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From Securities Regulation Daily, August 1, 2018

Senate joins House in passage of defense bill with CFIUS reforms

By Mark S. Nelson, J.D.

The Senate passed the John S. McCain National Defense Authorization Act for Fiscal Year 2019 with its significant reform provisions for the entity charged with reviewing many business deals that involve foreign companies. Subtitle A of Title XVII of the NDAA conference report contains the Foreign Investment Risk Review Modernization Act (FIRRMA), which will change how the Committee on Foreign Investment in the United States (CFIUS) reviews mergers and acquisitions that involve foreign acquirers of U.S. businesses. The legislation passed despite objections made by a group of senators to the conference report’s removal of a provision that would have reversed President Trump’s decision to allow Chinese telecommunications company ZTE Corp to do business in the U.S. Although the Administration had objected to the ZTE provision in an earlier version of the NDAA, it otherwise backed the CFIUS reforms. The Senate voted 87-10 to adopt the NDAA conference report, while the House previously adopted the conference report by a vote of 359-54. The conference report now goes to the White House for the president’s signature.

CFIUS gets broader mandate. One of the most significant changes is the addition of new types of "covered transactions" that CFIUS can review. Specifically, the reform package adds four categories of covered transactions: (1) real estate transactions in the U.S. where a foreign person would buy or rent property near military installations; (2) investments by foreign persons in any unaffiliated U.S. business that owns or operates critical infrastructure, develops critical technologies, or maintains or collects U.S. citizens’ personal data that may be exploited in a manner that threatens national security; (3) changes in the rights regarding a foreign person’s investment in a U.S. business; and (4) any other transaction designed or intended to evade CFIUS review. The new categories of review apply to transactions proposed, pending, or completed on or after the effective dates specified in Section 1727 of the NDAA.

The revised law retains most of the existing mandate to review any merger, acquisition, or takeover that is proposed or pending after August 23, 1988 that may result in foreign control of a U.S. business, including transactions achieved via a joint venture. There are, however, some changes in phraseology; for example, the prior version of the law referred to "any person engaged in interstate commerce in the United States" whereas the revised law refers to "United States business." The revised law also adds the reference to joint ventures.

Other provisions and reports. The reform package would extend the time for CFIUS review of a transaction from 30 days to 45 days, with the possibility of a 15-day extension in extraordinary circumstances. The CFIUS reforms further provide that any civil challenges to actions and findings made under the applicable law must be brought in the D.C. Circuit Court. The president also is directed to determine if CFIUS needs additional resources and to request funding for those resources from Congress.

Moreover, three federal departments would have to study and report on specific topics related to CFIUS’s work: (1) the secretary of Commerce must report every two years until 2026 to Congress and CFIUS on foreign direct investment transactions by Chinese entities in the U.S.; (2) the secretary of Homeland Security must report to Congress one year after enactment on investments in U.S. rail and rolling stock by state-owned or state-controlled entities; and (3) the treasury secretary must brief Congress within 60 days of enactment regarding CFIUS reviews of transactions during the past five years in which CFIUS found that the transactions would have allowed foreign persons to inappropriately influence democratic institutions and processes in the U.S. and elsewhere.

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