As described in Thucydides’ Trap, a newly emerging power must challenge the existing powers, and the existing powers will certainly respond to such threats, so war becomes inevitable. Therefore, it was unforeseen that the United States would launch a trade war against China considering the potential backlash it may have. Additionally surprising was that the Foreign Investment Risk Review Modernization Act (FIRRMA) was signed into law by President Trump. FIRRMA reforms and modernizes the review process of the Committee on Foreign Investment in the United States (CFIUS) is the first update to the CFIUS statute in more than a decade.
FIRRMA identifies several factors that Congress wants CFIUS to take into account when considering the national security risks posed by foreign investments. These include:
- Whether a transaction involves a country of special concern that has a strategic goal of acquiring technologies that would affect U.S. technological leadership in that area.
- The national security effects of cumulative market share control by foreign persons.
- Whether a foreign person involved in a transaction has a history of complying with U.S. law.
- How the control of U.S. industries and commercial activity affects the capability and capacity of the United States to meet the requirements of national security, including the reduction in employment of United States persons whose skills are critical to national security and the continued U.S. production of items necessary for national security.
- The extent to which a transaction is likely to expose sensitive data of U.S. citizens to exploitation by foreign persons and governments.
- Whether a transaction exacerbates cybersecurity vulnerabilities or allows a foreign government to gain new capabilities to engage in malicious cyber activities against the U.S., including activities designed to affect the outcome of any federal election.
Particularly, “modernization” is a euphemism for addressing concerns about Chinese investments. The Trump Administration has been firm in its messaging that FIRRMA is meant to “close gaps” between the transactions that CFIUS is currently able to review and transactions it currently cannot review despite them raising similar national security concerns. But the reality is that those “gaps” largely pertain to particular Chinese investment trends such as real estate acquisitions in sensitive areas, minority investments (particularly through private equity-type structures) that might not be controlling but that nonetheless provide access to sensitive information or technology of the target US business, the increasing use of Chinese joint ventures into which US-origin technology is transferred, and concerns that Chinese deals are being structured to circumvent CFIUS.
However, the extent to which covered transactions will expand is unknown. As mentioned above, the purpose of the new categories of covered transactions is largely to enable CFIUS to review additional types of Chinese investments. But the true effect is that, unless these categories are somehow limited, FIRRMA would cover every transaction in these new categories—potentially tens of thousands each year. The negotiated solution appears to be deferring to CFIUS to “prescribe regulations … to limit the application of real estate acquisitions and minority investments 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.
As mentioned above, a key impetus for FIRRMA is to enable CFIUS to review additional types of Chinese investment. This impacts both investments directly by Chinese entities and investments by non- Chinese entities that might have significant ties to China (such as through supplier, customer, partnership, joint venture, research and development, or funding relationships). FIRRMA highlights key areas of concern: proximity to sensitive US government facilities, sensitive personal data, critical infrastructure, critical technology, and (while now addressed in export-control reform initiatives) technology transfers to China. We expect that state-directed and -funded investment in these areas will be particularly highly scrutinized. That said, CFIUS’s analytical methodology is a case-by-case analysis of the threat, vulnerability, and consequences of the particular transaction under review, and FIRRMA does not change that. We expect that CFIUS will continue to clear Chinese transactions that do not present unresolvable national security concerns.
To be more specific, there will be huge impacts of FIRRMA to many Chinese companies especially ones who are interested in oversea investment in the US. Chinese companies may face more strict regulation and more difficult situation when investing in the US, which will be highly controlled by US regulation.
Changes to CFIUS that will directly affect any Chinese company looking to invest in the United States:
- Expanded scope of investigation
From the implementation of FIRRMA, the following Chinese investment in the United States must be reported to CFIUS:
- Real estate acquisitions in sensitive areas, which refers to the Chinese buying a house in the United States.
- A small amount of equity investment (especially through a private equity structure) – that is, Chinese investing in US companies, although the amount of investment is not enough to hold, but has the right to access the most advanced commercial sensitive information or technology in the United States. .
- The use of Sino-foreign joint ventures (JV) to transfer US origin technology – directly and explicitly indicating China’s Sino-foreign joint venture.
- China’s cross-border transaction structure that circumvents CFIUS review – such as the VIE.
- Extended period of investigation
FIRRMA extended the initial investigation period by 15 natural days (to 45 natural days) and allowed the Minister of Finance to increase the number of natural days at the back end of the survey under “special circumstances” at the request of the lead agency. This may accumulate up to 30 natural days in a CFIUS cycle (from 75 natural days to 105 natural days).
- Increase in application fee
Previously, there was no application fee associated with any notice from CFIUS. After the promulgation of the FIRRMA, it will be charged no more than 1% of the transaction value, and will be capped at US$300,000 (adjusted annually according to the inflation regulations set by the Commission).
- Declaration from voluntary to mandatory
In the past, CFIUS’ declaration was voluntary and no one was willing to declare, so CFIUS had always been a relaxed regulation. The FIRRMA requires all companies involving 25% or more of the shares held by foreign governments, all companies that are going to acquire 25% or more of the shares of US companies, and many other transactions listed in the regulations issued by the Foreign Investment Committee to declare from now on as a mandatory requirement.
- Foreigners investing in US companies through investment funds must now also be investigated according to the reformed FIRRMA. In addition to foreigners who gain indirect investment in the rights of a board seat or observer (such as positions involving sensitive personal data, key technologies or critical infrastructure), will also be included in the scope of the declaration.
However, FIRRMA stipulates that indirect investment that is made through an investment fund, in which a foreigner has a seat in the advisory board or committee, will not belong to this new category, as long as:
- The fund is exclusively managed by a general partner of the United States;
- The advisory committee or committee of the foreigner cannot control the investment decision of the fund;
- There is no other way for foreigners to control the fund;
- An advisory committee or committee served by a foreigner cannot obtain important non-public technical information.
Policies between our two countries are constantly changing in this increasingly volatile political environment. It is crucial to stay up to date to ensure that your current or future business plans will not be put in jeopardy with you realizing. Staying well informed and involved is just one easy way to ensure a business plan for the future that will ensure success.