Turkish Law Blog
FIRRMA’s Implications on Foreign Investment into the United States
I. Introduction – Executive Summary:
On August 13, 2018, Congress enacted the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”) to strengthen and modernize the Committee on Foreign Investment in the United States (“CFIUS”). This legislative step expanded CFIUS’ authority by amending the list of covered transactions (“Covered Transaction”). CFIUS can now review real estate transactions of developed and undeveloped land and acquisition of non-controlling interests in companies that involve critical technologies, critical infrastructure, or sensitive personal data of United States citizens.
FIRRMA also introduced several important procedural amendments. Among the most important is mandatory filing requirements; parties must submit a declaration when a transaction involves the acquisition of a substantial interest in critical technology or an infrastructure company, among others. Prior to FIRRMA’s enactment, a party to a covered transaction had the option to provide a voluntary notice to CFIUS – a step many cross-border parties already preferred. By making reporting mandatory in these specific transactions, FIRRMA – through the “Pilot Review Program” – has firmly established CFIUS’ authority in this area. However, the absence of concrete definitions for these terms coupled with CFIUS’ mostly arbitrary and secretive review process may obscure an international investor’s ability to forecast the outcome of potential transactions.
II. CFIUS Process Overview:
CFIUS is a multi-agency governmental committee that is authorized to review the national security implications of foreign investments in the United States. Chaired by the Secretary of Treasury, CFIUS’ main focus is to protect the United States’ national security from emerging risks.
CFIUS’s formal review policy usually begins when parties to a proposed transaction file a declaration with the committee. CFIUS may also initiate a review on its own initiative. CFIUS has forty- five (45) days to review the declaration. As part of the review process, the committee may choose to conduct further investigation. One of the most common reasons for further investigation is when the committee determines that the transaction “threatens to impair the national security of the United States and the threat has not been mitigated.” CFIUS must complete this additional investigation within forty-five days.
CFIUS may send the President a report “requesting the President’s decision with respect to a review of investigation of a transaction” if: (1) “the Committee recommends that the President suspend or prohibit the transaction, (2) the Committee is unable to reach a decision on whether to recommend that the President suspend or prohibit the transaction; or (3) the Committee requests that the President make a determination with regard to the transaction.”
Under Section 721 to the Defense Production Act of 1950, as amended, 50 U.S.C. §4565, the President of the United States has the authority to suspend or prohibit certain covered transactions. The President can exercise this authority, “when, in his/her judgment, there is credible evidence to believe that the foreign person exercising control over a U.S. business might take action that threatens to impair the national security, and when provisions of other law … do not provide adequate and appropriate authority for the President to protect the national security in the matter before the President.”
Previously, 31 C.F.R. §800.207 defined covered transaction to mean “any transaction that is proposed or pending after August 23, 1988, by or with any foreign person that could result in foreign control of any U.S. business, including such a transaction carried out through a joint venture.” And, 31 C.F.R. §800.208 defined critical infrastructure to mean, “in the context of a particular covered transaction, a system or asset, whether physical or virtual, so vital to the United States that the incapacity or destruction of the particular system or asset of the entity over which control is acquired pursuant to that covered transaction would have a debilitating impact on national security.”
III. FIRRMA’s Significant Amendments to CFIUS:
FIRRMA amends CFIUS substantially and procedurally in two significant ways:
1- FIRRMA Expands CFIUS’ authority to review transactions involving the acquisition of non-developed land; and
2- FIRRMA requires the filing of a mandatory declaration in transactions concerning U.S. businesses with critical infrastructure or technologies or that maintain sensitive personal data of U.S. citizens.
a) Amendment of Covered Transactions:
Until FIRRMA’s enactment, CFIUS had jurisdiction over transactions concerning U.S. businesses. Scrutinizing companies whose main line of business was maintaining or operating real property was fair game for CFIUS. However, acquisition of bare land was specifically excluded from its jurisdiction. Despite its limited authority, for the past several years CFIUS has developed and adopted a policy of reviewing transactions that may involve – even incidentally – acquisition of real property that may be in close proximity to sensitive U.S. government facilities. For example, in 2012, the Obama administration blocked Chinse owned Ralls Corporation’s purchase of a wind-farm that was located in Oregon because of its close proximity to a Navy military site.
Interestingly, Ralls Corp. sued CFIUS in the United States Court for the District of Columbia. The district court dismissed Ralls Corp.’s claims for mootness and nonjusticiability. However, the D.C. Circuit reversed on appeal and, for the first time, found that foreign companies have due process rights against CFIUS. The parties ultimately settled their differences. Despite the vail of secrecy surrounding the terms of the settlement agreement, many speculated that Ralls Corp. received compensation for its damages – though acquiring the wind farm never happened.
In 2015, CFIUS also reviewed a Chinese insurance company’s purchase of the Waldorf Astoria Hotel located in New York. Concluding that the transaction did not have any national security implications, and CFIUS approved the sale. Later in 2018, CFIUS intervened on its own and ordered a Chinese company to sell its majority stake in the Trump Tower for national security reasons.
