The recent expansion of powers of the Committee of Foreign Investment in the United States (also known as "CFIUS") by the passage of The Foreign Investment Risk Review Modernization Act of 2018 ("FIRRMA") has many Silicon Valley dealmakers concerned about the challenges CFIUS may pose going forward for business transactions in the technology industry. As you may know, the legislation significantly expands the powers of CFIUS to conduct national security reviews of pending business deals and imposes penalties on businesses for compliance failures, which will clearly complicate the ability of U.S. businesses in Silicon Valley to close transactions involving foreign investment. For more information on the key of FIRRMA and the national security review process which will be in place going forward, check out the U.S. Treasury website established to educate the public on the issue.
What types of business transactions are going to be affected by the new rules? Now, not only will CFIUS have the power to review proposed mergers, acquisitions, or takeovers that could result in foreign control of a U.S. business, but CFIUS will also be able to conduct national security reviews of the following deals:
- A purchase, lease, or concession by or to a foreign person of real estate located in proximity to significant government facilities.
- "Other Investments" by a foreign person in any unaffiliated U.S. business that owns, operates, manufactures, supplies, or services critical infrastructure; produces, designs, tests manufactures, fabricates, or develops one or more critical technologies; or maintains or collects sensitive personal data of U.S. citizens that may be exploited in a manner that threatens national security.
- Any change in rights that results in foreign control of a U.S. business or an "other investment" as defined above.
- Any transaction, transfer, agreement, or arrange, the structure of which is intended to evade the review of the committee.
As you might expect, the second point is what is perhaps most concerning to many in Silicon Valley. Of particular concern, is how two terms are being defined: "Other Investments" and "critical technologies." FIRMMA defines "Other Investments" as "any investment, direct or indirect, by a foreign person in a U.S. business" that affords the foreign person
- access to any material nonpublic technical information in possession of the United States business
- membership or observer rights on the board of directors or equivalent governing body of the U.S. business, or the right to nominate an individual to a position on the board of directors or equivalent voting body, or any involvement other than the voting shares in the substantive decision making of the U.S. business;
- the use, development, acquisition, safekeeping, or release of sensitive personal data of U.S. citizens maintained or collected by the U.S. business;
- the use, development, acquisition, or release of critical technologies;
- the management, operation, manufacture, or supply of critical infrastructure.
FIRRMA defines "critical technologies" to include:
- Defense articles or defense services;
- Items included on the Commerce Control List and controlled pursuant to multilateral regimes, including for reasons relating to national security, chemical and biological weapons proliferation, nuclear proliferation, or missile technology, or for reasons relating to regional stability or surreptitious listening;
- Specially designed and prepared nuclear equipment, parts and components, materials, software, and technology covered by part 810 of title 10, Code of Federal Regulations (relating to assistance of foreign atomic energy activities);
- Nuclear facilities, equipment, and material equipment, and material covered by part 110 of title 10, Code of Federal Regulations (relating to export and import of nuclear equipment and material);
- Select agents and toxins covered by part 331 of title 7, Code of Federal Regulations, part 121 of title 9 of such Code, or part 73 of title 42 of such code; and
- Emerging and foundational technologies controlled pursuant to section 1758 of the Export Control Reform Act of 2018.
While the full impact of the law is still to be determined, the interim rules already establish that transactions are going to be subject to review in a variety of industries represented by Silicon Valley, including but not limited to:
- computer storage device manufacturing;
- electronic computer manufacturing;
- optical instrument and lens manufacturing;
- primary battery manufacturing
- wireless communications equipment manufacturing
- research and development in nanotechnology
- research and development in biotechnology;
- semiconductor and related device manufacturing;
- semiconductor machinery manufacturing;
- storage battery manufacturing; and
- telephone apparatus manufacturing.
As our affiliate blog, The Silicon Valley Software Law Blog, also noted in a recent post, the software industry is also potentially going to be impacted.
While the implications of this new expansion of national security review powers are still unknown, the concern is clearly that many technology business deals are going to be subject to more federal compliance obligations going forward when the deals involve any foreign investment, that these compliance obligations could potentially slow down or even derail the closing of deals, and that the compliance obligations may subject Silicon Valley companies to significant fines up to the amount of the deal if they fail to meet these new obligations. The concern for licensing deals and IP transactions generally is that CFIUS is going to impose new barriers to closing these types of deals.
The Silicon Valley IP Licensing Law Blog will continue to follow the developments regarding this law and how it is applied and interpreted to Silicon Valley companies going forward.