Reform legislation strengthening the national security review process for mergers and acquisitions of U.S. companies by foreign ones seems likely to pass by August, lawyers who are experts in international trade and national security matters said.

They also said they expect the legislation—which would likely particularly affect M&A and early investment by Chinese entities in high-tech, telecommunications and big data industries—to progress despite White House vacillations over trade policy with China. The legislation also could affect some private equity transactions.

“The biggest change is that for a large category of investments it will no longer be voluntary to file, under FIRRMA [The Foreign Investment Risk Review Modernization Act of 2018]. In these cases there will be mandatory notification, which could in turn result in a full filing,” said CFIUS partner Michael Leiter, of Skadden, Arps, Slate, Meagher & Flom.

The bills expanding and strengthening the role of CFIUS were unanimously approved by U.S. Senate and House of Representatives committees in May after a number of hearings and favorable testimony from witnesses, particularly from the defense and intelligence communities, according to those monitoring the bills. The bills were initially introduced last fall.

Mandatory, rather than voluntary, review of certain transactions seems certain to pass, but questions remain about a proposed new requirement for a national security review of joint ventures and minority stakes investments, and whether such a review would remain within the Treasury Department's Committee on Foreign Investment in the United States, or move to the U.S. Department of Commerce, under its Export Administration Regulations (EAR) regime. The provision calling for review of early investments drew opposition from some big corporations concerned it would give CFIUS authority to block outbound investments by U.S. companies.

Already under the voluntary review, CFIUS has reviewed and investigated a growing number of transactions in recent years with Presidents Barack Obama and Donald Trump blocking several, including Broadcom Ltd.'s $117 billion hostile bid for Qualcomm Inc. in April.

The U.S. Senate Committee on Banking, Housing and Urban Affairs' “discussion draft” of S. 2098, released May 11, removed the so-called “joint venture” provision of FIRRMA, which is one of its most controversial elements. The Senate version of the bill would direct the U.S. Department of Commerce to review the national security risks associated with technology transfer under its export controls regulations, in consultation with other agencies. This could be a sticking point in reconciling the two bills. And while the Senate bill would expressly grant CFIUS the ability to review real estate transactions near military bases, it would exempt some transactions such as “single unit” purchases, according to a Jones Day update.

Both chambers' versions of the bills contain revised definitions of “critical technology,” which is a term that businesses had criticized as vague in the first drafts. Now they are defined as technology, components and items that “are essential or could be essential to national security.”

Both versions of the legislation in the Senate and House (HR 5841) also contain sections that would require the U.S. president, with the heads of the defense, energy, state and commerce departments and other relevant agencies to establish an ongoing process of identifying “emerging and foundational technologies” that are key to the U.S.national security. Those technologies probably would include artificial intelligence, self-driving technology, robotics and navigation, which aren't currently subject to specific export licensing requirements. The process would have a notice and comment period. Licenses would be required to export those technologies to countries under an arms embargo, but additional conditions also could be added and the process could be time-consuming, according to a detailed client letter from Morrison & Foerster. The U.S. Chamber of Commerce supports the legislation.

If the revised legislation passes both houses and is signed by Trump—who has indicated support for strengthening the national security review process in the past—the regulatory process designating critical technologies is likely to generate considerable controversy as it could be onerous. Nonetheless, FIRRMA is expected to be enacted in some form.

“The discomfort with China is pervasive on the Hill and [legislation] is probably more likely to pass it if they perceive the president is going soft on China,” one lawyer monitoring the legislation said.