CFIUS is much more powerful because of FIRRMA. As mentioned above, its expanded authority to review acquisitions of non-developed land may mean, in practice, that CFIUS can now review any type of real estate transaction.
b) Transactions for acquiring controlling or non-controlling interests in U.S. business with critical infrastructure, critical technology or sensitive personal data are subject to CFIUS review:
FIRRMA also brought foreign investment in U.S. businesses that possess critical infrastructure, critical technologies, or sensitive personal data on U.S. citizens under greater CFIUS scrutiny. Under FIRRMA §§1703(a)(4)(D)(i) and 1703(a)(4)(B)(iii), CFIUS is no longer limited to reviewing foreign acquisitions in these industries for controlling interests. Instead, CFIUS can now review any foreign investment, whether controlling or non-controlling interest, in these industries.
As an example, CFIUS recently blocked the proposed share sale deal between AppLovin Corporation (a United States-based app technology company) and Orient Securities Limited (a Shanghai-based company) because of CFIUS' concerns about "the security of the company's data under a foreign owner.” The parties were forced to abandon plans to sell a majority of AppLovin’s shares to Orient Securities Limited, instead of turning it into an $841 million loan financed by Orient Securities Limited.
In 2018 CFIUS blocked a Singapore-based company’s takeover bid for Qualcomm based on national security concerns. CFIUS, concluded that the Chinese Buyer’s purchase would allow China to surpass the U.S. in 5G technology thereby impinging on the U.S.’s national security interests. Similarly, during the same year, MoneyGram International Inc. had to cancel a proposed merger with a U.K. entity that was majority owned by a Chinese company. Although CFIUS did not directly block this transaction, the parties had to terminate the deal after concluding that CFIUS was not going to approve the transaction.
A recent example of CIFUS’ increased authority is its recent move to force a Chinese conglomerate to sell its majority stake in a dating app, Grindr. It has been reported that concerns for potential threats by Chinese officials to publicly disclose U.S. officials’ dating lives comprised the basis for the CFIUS review, implicating matters of national security. This regulatory intervention appears first taken against a social media application.
c) Mandatory Filings:
FIRRMA instituted a new short form of filing (a declaration limited to five pages) that will contain the basic information regarding a transaction. In certain instances, the parties are required to file a declaration while in others they are only encouraged to file one:
1- “If the transaction involves an investment that results in the acquisition, directly or indirectly, of a substantial interest in the United States business; [(I) owns, operates, manufactures, supplies, or services critical infrastructure, (II) produces, designs, tests, manufactures, fabricates, or develops one or more critical technologies; or (III) maintains or collects sensitive that may be exploited in a manner that threatens national security] with by a foreign person in which a foreign government has, directly or indirectly, a substantial interest,” parties must file a declaration;
2- In any other transaction, the parties may voluntarily submit a declaration.
In transactions that trigger mandatory filing requirements, a declaration or a written notice must be submitted no later than 45 days before the contemplated closing (completion) date of the transaction. CFIUS, may – although they are not obligated to – render an ultimate decision regarding any given transaction based on the declaration. However, it may also request an actual notice from the parties.
CFIUS may impose a civil monetary penalty up to the value of the transaction for certain international transactions if the parties fail to comply with the filing requirements.
IV. Judicial Review of CFIUS Determinations:
FIRRMA provides for judicial review of CFIUS determinations. FIRRMA §1715(2) designates the United States Court of Appeals for the District of Columbia Circuit as the proper forum to bring these claims. As discussed above, in Ralls Corp. v. CFIUS, the Chinese investors challenged CFIUS’ decision blocking their acquisition of an Oregon wind farm. Although the parties ultimately reached a settlement agreement, this case will likely serve as a road map for future litigants.
While promising to bring more transparency to CFIUS procedures, FIRRMA introduces an ambiguous and subjective set of standards to a larger number of transactions by bringing them under CFIUS scrutiny for national security concerns. As the United States has taken a more protectionist approach under the Trump Administration, any investor who wishes to invest in the United States should take these additional layers of scrutiny into account before finalizing their investment plans.
 The pilot program will end no later than the date on which the regulations fully implementing FIRRMA become effective, and in no event later than March 5, 2020.
 CFIUS operates pursuant to Section 721 of the Defense Production Act of 1950, as amended, and as implemented by Executive Order 11858, as amended, and regulations 31 C.F.R. Part 800 and 31 C.F.R. Part 801, as amended. https://home.treasury.gov/policy-issues/international/the-committee-on-foreign-investment-in-the-united-states-cfius
 31 C.F.R. §§800.401-402 governs the content of the declaration as well as the steps the parties must take to submit a compliant declaration.
 Foreign Investment and National Security Act of 2007 §2.
 31 C.F.R. §800.503.
 This would be an additional 45-day period independent of the original 45-day period.
 Executive Order 11858, §6(c).
 31 C.F.R. §800.101.
 Ralls Corp. v. Committee on Foreign Investment in the US, 758 F.3d 296 (D.C. Cir. 2014).
 FIRRMA §1703 (a)(4)(A)(iii).
 FIRRMA §1706.
 Federal Register / Vol. 83, No. 197 / Rules and Regulations § 801.409 Penalties.