FIRRMA Implementation Seen as Work in Progress, With Deals Reviewed Growing
Foreign Investment Risk Review Modernization Act (FIRRMA) implementation is in its early days, with new rules taking effect last week, but it's generally assumed the number of transactions coming under Committee on Foreign Investment in the U.S. (CFIUS) jurisdiction will quadruple, said David Plotinsky, DOJ National Security Division principal deputy chief, at an FCBA CLE event Wednesday. He said the number of telecom deals subject to CFIUS also likely will quadruple, though there's less concern about deals on "the pipes" of telecom than on data. CFIUS experts said prospective deals now have to take CFIUS issues and possible mitigation steps into consideration early in the planning.
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CFIUS is still trying to assess what FIRRMA will mean for its workload, said Chairman Brian Reissaus. It changed the jurisdiction for foreign investments below the level of control of a U.S. business, as well as certain real estate transactions, he said. He said the CFIUS focus will remain national security. He said CFIUS started seeing an uptick in the volumes and complexity of transactions it was dealing with in 2014, plus some transactions the committee didn't have jurisdiction over, such as real estate transactions near sensitive facilities, bringing about FIRRMA. He said the act gave CFIUS more power to mandate business declarations that used to be voluntary, and extended the review period by 15 days. CFIUS transaction volumes have gone from roughly 140 a year in 2014 to 230 or so over the past three years, but case processing numbers have improved, with fewer delays, he said.
Under FIRRMA, the big change is the mechanics of the declaration process, which opens the door to more transactions getting legal certitude and almost an unofficial advisory opinion relatively quickly, potentially speeding up deals, said Covington and Burling CFIUS lawyer David Fagan. The declaration process might seem abbreviated, but the risk analysis is the same but fuller, said Plotinsky. He said deals with U.K., Canada and Australia are generally considered low risk, while other nations, such as China, carry a higher risk profile, and the type of technology involved could also play a role in the assessment.
FIRRMA language is broad, but agencies tried to calibrate the regulations narrowly to avoid so many transactions being covered that they’re unable to focus on just the important deals, said Plotinsky. Stacia Sowerby, White & Case CFIUS adviser and formerly the Treasury Department's CFIUS review coordinator, said she was “pleasantly surprised” with the way the regulations came out because CFIUS was given long leash for its expanded jurisdiction and discretion, but the rules are tailored to the issues that caused concerns in recent years. She said there are implementation issues that must be finalized.
Sowerby said the "excepted investor" test -- determining which get blanket exemptions to types of reviews -- is going to be tough, and investors should assume they won't be considered one. Fagan said that test could end up a diplomatic tool and "there will be intrigue" about what nations get named excepted foreign states.
Fagan said principal place of business of a foreign company involved in a deal matters in examples like financial funds, but generally it’s far less important than how involved the foreign company is with a country of concern like China.
For Team Telecom national security reviews of deals submitted to the FCC, preparing for the DOJ/DOD/Department of Homeland Security “triage questions” involves getting the answers together when the transaction still is being prepared, said Shearman & Sterling CFIUS lawyer John Beahn. He said companies sometimes blanch at providing that level of competitive information to the government, but the information helps the government as it thinks about mitigation steps. DOJ Foreign Investment Review Section Telecom Deputy Chief Loyaan Egal said at times it might be the same DOJ lawyer handling both the Team Telecom and CFIUS reviews, so inconsistencies in information will occur. The days of companies signing compliance agreements with the government and then never hearing anything further are over, with Team Telecom agencies all building out their compliance and monitoring teams and functions, said Wiley national security lawyer Rick Sofield.