This August, The President signed into law the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). FIRRMA gives The Committee on Foreign Investment in the United States (CFIUS) greater purview over business deals involving foreign investment that may affect national security. CFIUS may now review more foreign entity business deals in the U.S., including real estate transactions dealing with property close to government facilities and deals that might afford foreign access to national security interests. FIRRMA also mandates the publication of a Report on Chinese Investment every two years, by the Secretary of Commerce.
The Committee on Foreign Investment in the United States (CFIUS) is a governmental body composed of the chiefs of several security, financial and technology organizations which serves to protect U.S. national security interests from foreign government influence, specifically over U.S. businesses and business transactions. CFIUS has the power to review business deals between domestic and foreign persons or entities and issue recommendations to the president on whether or not to revoke the transaction. The committee looks to whether the transaction would leave the foreign person in a position of control over U.S. security interests. Importantly, the definition of a security interest can have broad meaning. For example, if a private U.S. semiconductor manufacturer that supplies the U.S. government were to be bought by the Chinese government or a Chinese government backed investor, CFIUS may recommend the transaction be blocked, based on review of whether that investor would be in a position to influence production or access nonpublic technical information that would detriment domestic production if given to a competitor.
Since its inception in 1975, few transactions have been blocked by presidents, but the number has steadily risen due to increased technological, infrastructure and cybersecurity risks. Most recently, at the recommendation of CFIUS, President Trump blocked the attempted $117 Billion acquisition of Qualcomm (a U.S. semiconductor manufacturer) by Broadcom (a Singapore based semiconductor manufacturer). CFIUS cited that Broadcom’s acquisition would present a security risk to the U.S. by leaving a Chinese company as the sole developer of national security infrastructure. CFIUS reasoned that because Qualcomm’s development of 5G technology is the only meaningful research being done domestically, if acquired, a foreign company would be in control of the U.S. security interest in the development of 5G technology. CFIUS also cited that Broadcom would likely gut development spending in favor of short term earnings, leaving the U.S. solely dependent on Chinese suppliers of the technology, as Huawei is the only other major 5G technology developer.
For practitioners in business and finance, the passage of FIRRMA means a more expansive review of foreign investment into U.S. national security interests, and a more expansive definition of U.S. national security interests. CFIUS will now take into account the ownership of transacting parties, founders of the firm, and foreign government degree of control, to determine whether a foreign person or government might gain sensitive nonpublic technical material of national security interest.