As the old Chinese curse has it: “May you live in interesting times”, our times, fueled by US efforts to circumvent Chinese investment in critical US infrastructure and sensitive data — may have just become a tad more interesting. Enacted in 2018, the Foreign Investment Risk Review Modernization Act (FIRRMA) seeks to broaden the scope and modernize the review process of the Committee on Foreign Investment in the US (CFIUS). CFIUS is an interagency committee authorized to review certain transactions involving foreign investment in the US, in order to determine the effect of such transactions on the national security of the US.
In September of this year, the much-anticipated FIRRMA proposed regulations that will implement the law were released by the U.S. Department of the Treasury. While FIRRMA is not yet fully in effect, and proposed regulations will likely not become final until February 2020, it is very clear that FIRRMA means that far more transactions will now be subject to CFIUS review.
While the Trump Administration has been firm in its messaging that FIRRMA is meant to “close gaps” between the transactions subject to CFIUS review and those that are not yet raising similar national security concerns, those “gaps” largely relates to Chinese minority investments that nonetheless provide access to sensitive information or technology of U.S. business, joint ventures into which U.S. technology is transferred, investments in real estate in sensitive areas, and Chinese transactions viewed as structured to circumvent CFIUS. Nevertheless, because of its broad scope, other foreign investors, including Israeli, might be affected by FIRRMA as well. For example, Israeli companies or funds that have Chinese investors, Israeli companies with solutions involving U.S. sensitive personal data collection, and real estate investors and developers in sensitive areas such as near U.S. government facilities.
Israeli companies that may be affected by CIFUS, undergoing a merger and acquisition, or a private placement, as well as Israeli investors, should make sure to consult with their lawyers on whether there might be possible CIFUS implications to their transaction. A CFIUS counsel will conduct a careful review and advise whether a detailed notice to CFIUS before closing should be submitted, asking the committee to review the transaction.
Here are some of the key issues Israeli companies and investors should keep in mind:
- Mandatory filing: CFIUS expanded jurisdiction includes foreign investments in U.S. businesses involved in a) critical infrastructure, b) critical technologies or 3) the collection or maintenance of personal data on U.S. citizens meeting a minimum threshold, if the foreign investor is given access to material nonpublic technical information, membership or observer rights on the board, or any involvement in substantial decision making concerning the U.S. business. In such circumstances and with certain limited exceptions, a CFIUS filing will be mandatory – and substantial penalties can be imposed for failure to file. It is also import to keep in mind the “Pilot Program” launched last year. Under this program for certain investments involving critical technologies, CFIUS filings are now mandatory – and must be filed at least 45 days prior to closing. Such critical technologies include among others, aviation, defense, semiconductors and telecommunications. Otherwise, in most other cases CFIUS filing is a voluntary process, however when in doubt — in order to avoid a CIFUS review on a later date (even many years after a transaction has closed), often times parties to a transaction that might trigger a CIFUS review take an active stand and make a voluntary CFIUS filing.
- Control of U.S. Business: CFIUS review would typically be triggered when a transaction involving a U.S. business results in a foreign person or company’s control in what may raise U.S. national security issues. “Control”, however, is now broadly defined and could include even a minority stake that provides the direct or indirect power to “determine, direct, or decide important matters affecting an entity.”
- A “U.S. business” is broadly defined: U.S. business refers to any “person engaged in interstate commerce in the United States” — even persons or companies based in Israel, but with an affiliate or other significant operations in the U.S. might be deemed a “U.S. business” for CFIUS purposes.
- The Definition of “critical technology” is still evolving: critical technologies also include those deemed “emerging” or “foundational” – categories that, under the concurrently enacted Export Control Reform Act of 2018, the U.S. Commerce Department is currently reviewing. The “emerging” technologies include for example, certain microprocessor technologies, biotechnologies, artificial intelligence and machine learning. The Commerce Department asked for public comment on its list, and the final list is still under consideration.
- Real estate: property in “close proximity” to a military installation or other sensitive U.S. government facility, which could provide the opportunity for the foreign investor to collect intelligence on sensitive U.S. government activities might pose a threat to U.S. national security. Or for example, property located within an airport or seaport.
- Investments clearly designed to circumvent CFIUS review: FIRRMA provides that CFIUS has jurisdiction to review investments clearly designed to circumvent CFIUS review.
Notwithstanding its broad scope, for most transactions not involving Chinese investors, the new CFIUS rules should not stand as a huge obstacle. One strong argument Israeli companies and investors can make is that they should be exempted from much of the expanded CFIUS jurisdiction, in light of Israel being a close ally of the U.S. Among the many items still under consideration by the Treasury Department is expansion of CFIUS jurisdiction to non-controlling investments with regard to certain “excepted” investors or foreign states – namely, countries deemed sufficiently friendly to the U.S. to present less of a national security risk. Such investors would not be exempt from CFIUS jurisdiction with regard to investments resulting in foreign control of a U.S. business, but conceivably could avoid the expanded CFIUS jurisdiction for certain other non-controlling investments. All in all, CFIUS should be regarded as one more regulatory review on a due diligence checklist and not as a major barrier, assuming the parties engaged experienced CFIUS counsel to guide them through the process and, if necessary, negotiate with CFIUS and address mitigation measures that CFIUS may propose.