Tightening the Net: Investment Screening in the United States
With the presidency of Donald Trump, national security considerations play a growing role in economic policy-making of the United States. This can be witnessed not only regarding trade policy and the national security tariffs (Section 232 Tariffs) on steel and aluminum but also in the field of investment policy.
At the end of 2018, the Foreign Investment Risk Review Modernization Act (FIRRMA) considerably tightened the screening of foreign investment. President Trump signed FIRRMA in August 2019 as part of the National Defense Authorization Act (NDAA) together with other legislation such as on export controls. At the end of 2019, the draft implementing regulations was published, which is due to come into force in mid-February 2020 at the latest.
Long Tradition of Investment Screening in the United States
Investment screening is not in the United States. The U.S. government has been screening foreign investment since 1975. The checks are carried out by the Committee on Foreign Investment in the United States (CFIUS). The Heads of the Departments of Commerce, Justice, Homeland Security, Defence, Foreign Affairs, Trade and Research and Energy are represented in this committee.
If CFIUS comes to the conclusion that an investment could jeopardize the national security of the United States, the committee can refer the case to the U.S. president for a decision. The president’s decision is binding and not legally contestable. Between 2014 and 2018, CFIUS examined 627 takeovers; in three cases the investigations led to a ban by the president. In 2018 alone, President Trump banned two investments; both were Chinese investments in U.S. technology companies (Xcerra and Qualcomm). With FIRRMA, the U.S. Congress has adopted a reform package that significantly expands the competencies of CFIUS. Although investment screening in the United States is not new, an increase in prohibitions is to be expected. The law will result in more reviews.
State Intervention Rights Extended
The proposal for the implementing regulation specifies the economic sectors in which and the circumstances under which foreign investment may be reviewed or prohibited. First, investment in real estate can be prohibited if it is located, for example, near U.S. military facilities. Secondly, it provides for reviews of the acquisition of companies involved in certain technologies, infrastructure or the processing of personal data (TID businesses: technology, infrastructure, and data). The implementing regulation also provides clarifications for the real estate sector and the three TID sectors. Reference is also made to other U.S. laws, such as the U.S. Data Protection Act and Section 1758 of the Export Control Act of 2018 (ECRA).
There is another important change which expands the scope of investment screening: It is no longer just a question of whether an investment allows control over the respective company. Rather, CFIUS can now check all investments that allow the investor to carry out activities within the company (“non-passive investments”). Under the old rules, investments by foreign companies could only be screened if they were accompanied by actual control over the acquired company.
Fees and Timeframes
FIRRMA also entailed changes to the screening procedure. CFIUS now has a maximum of 60 instead of 30 days to process an investment screening. The planned introduction of fees for investment audits amounting to one percent of the transaction value (up to a maximum of 300,000 U.S. dollars) is clearly at the expense of the companies. However, the fee schedule is not yet listed in the implementing regulation presented in 2019 but will be subject to separate regulation at a later date. Companies are expected to benefit from a newly introduced simplified registration procedure that allows a firm to apply for pre-approval for investments. FIRRMA has also institutionalised CFIUS. The reform has given CFIUS an autonomous budget and the right to employ staff independently. A positive contribution to the transparency of the committee’s activities is the introduction of a reporting obligation for CFIUS to Congress and the public.
Greater legal certainty has been achieved by establishing criteria for the sectors and circumstances in which foreign investment should be examined. Overall, however, FIRRMA raises the hurdles for foreign investment in the United States. The scope of the screenings has been extended, and in many cases the screening becomes mandatory.
Comparison: Investment Screenings in Germany and the United States
|German Foreign Trade and Payments Act (Außenwirtschaftsgesetz) (AWG)||United States (CFIUS)|
|Criteria||Public safety and order||National Security|
|Institution||Ministry of Economic Affairs, participation of various ministries, advice from security authorities||Department of the Treasury, involvement of various ministries, advice from security authorities|
|Threshold||Starting at 25 percent of shares||If investments allow the investor activities in the company|
|Duration||Max. 120 days||Max. 60 days|
|Denied acquisitions (2009 until today)||1 (Leifeld Metal Spinning GmbH)||4|
|Costs||None||One percent of the transaction value|
|Possibility of challenging investment restrictions||Through administrative courts||Not contestable|