U.S. Treasury Department. Photo Credit: Mike Scarcella/ALM

Corporate legal departments that expected to have more time to prepare for the arrival of new rules subjecting foreign investments in American businesses to national security reviews got a surprise this week.

The U.S. Treasury Department announced Wednesday that a pilot program under the recently enacted Foreign Investment Risk Review Modernization Act would take effect on Nov. 10 and greatly expand the list of transactions that are subject to review by the Committee on Foreign Investment in the United States.

Under the new rules, any American business that has a hand in “critical technology” and takes certain types of foreign investments, including noncontrolling investments, must file a declaration that provides details of the transaction to CFIUS.

The declaration must be filed at least 45 days before the transaction in question is expected to be finalized. And the government has 30 days to take action. Companies that fail to file a declaration will face a civil fine capped at the value of the transaction.

The new rules could prolong some business deals, but filing a declaration with CFIUS “isn’t a death knell for your transaction,” said lawyer Nicole Lamb-Hale, a managing director at Kroll Associates Inc. in Washington, D.C., who leads the consulting firm’s CFIUS advisory practice. “You’re just going to need to do your due diligence.”

The program is designed primarily to keep U.S. trade secrets under wraps. And so transactions that give foreign investors access to a company’s “nonpublic technical information” are subject to the mandatory declaration provision.

“If the investor has access to the secret sauce and can take that out of the country, it’s going to be a problem,” Lamb-Hale said.

The mandatory declaration provision also applies to deals that put investors in decision-making roles at a company. And the new rules cast a wide net over many industries, including aircraft manufacturing, aluminum production, battery makers, communications equipment, defense-related items, biotech and nanotech.

“It’s a huge sector,” said Christian Davis, a partner at Akin Gump Strauss Hauer & Feld in Washington, D.C, who focuses on trade law and policy. He spent much of Wednesday answering calls and email from clients who were trying to figure out whether they were affected by the pilot program.

“The pilot program was kind of an idea that could be imposed and was in the [FIRRMA] statute but not given a timeline,” he added. “Most people thought they had more time to get ready for this.”

The pilot program has already caused some turmoil in the marketplace—the same day that the program was announced California-based chipmaker Broadcom Inc.—which re-domiciled from Singapore earlier this year—received a likely fake memo stating that its acquisition of CA Technologies in New York was going to be subject to a national security review, Reuters reported. Because both companies are currently based in the United States, the deal probably wouldn’t be on CFIUS’s radar, but Broadcom’s hostile bid to buy Qualcomm Technologies Inc. was blocked by President Donald Trump in March when the company was still headquartered in Asia.

Davis and Lamb-Hale have been advising clients who aren’t sure whether they’re going to be affected to put a magnifying glass over their investment portfolios and really get to know their investors. They should make sure, for instance, that their investors haven’t violated U.S. sanctions or export controls.

“This is a time where proactivity is in the best interest of entities that are looking at foreign investors,” Lamb-Hale said.

She added that companies also need to understand how the government might view their business to determine whether they’re involved in critical technology.

“The problem is that it’s really a fact-intensive exercise,” she said. “I bet there are a number of companies that didn’t know they were viewed as a critical technology by the government.”

The pilot program will be in place until March 2020 and its results are expected to shape the final FIRRMA regulations, which could be narrowed to include certain countries and exclude others, according to Lamb-Hale.

“The fact that it’s global now is a way to turn the volume down on this legislation being focused on China. It’s going to allow the U.S. government to say, ‘We’ve looked at transactions involving everyone and now we’ve identified the following countries,’” she said. “From a political standpoint, that’s probably a good thing.”