In August 2020, President Trump ordered social media company ByteDance to divest from TikTok. The President’s action left many wondering, “Can he do that?” The order kicked off a flurry of legal battles, ultimately putting TikTok’s future in the US in an odd sort of holding pattern. The incident perhaps marked a low point in what was already rapidly shrinking Chinese investment in the US amidst the federal government’s significant ramp-up of “non-notified transaction” investigations. These actions have continued to rapidly increase in number. Recent testimony from a Department of Commerce official offered little comfort to investors and businesses seeking clarity on the types of transactions subject to investigation and mandatory reporting.
The President does indeed have authority to alter or block many cross-border transactions, and the TikTok incident was only one example of the government’s increasing willingness to do so. Such actions originate with the Committee on Foreign Investment in the United States (“CFIUS”), an interagency committee originally established by executive order in 1975. With representation from multiple executive branch departments, CFIUS is chaired by the Secretary of the Treasury and is tasked with reviewing and investigating “covered transactions” involving various forms of foreign investment in the United States. This process is meant to identify national security concerns and, if necessary, recommend action to the President. It operates pursuant to section 721 of the Defense Production Act of 1950 (“Section 721”), which has been amended over time, gradually formalizing the committee’s practices and granting it an increasingly prominent role.
CFIUS’ activity began to pick up steam in 2008, shortly after the Foreign Investment and National Security Act (“FINSA”) codified its practices and gave it additional authority. Since then, the committee turned its attention primarily (though not entirely) to China, and began reviewing many more transactions than in the previous decades of its existence. CFIUS has occasionally garnered public attention (in addition to the TikTok incident, CFIUS blocked Broadcom from its proposed acquisition of Qualcomm in 2018). However, many of CFIUS’ actions remain secret and subject to limited judicial review. US investors have reported that even the full sum of CFIUS’ actions could dramatically understate the ultimate effects since foreign investors forego many prospective deals altogether based on concerns that CFIUS could eventually squash them.
Nonetheless, review of transactions remained limited mostly to concerns around data privacy and 5G until, in 2018, the Foreign Investment Risk Review Modernization Act (“FIRRMA”) gave CFIUS substantial new resources, created mandatory filing requirements for certain transactions, and broadened CFIUS’ jurisdiction. This broader jurisdiction now includes wide latitude for CFIUS to review transactions that involve businesses dealing in “critical technologies.” While CFIUS has the discretion to review a wide range of transactions, FIRRMA requires that many deals involving “critical technologies” be reviewed and approved by CFIUS and mandates that parties to many such deals give advance notice to CFIUS. So while FIRRMA significantly expanded the scope of CFIUS review in general, it mandates special attention for many deals involving “critical technologies.”
What, then, is a “critical technology”? Federal regulations issued following FIRRMA include in this category a number of likely unsurprising things: nuclear equipment and facilities, select toxins, certain munitions, etc. In addition, the definition includes a more surprising and far less specific category: “emerging and foundational technologies controlled under section 1758 of the Export Control Reform Act of 2018.” These “emerging and foundational technologies,” in turn, are ultimately identified by an agency housed within the Department of Commerce, the Bureau of Industry and Security (“BIS”).
What this means for CFIUS—and thus for investors and businesses—is that anything the BIS deems an “emerging” or “foundational” technology falls within CFIUS’ jurisdiction, is subject to mandatory filing requirements, and will likely receive special attention (i.e., non-notice review and investigation) from the committee. In 2020, the BIS released an initial list of technologies that it explicitly considers to be “emerging technologies,” ranging from big things (sub-orbital aircraft) to very small things (finishing wafers for 5-nanometer production). This list, however, is non-exclusive and says nothing of the category of “foundational technologies.” Accordingly, the agency published an ANPRM seeking public comment on criteria for identifying “foundational technologies,” leaving some room for hope that the agency would speak definitively on the matter after public input.
In September, a BIS official squashed any such hope. In testimony before the US-China Economic and Security Review Commission, Jeremy Pelter outlined aspects of the process of identifying critical technologies and clarified that that process would “not result in the creation of a new list.” Many in industry had hoped that the BIS would issue such a list, and some in Congress claimed that one is statutorily required by the ECRA. Without one, the scope of CFIUS review may be both limited (in the sense that the committee will not extend review to technologies that would be included in a definitive list) and uncertain (since the BIS may update its definition on an ongoing basis).
CFIUS’ jurisdiction is not without limit. As Pelter pointed out in his testimony, the BIS has been deliberate in its approach to naming “critical technologies” and has made serious efforts to coordinate the process with US allies. The decision may have even been inevitable. After all, how could the BIS produce an exhaustive list to determine which technologies in an ever-growing field match its criteria? Nonetheless, the agency’s decision to leave the term relatively undefined may relegate many US-based technologies to the same uncertain fate as TikTok. Ultimately, the decision offers at least one clear message: foreign investors must continue to think twice before doing business with US tech companies.