The August 2018 enactment of the Foreign Investment Risk Review Modernization Act (FIRRMA) came after more than two years of debate over the appropriate scope of jurisdiction for the Committee on Foreign Investment in the United States (CFIUS). Much has already been written about FIRRMA and its potentially ambitious reach, as well as about the interest by certain parties, including members of Congress, to keep CFIUS away from some transactions. The result was a law that amended a number of provisions defining CFIUS jurisdiction, both expanding and narrowing key parts of the Committee’s reach.
To manage the many changes included in FIRRMA, Congress made some of its provisions effective immediately upon enactment, while leaving many of the more important and/or controversial provisions to become effective when CFIUS issued new regulations or established pilot programs to test the viability of certain provisions. To that end, and in an effort to better inform the Committee regarding how certain sections of FIRRMA would impact both the government and investors, CFIUS has invoked a lesser-discussed provision to begin implementing those authorities immediately. Using the pilot program authority in Section 1727(c), CFIUS has announced the immediate implementation of two important parts of the authority granted by FIRRMA:
The pilot programs become effective November 10, 2018, and will end no later than March 5, 2020 (or presumably sooner if the full regulations issue before then).
While certain provisions of FIRRMA, included in Section 1727(a), were effective immediately upon enactment of the law on August 13, 2018, Section 1727(b) delayed the effective date of any provision of FIRRMA not listed in Section 1727(a) until the earlier of February 13, 2020 (defined in the statute as 18 months after the effective date); or 30 days after publication in the Federal Register by CFIUS that the regulations, organizational structure, personnel, and other resources necessary to administer the new provisions are in place. Section 1727(c) authorizes CFIUS to implement “pilot programs” that can begin 30 days after notice and procedures are published in the Federal Register. The Committee’s action starts that 30-day clock.
Although the interim rules are posted for comment, they are not subject to the notice and comment requirements of the Administrative Procedure Act (APA), and therefore can enter into effect immediately after the 30-day period required by FIRRMA expires—November 10, 2018. The CFIUS notice nonetheless allows an “immediate opportunity for public comment” on the interim rule and indicates that CFIUS will consider and address any comments in the process of promulgating any final rule. This approach “appropriately balances the urgency of the pilot program with the need for public participation in the formulation of any final rule.” Under the Defense Production Act, of which FIRRMA is a part, CFIUS may forego the full APA notice and comment period if it finds that there are “urgent and compelling circumstances” requiring immediate implementation of the interim rule. CFIUS concludes that these circumstances exist because delay in implementing the pilot program will allow foreign “threat actors with time to harm U.S. national security by quickly acquiring U.S. critical technologies.” The Committee determined that there is an imminent danger that foreign entities intend to engage in “foreign investment into certain U.S. businesses that produce, design, test, manufacture, fabricate, or develop one or more critical technologies.”
The pilot program encompasses two main objectives:
The program is designed to address two key concerns:
In addition, the pilot program currently includes all countries (i.e., excludes no country) from the mandatory declaration process. According to the Federal Register preamble, this approach is expected to better inform CFIUS of the nature and focus of foreign direct investment and thereby improve the final regulations. The interim regulations do not change the definition of critical technologies, except for the addition of technologies to be identified by BIS as “emerging and foundational.” The pilot program currently does not include transactions involving critical infrastructure that do not involve critical technology and these transactions will continue, for now, to be governed by the existing rules.
The pilot program is focused on certain specific types of transactions, without regard to the country of the acquiring entity, that CFIUS can review under FIRRMA—transactions that give the following to the foreign investor:
The pilot program also identifies 27 critical industries, defined by NAICS codes, which it includes as “Pilot Program Industries.” According to CFIUS, this list was “carefully developed” based on the government’s determination that these are “industries for which certain strategically motivated foreign investment could pose a threat to U.S. technological superiority and national security.” The “Pilot Program Industries” currently includes the following industries and NAICS codes:
Industry |
NAICS Code |
Aircraft Manufacturing |
336411 |
Aircraft Engine and Engine Parts Manufacturing |
336412 |
Alumina Refining and Primary Aluminum Manufacturing |
331313 |
Ball and Roller Bearing Manufacturing |
332991 |
Computer Storage Device Manufacturing |
334112 |
Electronic Computer Manufacturing |
334111 |
Guided Missile and Space Vehicle Manufacturing |
336414 |
Guided Missile and Space Vehicle Propulsion Unit and Propulsion Unit Parts Manufacturing |
336415 |
Military Armored Vehicle, Tank, and Tank Component Manufacturing |
336992 |
Nuclear Electric Power Generation |
221113 |
Optical Instrument and Lens Manufacturing |
33314 |
Other Basic Inorganic Chemical Manufacturing |
325110 |
Other Guided Missile and Space Vehicle Parts and Auxiliary Equipment Manufacturing |
336419 |
Petrochemical Manufacturing |
325110 |
Powder Metallurgy Part Manufacturing |
332117 |
Power, Distribution and Specialty Transformer Manufacturing |
335311 |
Primary Battery Manufacturing |
335912 |
Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing |
334220 |
Research and Development in Nanotechnology |
541713 |
Research and Development in Biotechnology (except Nanobiotechnology) |
541714 |
Secondary Smelting and Alloying of Aluminum |
331314 |
Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing |
334511 |
Semiconductor and Related Device Manufacturing |
334413 |
Semiconductor Machinery Manufacturing |
333242 |
Storage Battery Manufacturing |
335911 |
Telephone Apparatus Manufacturing |
334210 |
Turbine and Turbine Generator Set Units Manufacturing |
333611 |
A wide range of other industries have been mentioned previously by the government in other contexts as also constituting critical technologies for US national security or industrial competitiveness, including new energy vehicles and alternative energy generation (wind and solar), might be added in the future as the new program evolves. “Critical technologies” does not need to be new technologies. FIRRMA includes within critical technologies (as the interim rule confirms) existing technologies, including, for example, items on the US Munitions List and the Commerce Control List, in addition to “emerging and foundational technologies.”
While the interim rule identifies these areas as critical technologies, the Committee is not precluded from reviewing covered transactions that involve technologies other than those identified at this stage.
The pilot program also adds a mandatory declaration requirement for any transaction for foreign transactions involving pilot program US businesses that are within CFIUS’s jurisdiction. Thus, if the transaction involves both “control” by the foreign investor and meets the definition of “other investments,” the parties will have to file either a full notice or the mandatory declaration.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Washington, DC
Giovanna Cinelli
Kenneth J. Nunnenkamp
Boston
Carl Valenstein