The new Committee on Foreign Investment in the U.S. (CFIUS) regulations implementing the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) are effective today. These regulations provide CFIUS with the legal authority needed to more effectively screen foreign investment in the United States. The new rules are the culmination of a lengthy legislative process aimed at reforming CFIUS procedures and expanding the committee’s jurisdiction. That process began in 2017, with the introduction of the first draft iteration of FIRRMA, directly following a record year in Chinese mergers and acquisitions in the U.S. in 2016. Much has changed since then.
In the intervening years, CFIUS has established a new reputation as a committee with teeth (really, just run a search for “CFIUS teeth” and you’ll see). CFIUS doubled its number of investigations from 2016 to 2018; imposed a $1 million civil penalty in 2018 and a $750,000 civil penalty in 2019; unwound several newsworthy transactions after closing; and managed to quintuple the number of “abandoned deals” (deals terminated after withdrawal of a CFIUS notice).
Now, CFIUS is a global hot topic. Chinese M&A investments in the U.S. have fallen off the map. And the FY 2021 federal budget released this week “requests $35 million for Treasury to continue the swift implementation of FIRRMA.” So, even before today’s launch of the new rules and this week’s budgetary request, CFIUS has undergone major transformations.
The New Rules
What does today mean, legally? Among other things:
1) The critical technology pilot program concluded yesterday.
2) Mandatory filing requirements for certain deals (e.g., certain investments by foreign governments and certain investments in “TID U.S. Businesses”) are now in effect, although CFIUS review is, to quote the U.S. Department of Treasury, still “largely a voluntary process”.
3) CFIUS now has new jurisdiction over certain real estate transactions that are subject to voluntary filing rules.
4) Australia, Canada, and the United Kingdom now enjoy “excepted foreign state” status—a designation that is part of a complex analysis for determining whether certain non-controlling investments by investors linked to those countries may be exempt from CFIUS review.
These are only some of the changes now in effect. But mentioning these changes is enough to give you a sense of the new layer of complexity and uncertainty added to an already opaque process. In fact, I urge you to read about “the shrug,” which has emerged as a fixture of the CFIUS short form declaration process (see, § 800.407(a)(2) of the new rules).
A New Budget for a New CFIUS
The Treasury Department’s Congressional Budget Justification and Annual Performance Report and Plan for FY 2021 requests $20 million in upfront appropriations “to implement FIRRMA and handle an anticipated workload of 1,000 cases a year.” An annual workload of 1,000 cases would more than triple the number of CFIUS notices filed in 2018, as reported in official committee data. The budget’s explainer states that the committee’s “caseload has increased in volume and complexity” and that it is engaged in increased investigations that “require more resource intensive analysis and/or corrective action.”
Remember the filing fees that remain TBD? (FIRRMA gives CFIUS the authority to collect filing fees but Treasury has yet to release a separate proposed rulemaking implementing this fee authority.) Here’s where the fees come into play: Treasury proposes that the $20 million amount “will be offset by up to $20 million in offsetting collections from filing fees, which will be established in forthcoming regulations.” Notably, last year, the anticipated filing fees for the same number of anticipated cases (1,000) was $10 million—half the fees anticipated for FY 2021. This could mean that Treasury has, in its internal deliberations, raised the fees it plans to impose. We knew the fees were coming. But now we know that they’re probably coming soon, they may be hefty, and they are key to CFIUS’s vision of becoming both bigger than ever and self-sustaining.
Uncertainty on the part of transaction parties in this new landscape will likely lead to more CFIUS filings by parties erring on the side of caution. This is probably an understatement, considering that Treasury’s budget is already preparing for a flood of CFIUS cases.
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