
Dan Brecher
Counsel
212-286-0747 dbrecher@sh-law.comFirm Insights
Author: Dan Brecher
Date: November 26, 2018
Counsel
212-286-0747 dbrecher@sh-law.comHeadlines show that foreign governments, particularly China, have used clandestine methods to obtain, copy and use intellectual property developed and owned by American businesses. These methods originally included criminal acts such as bribery, commercial spying and outright theft of property. Criminal indictments have been obtained against numerous foreign nationals and American citizens working conspiratorially with them, for outright stealing of intellectual property with military and national security implications, as well as improper purchase and shipping of protected military and national security assets.
With the advent of prosperity, aided in part by these thefts, and being welcomed into international commerce, there is a newer and more insidious threat to American intellectual property and to our worldwide commercial and military influence and might: foreign interests simply (and legally) buying access to and even control over strategic American business and military assets. This is an “invasion” that is real, that has happened and is a continuing threat.
Seeking to curtail the uncompensated taking of American intellectual property and business secrets, the U.S. Treasury has begun the process of implementing the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). The law, which President Donald Trump signed this summer, significantly changes the procedures used to conduct national security reviews of foreign investments in the United States.
Prior to FIRRMA, section 721 of the Defense Production Act of 1950 (DPA) authorized the Committee on Foreign Investment in the United States (CFIUS) to review mergers, acquisitions, and takeovers by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States. The reviews are conducted to determine the effects of such transactions on the country’s national security.
FIRRMA modified and broadened the authorities of the President and CFIUS under section 721 to expand the scope of foreign investments in the United States subject to national security review pursuant to section 721. While several FIRRMA provisions took effect immediately, others require implementing regulations. FIRRMA also authorizes the U.S. Department of the Treasury, as chair of CFIUS, to conduct pilot programs to implement provisions in the legislation that did not become effective immediately upon enactment.
As set forth in the U.S. Treasury’s Pilot Program Interim Rule, the pilot program expands the scope of transactions subject to CFIUS review to include certain non-controlling investments in U.S. businesses involved in critical technologies related to specific industries. As detailed in the rulemaking, “the purpose of implementing a pilot program addressing these areas is to confront the rapid changes in certain critical technology industries, the significant growth of certain types of foreign investment in those industries, and the current inability of CFIUS to review non-controlling transactions, which creates an unacceptable risk of undermining U.S. technological superiority in industries with national security implications.” The pilot program also makes effective FIRRMA’s mandatory declarations provision for transactions that fall within the scope of the pilot program. Below are several key aspects of the regulations:
The pilot program started on November 10, 2018. It will end no later than the date on which the final FIRRMA regulations are fully implemented, which is no later than February 2020. Given the breadth and significance of the changes, we encourage private equity funds and other businesses that may now fall under the purview of CFIUS to contact an experienced business attorney.
If you have any questions or if you would like to discuss the matter further, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work at 201-806-3364.
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