A FIRRMA Hand…

Until fairly recently, the meaning of the acronym CFIUS was probably opaque to most people. While the Committee on Foreign Investment in the United States was created by President Ford under Executive Order in 1975 and given expanded powers by a further Executive Order by President Reagan in 1988, its existence and functions were fairly obscure until the last few years. It is chaired by the Secretary of the Treasury, with membership drawn from a broad range of federal departments and agencies.

Now, however, under legislation recently signed into law by President Trump (the Foreign Investment Risk Review Act- FIRRMA), CFIUS has been granted a greatly expanded remit and enhanced powers. The reasons for this lie in concerns by the US Administration and Congress that foreign actors (code, in particular, for entities from or associated with the PRC, an obvious strategic rival) are taking advantage of lacunae in existing rules to take control of or gain access to businesses and assets (both real and virtual) essential to the national security interests of the US, creating the potential for serious harm.

The definition in the legislation of a “covered transaction” subject to CFIUS review has been significantly broadened to include non-controlling investments (“other investments”) in US businesses, as well as investments in real estate near US military or national security related sites (including, potentially, Trump Tower in Manhattan.) Not only that but the definition of a “US business” has been amended to “a person engaged in interstate commerce in the US”. In addition there is now a requirement that potential acquirers give notice to CFIUS of a transaction that may fall within its purview.

The focus of CFIUS’s new mandate will be on businesses involved in 3 key areas: “critical infrastructure”; “critical technologies”; or maintaining or collecting “sensitive personal data of US citizens that may be exploited in a manner that threatens national security”.

One can see from all this that the probability of CFIUS becoming involved in reviewing direct and indirect (i.e., foreign investor) proposed transactions has now greatly increased, with any would be acquirer having to seek advice on navigating a process for which the parameters have yet to be defined (as CFIUS is supposed to publish regulations clarifying its interpretation of the new FIRRMA provisions.) This begs the questions of whether sufficient resources will be provided to manage the processes now created.

There is also now the concept of a “Country of Special Concern”, which leads to heightened scrutiny by CFIUS. These countries are not identified in the legislation, but it does not require too much guesswork to identify not only the primary target (the PRC), but also the level of discretion given to CFIUS to act against particular “out of favour” jurisdictions.

One can certainly understand the reasons behind the new FIRRMA legislation, in a world in which powers over trade and commerce are being much more explicitly wielded as weapons to modify or compel particular actions. However, the level of uncertainty which its significantly expanded but, as yet, undefined scope and interpretation introduces may create a potentially chilling effect upon capital allocation and cross-border FDI in which a “US business” is the subject of interest.

And it would be foolish to expect other states not to reciprocate, thereby potentially affecting the ability of US investors to deploy capital globally. One can envision the potential for both misunderstanding of FIRRMA’s applications and for earnest signaling of “peaceful intentions” by governments that do not wish to find their own multinationals or investment arms shut out of acquisitions in the US markets.

At Awbury, understanding and assessing FIRRMa’s implications will be another factor in our comprehensive assessment of the all the transactions which we undertake.

The Awbury Team

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