A New Year’s Shopping List for CFIUS
A New Year’s Shopping List for CFIUS
As the end of 2022 approaches, many people are shopping for and giving holiday gifts. While it is too late for the Committee on Foreign Investment in the United States (CFIUS) to receive any gifts from Congress this year, we’ve suggested a list of things, based on recent events, that the new Congress may want to give CFIUS — or CFIUS may want to give itself — in 2023.
The event giving rise to three of the items on this list is CFIUS’s recent determination that it lacks jurisdiction to review the development and construction of a 370 acre, US$700m corn milling plant in Grand Forks, North Dakota, by Fufeng Group, a China-based maker of bio-fermentation products.
Jurisdiction over greenfield investments
Most of CFIUS’s jurisdictional authority relates to foreign investments in U.S. businesses, defined roughly as an entity engaged in interstate commerce in the United States or sufficient assets of such an entity to operate the business.
The CFIUS rules explicitly carve out “greenfield” investments — those involving the establishment of an entirely new business. Although CFIUS has historically interpreted the greenfield exception narrowly, it appears that Fufeng’s investment met all of the qualifications.
Senators from North Dakota and Florida have expressed concern with CFIUS’s inability to review the Fufeng investment. If they want to make such reviews possible in the future, they might seek to amend Section 721 of the Defense Production Act of 1950 (Section 721) — the principal law governing CFIUS — to permit reviews of greenfield investments.
Expansion of jurisdiction over real estate transactions
Since Section 721 was last amended in 2018 and implementing regulations were issued in 2020, CFIUS has also had jurisdiction over a variety of real estate transactions in sensitive locations listed or described in Part 802 of the CFIUS regulations (Part 802). Locations are typically listed in Part 802 because they host military training or other activities that could be targeted for intelligence collection by adversaries.
As noted in our summary of highlights of CFIUS’s 2021 annual report to Congress, relatively few CFIUS filings have been made under Part 802. The rule lists only a limited number of sites that are deemed sensitive and includes a number of exceptions. Moreover, many real estate transactions are subordinate to corporate investments that are already subject to CFIUS jurisdiction under the authorities described earlier.
The proposed Fufeng corn mill, which would be built on newly acquired real estate, is just a few miles from Grand Forks Air Force Base, which is not one of the sensitive sites listed in Part 802. Although Grand Forks AFB is the headquarters of the 319th Reconnaissance Wing that operates remotely-piloted Global Hawk aircraft around the world, many if not most of those aircraft are located as far away as Guam and Italy. It is possible that Grand Forks AFB is not on the Part 802 list because the activities performed there are not as vulnerable to intelligence collection from nearby locations.
Still, if CFIUS wants to be able to review future Fufeng-like transactions, it can add more sensitive sites to Part 802, thereby extending its jurisdiction to more real estate transactions. Notably, unlike the other items on our shopping list, this change could be made through the normal CFIUS regulatory process — no new legislation would be required.
Federal preemption of foreign investment reviews
One of the immediate results of the Fufeng decision was the proposal in neighboring South Dakota to create “CFIUS-SD”, a state body that would investigate and in some cases recommend prohibition of certain foreign investments in South Dakota. In 2021, Texas enacted similar legislation in the form of the Lone Star Infrastructure Protection Act, barring control of or access to critical infrastructure by certain foreign countries.
In 2022, a University of Virginia law professor, analyzing the Texas legislation, assessed that at least part of what Texas was trying to do is preempted by Section 721. She acknowledged, however, that Section 721 lacks a provision explicitly preempting state authority over foreign investment reviews. She also suggests that states could instead contribute to the CFIUS process by notifying CFIUS of transactions that may be within its remit.
To avoid state competition with CFIUS and a potential patchwork of inconsistent state processes and standards for review, Congress could amend Section 721 to include a clear statement of federal preemption.
CFIUS jurisdiction over licenses of intellectual property (IP)
Another 2022 event that may contribute to the CFIUS wish list is the UK government’s decision in July to block the licensing of machine vision technology by the University of Manchester to a Chinese company. As described in our earlier blog post, this was the first transaction prohibited under the National Security and Investment Act since it came into force in January 2022.
As discussed above, CFIUS has jurisdiction over certain investments in U.S. businesses as well as certain real estate transactions. The licensing of IP by itself falls under neither category. In general, CFIUS relies on export control authorities to identify critical technologies and to address licensing transactions outside the scope of corporate investments, but as noted in our Tech Insights post from August, the Commerce Department, which regulates exports of “dual-use” (i.e. civil/military) technologies, has been approving the vast majority of license applications for technology transfers to China.
Just as when Congress amended Section 721 to allow CFIUS jurisdiction over real estate transactions, leading to Part 802 reviews, Congress could similarly decide that too many technology transfers are slipping through the regulatory cracks and seek to amend Section 721 to give CFIUS independent jurisdiction over IP licensing transactions. The challenge in doing so will be to balance the roles of CFIUS, the Commerce Department, and other bodies responsible for controlling foreign transfers of technologies.
