Certain exemptions from review are already contemplated in the regulatory framework.  For example, a purchase of a single housing unit is not subject to CFIUS review. Also, a purchase of real estate in an “urbanized area” (as defined by the U.S. Census Bureau), unless prescribed otherwise in CFIUS regulations, is exempt from CFIUS review. Further, foreign investments in private equity funds are disregarded to the extent

  • the fund is managed exclusively by a general partner, managing member, or equivalent that is not a foreign person
  • the fund’s advisory board does not control the fund’s investment decisions or the investment decisions of such general partner, managing member or equivalent, and
  • the foreign investor does not otherwise have the ability to control the fund or access material nonpublic technical information as a result of its participation on an advisory board or committee.

Other changes in CFIUS legislation include the imposition of filings fees, limited mandatory filing requirements (most CFIUS filings are voluntary unless CFIUS self-initiates an investigation), and modifications to CFIUS’s review process and disclosure requirements. In 2015, the most recent year for which public information has been available, CFIUS investigated 66 transactions that it determined were within its jurisdiction, with no investigation resulting in a recommendation to block or divest an investment.

As noted above, in order for this change in legislation to take effect, CFIUS must issue promulgating regulations. Until such regulations are issued, the impact of the change in legislation will be unclear.

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