Tweaks to CFIUS Expected as Industry Continues to Face Complications

The U.S. will likely continue to update the regulations for the Committee on Foreign Investment in the U.S., which has created some complications for industry, trade lawyers told the American Bar Association April 15. The recently revised regulations have also severely reduced incoming Chinese investments, which could have long-term implications, one lawyer said.

The Foreign Investment Risk Review Modernization Act (see 2001140060) last year expanded CFIUS’ jurisdiction, allowing the committee to review investment transactions involving critical technologies. As national security concerns change and technologies continue to evolve, the government will likely update its investment screening regulations, said Jess Sanchez, an attorney adviser at the Treasury Department, at the ABA International Law Section's virtual annual meeting. “I think that you'll continue to see updates come out, a continued tweaking of different components of the regulations.”

Sanchez also said CFIUS has worked to shake its reputation of secrecy and is committed to providing “due process” to parties. The committee came under criticism last year by TikTok, which said its CFIUS review process was heavily politicized and unfair (see 2008240031). “CFIUS has been called a black box and shadowy and cloak and dagger and all these things,” Sanchez said. “But the goal really is interaction.”

She said CFIUS conducts “extensive” talks and meetings with parties before deciding whether to clear an investment or negotiate a mitigation agreement. “It's not lost on anybody involved in the process that the consequences that we're talking about are severe,” Sanchez said. “The process really is premised on providing legitimate due process to parties.”

Some companies have struggled to determine whether their investment transactions may require a CFIUS filing because the Commerce Department has yet to publish a comprehensive list of emerging and foundational technologies, which falls under CFIUS’ critical technology criteria (see 2002110042). Although Commerce has “been very deliberate” in issuing those controls, Duane Morris trade lawyer Geoffrey Goodale said, he expects the Bureau of Industry and Security to issue new emerging or foundational technologies in the next few months. “There's still much more to come,” Morris said. BIS officials have said they expect to issue a new set of emerging technologies before the end of the year with the aim to propose them for multilateral control at the Wassenaar Arrangement in 2022 (see 2103190037).

Some companies have struggled to adapt to CFIUS’ new mandatory declaration requirements, which were previously based on North American Industry Classification System codes but now are directly linked to export control classification requirements (see 2001140060), said Laura Molinari, a trade lawyer with TE Connectivity. She said the change was especially problematic for smaller businesses that don’t export. “The negative is for the small companies. They don't classify all the time, particularly if they're selling domestically,” Molinari said. “So if they're not exporting, they're not going to have these classifications in their system.”

CFIUS regulations have also been complicated by China’s export control law, which was enacted last year and challenged compliance programs (see 2010190033 and 2011030033). Chinese and U.S. companies are continually having to choose between the two sets of regulations or find rare middle ground, said Alex Yong Hao, a JunHe lawyer who advises Chinese companies doing business in the U.S. “All of a sudden you find yourself between a rock and a hard place,” he said. “You really don't want to be in that situation, but that's kind of where we are.”

Hao also said he has recently noticed a steep drop-off in large Chinese investments in the U.S., which he expects to continue. Two-way investment between the U.S. and China hit a nine-year low during the first half of 2020 as CFIUS emphasized reviews involving Chinese companies (see 2009170017), a trend that’s expected to continue under Joe Biden's administration (see 2101220034). “I think it's very unlikely in the near future to see big acquisitions of big companies,” Hao said. “I think the days for that are pretty much gone. I don’t know if it’s going to be gone forever, but I guess for the near future.”