The China Question

www.worldecr.com 35 ThE ChInAquESTIOn INSIgHT Investment Risk ReviewModernization Act (‘FIRRMA’). While all controlling investments in US businesses remain subject to the Committee’s jurisdiction, FIRRMA’s implementing regulations create a new emphasis on ‘TID US businesses’ – that is, US businesses that develop ‘critical technologies’, perform functions related to ‘critical infrastructure’, or maintain or collect ‘sensitive personal data’ of US citizens. Specifically, under FIRRMA, certain non-passive minority investments in TID US businesses are now subject to CFIUS review. In addition, the FIRRMA implementing regulations created a mandatory filing requirement for transactions involving a TID US business by (1) certain state-owned investors, or (2) investors who would gain control or access to ‘critical technologies’ that would require an export licence for the country of the investor’s nationality. Impact on Chinese companies Although China is not explicitly mentioned in FIRRMA, it is clearly the target of the reforms and Chinese companies have accordingly avoided investments that could fall within the Committee’s expanded jurisdiction since FIRRMA’s passage. According to CFIUS statistics through 2019 (the most recent available), investors from China filed the most voluntary notices with CFIUS by far in 2017, with nearly three times the number of notices (60) of the next closest countries, Canada (22) and Japan (20). However, this number sharply dropped off in 2019, the first year aer FIRRMA, with Chinese investors filing nearly half the number of notices (25) of the most active country, Japan (46). At the same time, CFIUS enforcement against Chinese companies increased. FIRRMA authorised increased funding for CFIUS, and the Committee’s budget increased from $15 million in 2019 to over $44 million in 2021. e number of full- time employees correspondingly increased from 32 in 2019 to 120 in 2021. FIRRMA also authorised CFIUS to charge a filing fee, which has created an additional source of revenue. Although CFIUS does not publicly release its decisions, between 2019 and 2020, CFIUS cleared or approved with mitigation five publicly known transactions involving Chinese investors, with four publicly known transactions either abandoned or blocked, for an approval rate of only 56%. is build-up of funding and personnel has allowed CFIUS to engage in a look- back analysis of investment by Chinese companies in US tech start-ups reportedly going back as far as ten years. It has also allowed the Committee to review compliance with mitigation agreements from cleared transactions. In 2018, CFIUS assessed a $1 million fine for violations of a 2016 mitigation agreement, and in 2019 assessed a $750,000 fine for violations of a 2018 mitigation agreement. Perhaps the most well-publicised result of this look-back analysis is CFIUS’s review of Chinese company Bytedance’s 2017 acquisition of Musical.ly, another Chinese company with US operations (which ultimately created the popular TikTok app). US officials were concerned that the personal data of many millions of Americans would come into Chinese hands. at review demonstrates both the breadth and limitations of the current CFIUS regime –it occurred nearly two years aer the acquisition was closed and culminated in a recommendation from CFIUS that President Trump order divestment of Musical.ly’s US assets. President Trump accepted the recommend- ation and ordered the divestment in August 2020. e post-closing divestment was difficult: a proposed deal was negotiated whereby Oracle and Walmart would each take a minority position and Oracle would provide cloud hosting services for the app to ensure data privacy protections. Ultimately, the deal fell through in September 2020. Despite numerous missed deadlines and subsequent extensions, the divestment order remains pending. It is not yet clear whether the Biden administration intends to withdraw the order or pursue the divestment. Another complication with the Bytedance CFUIS review is that President Trump issued an executive order prohibiting US persons from engaging in transactions involving TikTok one week before the CFIUS divestment order. at ban, however, was made under the International Emergency Economic Powers Act (‘IEEPA’), which serves as the statutory authority for most US sanctions programmes, and broadly grants the president the authority to block transactions without the jurisdictional constraints applicable to CFIUS. Although courts tend to be deferential to presidential action under IEEPA, Bytedance filed litigation to challenge the order on the grounds that, among others, it restricted speech protected under the First Amendment. Ultimately, the district court issued a preliminary injunction preventing the US government from enforcing the ban, and on 9 June 2021, President Biden revoked the underlying executive order. potential future changes ere remains some consideration by the Biden administration for a two-pronged The build-up of funding and personnel has allowed CFIuS to engage in a look-back analysis of investment by Chinese companies inuS tech start-ups.