June 01, 2021
Export controls have been used for decades to protect U.S. technology with military applications. In recent years, however, these controls have expanded to such an extent that some investments or acquisitions in certain U.S. companies may now be precluded. The U.S. government has long sought to control the export of defense articles and services, as well as “dual-use” U.S.-origin civilian products, materials, technology, technical data and software that have potential military applications. New legislation and regulations over the last several years have expanded that reach, making export controls an additional tool for controlling foreign direct investment. It is therefore important for foreign investors to examine this risk very early in the due diligence process by checking if an export license is required for access to a U.S. target’s technology and whether such a license is likely to be granted.
The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), which overhauled the rules governing national security reviews undertaken by the Committee on Foreign Investment in the United States (CFIUS), was intended to protect the technological edge held by the United States by preventing companies from perceived geopolitical adversaries from gaining access to next-generation technologies. For this reason, Congress also enacted and substantively linked companion legislation, the Export Control Reform Act of 2018 (ECRA), which restored the statutory authority for export controls and significantly expanded the government’s current practice in several important areas. FIRRMA includes the “Sense of the Congress” that “the national security landscape has shifted in recent years, and so has the nature of the investments that pose the greatest potential risk to national security, which warrants an appropriate modernization of the processes and authorities of [CFIUS] and of the United States export control system.”
FIRRMA and its implementing regulations establish mandatory CFIUS filings for certain foreign investments in three categories of U.S. businesses. One of these categories includes certain transactions involving a foreign investment in a U.S. business that produces, designs, tests, manufactures, fabricates or develops a U.S. critical technology, which is defined as certain items controlled for export under various authorities including the following:
By defining critical technology this way, FIRRMA clearly links the responsibilities of CFIUS with those CFIUS member agencies that administer U.S. export control laws, especially the U.S. Department of Commerce.
While early versions of FIRRMA would have given CFIUS broader authority to review technology transfers, export control reform was eventually carved out into companion legislation. ECRA requires interagency coordination among those departments that administer export control laws and with the Director of National Intelligence. It also adds the ability to control services related to certain dual-use controlled items and technology, similar to the ITAR. It increases the level of civilian fines and codifies the level of criminal fines and penalties. ECRA greatly expands enforcement authority to include, among other things, undercover investigations and investigations outside of the United States, the execution of subpoenas and search warrants, as well as the ability to inspect, search, detain, seize and carry firearms. And, finally, ECRA sets out the process, run by the U.S. Department of Commerce, for determining whether a technology is emerging or foundational and controlling it for export under EAR.
The Trump Administration began implementation of both FIRRMA and ECRA immediately after enactment and rolled out new regulations over the following two years.
While many regulatory or policy actions that were pending before President Biden’s inauguration were placed on hold for review by the incoming administration, those implementing ECRA have, so far, generally proceeded on schedule. For example, in its first 100 days, the Biden Administration:
Export controls have long been in effect and an important consideration in any cross-border investment. These new rules, which implement the government’s view that export controls should be used to control foreign investment in addition to just controlling the technology, however, make it a critical component of due diligence and transaction planning:
Just as critical is ascertaining whether a mandatory notification to CFIUS is required, as it is in any transaction involving the critical technology discussed here. Failure to make a mandatory filing can result in a civil penalty up to $250,000 or the value of the transaction, whichever is greater, in addition to potential unwinding of the investment.
Special thanks to Lisa Raisner, Head of Government Relations, who co-authored this publication.