U.S. Regulatory Scrutiny of Cross-Border Transactions Is Heating Up: Forbes Article Explains the Implications for U.S.-China and Other Market Activities

Mergers & Acquisitions Alert | August.16.2018

In this Forbes article, Orrick Partner Harry Clark and Richard Harroch, Managing Director and Global Head of M&A at VantagePoint Capital, describe new U.S. laws that will expand U.S. government restraints on certain transactions involving foreign companies and governments. The new laws will also lead to new restraints on the transfer and use of sensitive U.S. goods and technologies in the United States and abroad. This new legislation has been prompted by a changed national security landscape, especially challenges posed by China.

Businesses planning cross-border transactions that involve investment in the United States or transfer of technology abroad should be aware of the following:

  • There are two new laws. The Foreign Investment Risk Review Modernization Act ("FIRRMA") clarifies and expands the authority of the Committee on Foreign Investment in the United States ("CFIUS") to analyze, monitor and budget for an extensive range of transactions that go beyond corporate acquisitions. The Export Control Reform Act ("ECRA") provides sweeping statutory authority for regulation of commodities and technology, including in-country transfers and changes in an item's use in foreign countries.
  • FIRRMA will confirm recently expanded screening of investment in the United States by CFIUS and expand CFIUS's authority in various ways. Key areas addressed by FIRRMA include (1) acquisitions of U.S. companies holding "critical technology" by non-U.S. acquirers; (2) minority investments by non-U.S. investors in U.S. companies holding "critical technology"; (3) investment into U.S. venture capital funds by foreign investors; (4) sales, licenses or export of technology to non-U.S. companies; and (5) acquisition or lease of certain types of U.S. real estate for foreign entities.
  • The new legislation calls for a new interagency group and new international cooperation. The new interagency group will identify and set up controls on "emerging and foundational technologies" and will require a license for the export, re-export, or in-country transfer of these technologies to a country subject to an arms embargo imposed by the United States. United States companies, especially those that develop or work with advanced technology, should consider at least monitoring and perhaps seeking to affect the process for selecting new export controlled technologies. The new international cooperation takes the form of a formal process of exchange of information with allies and partners of the U.S. regarding investments and technology that could pose national security risks to the U.S. and its allies and partners.
  • There are several practical implications. Critical technology and infrastructure, real estate and bankruptcy related transactions will now fall automatically under CFIUS's jurisdiction in addition to CFIUS's historical concerns. We can also expect intensified scrutiny of Chinese investments in and acquisitions of U.S. technology companies; transaction parties devoting more attention to addressing CFIUS-related risk; higher transaction, legal and fee expenses; longer time to closing for acquisitions; and new rules expected within the year that will further affect transactions.