Stricter Regulation of Foreign Investments and Exports Advances: An Update
June 28, 2018
On June 27, 2018, the White House issued a Statement from the President Regarding Investment Restrictions announcing President Trump’s determination that the pending Foreign Investment Risk Review Modernization Act (FIRRMA) provides the tools to “combat the predatory investment practices that threaten our critical technology leadership, national security, and future economic prosperity,” and, upon enactment, will be implemented to address “the concerns regarding state-directed investment in critical technologies identified in the Section 301 investigation.” FIRRMA will substantially revise the scope and operation of the Committee on Foreign Investment in the United States (CFIUS), which reviews foreign investments in US businesses and seeks to resolve any potential national security threats indicated by such transactions.
The President’s announcement is a surprising change from the direction he laid down in his May 29, 2018, decision to impose “specific investment restrictions and enhanced export controls for Chinese persons and entities related to the acquisition of industrially significant technology,” which we described in our prior client alert: Stricter Regulation of Foreign Investments Advances on Two Fronts: Congressional Committees Approve CFIUS Reform Legislation, and President Trump Announces Forthcoming Restrictions on Investments from China.
The Statement came a day after the House of Representatives passed its version of FIRRMA (H.R. 5841) on a vote of 400 to 2 and eight days after the Senate passed its version of the bill (S. 2098) as an amendment to the National Defense Authorization Act for Fiscal Year 2019. The bills will now move to a Conference Committee to resolve the differences between the two versions.
In addition to the announcement regarding investment restrictions, the President directed the Secretary of Commerce to “lead an examination of issues related to the transfer and export of critical technologies” to assess and to make any modifications to US export controls. This directive anticipates the enhanced export control process mandated by FIRRMA “to identify emerging and foundational technologies” that are essential to US national security.
Only a few days ago, news media reported that the President would invoke the International Emergency Economic Powers Act to impose a cap of 25% voting equity on Chinese-origin investments in “industrially significant” US companies, with potentially lower limits in some cases and without distinguishing among state-owned and private Chinese companies.1 The plan reportedly would have barred US companies from contributing further technology to joint ventures in China to which they are party and may have asserted jurisdiction over licenses by US companies of certain technologies to Chinese persons—authority that the administration sought in earlier versions of FIRRMA. The proposal reportedly also contemplated a two-track CFIUS process, with one track specific to China. As late as Monday, June 25, Assistant to the President Peter Navarro strongly indicated the President would issue a China-specific order.
The President’s Statement aligns with Secretary of the Treasury Mnuchin’s comments earlier this week where he emphasized that tightened rules would apply to investments from all countries, not China alone. Adoption of the FIRRMA framework will provide transparency and consistency regarding foreign investment reviews by CFIUS. Within that common framework, however, it remains likely that CFIUS will effectively implement the concepts that the administration apparently came close to adopting. Through rulemakings and informal practice, CFIUS will set a higher bar for investments from China (and other “countries of special concern”), especially when state-owned enterprises are among the investors. Separately, agencies will move aggressively to identify and to impose greater controls on exports of critical technologies, including prevention of technology transfers to foreign business partners and joint ventures.
1 By comparison, FIRRMA will require parties to file at least short-form declarations of transactions involving a foreign entity in which a foreign government has a “substantial interest” will acquire a “substantial interest” in a US critical infrastructure or critical technology company.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Theodore Kassinger, an O’Melveny partner licensed to practice law in the District of Columbia and Georgia, Greta Lichtenbaum, an O’Melveny partner licensed to practice law in the District of Columbia, and David J. Ribner, an O’Melveny counsel licensed to practice law in the District of Columbia and New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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