Glossary: Committee on Foreign Investment in the United States

In this installment, let's take a look at the "Committee on Foreign Investment in the United States".

I believe this is an organization that Japan also fundamentally needs.

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"Committee on Foreign Investment in the United States (CFIUS)": An extremely important U.S. government agency that reviews the impact of foreign investment in the United States on U.S. national security.

1. Historical Background and Evolution

The prototype of CFIUS was established in 1975 by an executive order from President Gerald R. Ford. At the time, the background was concern over the rapid increase in foreign investment in the U.S. from OPEC member countries, and its primary function was monitoring the impact of foreign investment in the U.S. and policy coordination.

A turning point was the Omnibus Trade and Competitiveness Act of 1988 (commonly known as the "Exon-Florio Amendment"). This codified the authority for CFIUS to review and investigate foreign investment cases in the U.S. and for the President to block transactions if they are determined to pose a threat to national security.

Following this, after issues such as the 2006 acquisition of U.S. port operations by Dubai Ports World (which was approved by CFIUS but viewed as problematic by Congress), the **Foreign Investment and National Security Act (FINSA)** was enacted in 2007, which strengthened regulations, particularly regarding investments in critical infrastructure by foreign investors owned or controlled by foreign governments.

And the most significant transformation was brought about by the Foreign Investment Risk Review Modernization Act (FIRRMA) of 2018. This significantly expanded the authority and scope of CFIUS reviews, aiming to strengthen it to address the modern security environment.

2. Organization and Composition

CFIUS is an interagency committee consisting of multiple departments and agencies, with the Secretary of the Treasury serving as chair. The primary members are the heads of the following departments and agencies:

• Department of the Treasury

• Department of Homeland Security

• Department of Commerce

• Department of Defense

• Department of State

• Department of Justice

• Department of Energy

• Office of Science and Technology Policy

• Office of the U.S. Trade Representative (USTR)

These departments and agencies collaborate to evaluate investment transactions from multiple perspectives based on their respective expertise.

3. Transactions Subject to Review

With the implementation of FIRRMA, the scope of CFIUS review has expanded beyond transactions involving 'control of a U.S. business' to include certain non-controlling investments and real estate transactions that raise national security concerns. The main categories subject to review are as follows:

• 'Covered Control Transactions': Mergers, acquisitions, or other transactions in which a foreign person acquires control of a U.S. business. This has been the traditional subject of CFIUS review.

• 'Covered Investments': Direct or indirect investments by a foreign investor that do not result in control of a U.S. business dealing in critical technology, critical infrastructure, or sensitive personal data. These investments are subject to review if they grant the foreign investor certain rights (e.g., access to significant non-public technical information, board participation rights, or status as a key information provider).

• 'Covered Real Estate Transactions': Real estate transactions involving property in close proximity to certain military or government facilities, or property that is part of certain ports or airports. In November 2024, a final rule was announced expanding the scope of CFIUS review for real estate transactions adjacent to U.S. military installations, significantly broadening the covered military facilities and their geographic range.

• Other Transactions: Transactions, transfers, or contracts intended to evade the application of Section 721 of the Defense Production Act or CFIUS review may also be subject to review.

Definition of 'National Security'

There is no clear definition of 'national security' that CFIUS uses as a standard for review. This is said to be because CFIUS is granted broad discretion, as what constitutes a national security threat changes with the times, technological advancements, and geopolitical situations. Consequently, the scope of what can be subject to review is extremely broad, and any foreign investor, including Japanese companies, may be subject to CFIUS review.

4. Review Process

The CFIUS review process is broadly divided into the following stages:

1. Notification or Declaration:

   • Voluntary Notice: Most transactions begin with a voluntary notice to CFIUS by the parties (buyer and seller). Because failing to notify CFIUS carries the risk of being ordered to unwind the transaction later, many companies notify voluntarily.

   • Mandatory Declaration: For certain transactions, such as investments in U.S. businesses dealing with specific critical technologies where a foreign government has a substantial interest, there is a legal obligation to file a declaration with CFIUS in advance. Violations may result in the imposition of fines.

2. Review Phase (30 or 45 days):

   • After receiving a notice or declaration, CFIUS conducts an initial review to determine if there are any national security risks. This period is typically 45 days (30 days for declarations).

   • If it is determined at this stage that there are no risks, the review is concluded.

   • However, if there is a risk of compromising national security that has not been mitigated, or if the transaction involves a foreign government, it proceeds to the next investigation phase.

3. Investigation Phase (45 days):

   • A more detailed investigation is conducted as a secondary review. This period is also typically 45 days.

   • CFIUS negotiates mitigation measures with the parties to the transaction. Mitigation measures may include restricting access to intellectual property, limiting the sharing of sensitive information, divesting specific business units, or agreeing to share information with the U.S. government.

   • If the parties agree to the mitigation measures, the transaction is approved.

   • If risks remain or if an agreement cannot be reached, the matter is referred to the President for a final decision (up to 15 days).

4. Presidential Decision:

   • Based on the recommendation of CFIUS, the President decides whether to block the transaction, impose additional conditions, or approve it. While it is rare for the President to block a transaction, the decision is final.

CFIUS reviews are highly confidential, and information is rarely leaked to the public.

5. Impact on Japanese Companies

Since Japanese companies can also be subject to CFIUS review, it is necessary to fully consider CFIUS risks when contemplating investments in U.S. companies. In particular, extreme caution is required when investing in U.S. companies that handle critical technology, critical infrastructure, or sensitive personal data, as well as when acquiring real estate near military facilities.