The Second Friends of Summit Seminar was successfully held on March end, 2019. Mr. Ruchun Ji, the partner of Sidley Austin LLP (Silicon Valley Office), brought in biomedical investors, physicians, cross-border entrepreneurs, and established a clear understanding of the U.S. regulations and the details about cross-border biomedical investments under the power expansion reform of CFIUS.
The Summit started with Mr. Ji reviewing the development history of CFIUS. Founded in the 1980s, CFIUS is a federal multi-agency group led by the U.S. Treasury Department. It is dedicated to reviewing foreign investment transactions that may affect American national security. In 2018, over 50% of the investment in biomedicine in the U.S. were from overseas. The investment of Chinese capital increased rapidly, especially in technology, along with the influx of foreign capital, CFIUS has taken a series of tough measures in recent years.
In 2007, an amendment was adopted to supplement the provision that all transactions involving foreign government controlling or crucial infrastructure must be reviewed. In August 2018, the introduction of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) has greatly expanded the scope of CFIUS’s authority to review foreign investment. In November of 2007, the adoption of the temporary scheme has cast a shadow on cross-border investment.
Based on real cases, Mr. Ji raised the following opinions on the current CFIUS review system and investing in the U.S.:
1. Reviewing will be a long-term regulation: Mr. Ji predicted that the increasingly strict reviewing mechanism is a consensus between two parties, which will not be loosened because of the general election in 2020.
2. China is the focus of the review: Mr. Ji emphasized that due to the concerns about technology and intellectual property as well as the rising of China, capitals with Chinese background usually have longer reviewing time in the process of declaration and approval. The 2018 report of Defense Intelligence Agency (DIA) even pointed out that some Chinese investment institutions, including Danhua Capital are involved in the government.
3. The criteria of reviewings are vague: according to the definition of FINSA, the review subjects of CFIUS include all covered transactions, which refers to any transaction that would result in foreigners controlling American companies.
“Controlling”: there is no clear definition of criterium. Shares with voting rights, being a member of the board, the possession of the core resources and technology of a company could all be used as a measurement but it is not the only determinant.
“All covered transactions”: It used to be thought that those areas closely related to national security, such as energy, information technology, etc., were the subjects to be reviewed by CFIUS. After the expansion of power, areas like food production, agriculture, transportation, etc, have all been included in the scope of reviewing, because the impact generated by every area is regarded as a threat to the national security of the U.S.
Also, since CFIUS adopts a review method to “discuss each case independently”, there is no relatively clear criterium of reviewing, and basically there is no rule or criterium to define a transaction.
Mr. Ji concluded that CFIUS is an elusive problem for investing and merging in the U.S. because of the continuous expansion of the review power, the great discretionary power, the prolonged reviewing circle, and the review method to “discuss each case independently”. Therefore, Chinese companies should design a reasonable investment structure with lawyers since the very beginning of investment, properly deal with the interaction with CFIUS, and manage the legal risks that may arise in the investment process.