10 April 2018

Buyer Beware: CFIUS’s Expanding Reach


Although the Committee on Foreign Investment in the United States (CFIUS) has been evaluating foreign investment for implications to U.S. national security interests since 1975, its authority has expanded only incrementally over the years, with the last significant legislative changes more than a decade ago, through the Foreign Investment and National Security Act (FINSA) in 2007.  Recent and potentially imminent developments suggest that the scope and import of CFIUS will continue to expand.  CFIUS’s recent blocking of Broadcom’s acquisition of Qualcomm clearly demonstrates – if there was ever any doubt - that CFIUS increasingly considers indirect threats to national security when assessing potential transactions.  In addition, pending reform legislation in Congress, if passed, will expand the types of transactions within CFIUS’s jurisdiction and enhance CFIUS’s review process.  Each of these developments is considered below.

Blocking of Qualcomm / Broadcom Transaction

On March 12, 2018, President Donald Trump issued an order blocking Broadcom’s $117 billion bid for Qualcomm due to national security concerns.  This followed an investigation by CFIUS, which had concluded that Broadcom’s acquisition would threaten American advancement of 5G technology, and potentially position Huawei, a Chinese competitor, to emerge as a leader in 5G technology.  CFIUS and President Trump took this measure notwithstanding that Broadcom was in the midst of efforts to redomicile its headquarters in the United States from Singapore, a move that had been previously praised by the President, and had pledged to prioritize Qualcomm’s development of 5G technology. 

Citing “credible evidence” that the transaction could “threaten to impair the national security of the U.S.,” President Trump blocked the transaction after CFIUS raised concerns that Broadcom’s takeover would precipitate reduced investment in 5G research and development by Qualcomm, a leader in the field, which would in turn position Chinese companies to take the lead on developing this new technology.  The blocking – a still rarely-employed measure – is of particular note as a signal of CFIUS’s disfavor of structuring efforts to evade the Committee’s review jurisdiction, given that Broadcom was in the process of relocating to the United States, a move that may have eliminated CFIUS jurisdiction to review the transaction.  Also notable is that the potential threat to national security identified by CFIUS, namely competition in 5G technology by Chinese firms, was not manifested directly by the potential acquirer Broadcom, but by the perceived knock-on effect the transaction could have in the industry more broadly.    

Foreign Investment Risk Review Modernization Act – FIRRMA

The number of CFIUS filings has risen consistently, and although the scope of CFIUS review is widely perceived to have broadened in recent years, CFIUS has not been subject to a significant legislative overhaul since 2007.  In tandem with an increase in concerns about potential national security threats associated with cross-border transactions and a rise in economic protectionism, various proposals have been made to update and modernize CFIUS.  Certain of these proposals have crystallized into the proposed Foreign Investment Risk Review Modernization Act (FIRRMA), which the U.S. Congress is currently considering.  FIRRMA enjoys broad bipartisan support, has been endorsed by President Trump, and is widely expected to become law in 2018.  Some of its key changes are highlighted below:

Mandatory Declarations

Although filing in certain circumstances is generally advisable, there are currently no circumstances in which filing with CFIUS is compulsory.  In a marked change from current practice, FIRRMA would require brief declarations to be made in certain circumstances, including transactions involving companies with 25% or more foreign government ownership acquiring 25% or more of a U.S. business, or certain other transactions to be delineated in future regulations by CFIUS.  Following such a declaration, CFIUS may either provide for an expedited approval or request that a full filing be made.

IP / Technology Controls

FIRRMA would also expand the scope of CFIUS’s geographic jurisdiction with respect to certain transactions.  This expansion would bring within CFIUS’s remit any transfer of intellectual property or technology, including those executed by way of a joint venture or licensing agreement, or acquisition of a non-controlling interest in a U.S. company.  Under the proposed change, so-called “covered transactions” would not necessarily need to involve the acquisition of a U.S. business at all to be covered.  Rather, even transactions that involve only the export of U.S. intellectual property or technology outside the U.S. by way of a joint venture or licensing agreement between a U.S. business and a non-U.S. entity could also be deemed to be “covered.”  Also coming within the jurisdiction of CFIUS would be purchases and leases of property located near sensitive U.S. government facilities, including transactions in which the U.S. target is not itself a U.S. business.

Extended Review Period

FIRRMA would extend CFIUS’s initial review period from 30 days to 45 days, and grant CFIUS the right to further extend its review period in certain circumstances by an additional 30 days (on top of the 45 days automatically provided for).

Critical Technology / Critical Infrastructure

FIRRMA provides for CFIUS jurisdiction over any investment by a non-U.S. person in certain U.S. companies.  These include companies that are deemed to be involved in national security-related business or which own, operate, or provide services to critical infrastructure.  This expanded jurisdiction would include even non-controlling investments, though not passive investments (essentially those investments that do not afford access to non-public/technical information and which do not grant authority to the investor).  The specific parameters of critical technology/infrastructure will be delineated in regulations that will be promulgated by CFIUS following passage of the legislation, but it is likely that certain chemical, nuclear, and defense-related firms would be captured, along with any firms providing key services to the types of critical infrastructure already captured by CFIUS currently.

To some extent FIRRMA would be merely codifying aspects of CFIUS review that are already common practice.  As noted above however, this legislation would also expand the scope of CFIUS review substantially by broadening the range of transactions that would be subject to CFIUS review.

Key Take-Aways

As noted above, the Broadcom/Qualcomm transaction was blocked due to potential indirect ramifications on American competitiveness in a key emerging technology sector.  This action is consistent with the expansion of the scope of CFIUS reviews in recent years, which in many respects would become codified and further expanded if FIRRMA is passed by the U.S. Congress and signed into law.  Given the current political climate in the United States and FIRRMA’s broad bipartisan support (including support from the Trump Administration), FIRRMA is widely expected to become law in 2018.  It is more critical than ever that entities contemplating cross-border transactions with a U.S. nexus consider whether their transactions would fall within CFIUS’s jurisdiction and the ramifications of the increasing expansion of CFIUS’s reach.

Ken Rivlin
Partner, New York ken.rivlin@allenovery.com
Maura Rezendes
Senior Counsel, Washington D.C. maura.rezendes@allenovery.com
Nick Ognibene
Associate, New York nick.ognibene@allenovery.com

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