CFIUS Reviews of Foreign Gifts to U.S. Universities — Practical Considerations for Proposed Legislation
On April 8, 2021, the U.S. Senate Foreign Relations Committee published a bill, the Strategic Competition Act of 2021, described by the Committee’s chair as an “unprecedented bipartisan effort to mobilize all U.S. strategic, economic, and diplomatic tools for an Indo-Pacific strategy that will allow our nation to truly confront the challenges China poses to [U.S.] national and economic security.” The Foreign Relations Committee, with the support of its Democratic and Republican leadership, is expected to consider and vote on the bill on Wednesday, April 21.
CFIUS Reviews of University Gifts and Contracts
Section 138 of the bill would institute mandatory CFIUS reviews of certain foreign gifts to or contracts with U.S. universities that directly or indirectly receive financial support from the U.S. government. For a CFIUS review to be required, the gift or contract would have to have the following features:
- The donor or contracting party would have to be a single foreign person
- The gift or contract would have to have a minimum value of $1 million or more over two consecutive calendar years; and either
- The gift or contract would relate to research, development, or production of critical technologies, with the foreign person having to receive access to material nonpublic technical information held by the university; or
- The gift or contract includes provisions relating to the (i) employment, assignment, or termination of faculty; (ii) establishment of new departments, research or lecture programs, or faculty positions; (iii) selection or admission of students; or (iv) the award of student financial aid based on nationality, religion, sex, ethnicity, or political opinion, in each case in a manner that constitutes control (with CFIUS’s current definition of control to be expanded accordingly to reflect academic versus commercial relationships).
CFIUS reviews of these gifts and contracts would be initiated under a 9-month pilot program that would start within 10 months after enactment of the bill. CFIUS is also required to issue implementing regulations within 9 months after enactment.
Section 138 would appoint the U.S. Department of Education as a voting member of CFIUS for purposes of preparing the implementing regulations and reviewing the resulting cases. Section 138 would also allow CFIUS to consider, as a national security factor, academic freedom at U.S. universities.
The bill is at a very early stage of the legislative process, and its provisions, including Section 138, may be amended considerably before enactment. Still, in light of the bipartisan nature of the legislation, the ongoing tensions between the United States and China, and several criminal cases involving undisclosed Chinese government financial support for academics at U.S. universities including Harvard and MIT, as well as hidden Chinese military affiliations of researchers at four other universities, it seems more likely than not that some form of Section 138 will ultimately be enacted.
If so, Section 138 as currently written presents the following potential implementation challenges:
- Single foreign person. When evaluating foreign investments in U.S. businesses under its current authorities, CFIUS already considers whether there are any arrangements to act in concert among multiple foreign persons. Section 138 refers specifically to “a” foreign person or the “same” foreign person; this language may tie CFIUS’s hands if it seeks to draft regulations covering parallel arrangements with U.S. universities by foreign parties that are affiliated with each other or otherwise acting in concert.
- Timing of gifts and contracts. Under current regulations, mandatory CFIUS filings must be submitted at least 30 days prior to the “completion date” for the subject transaction, defined as “the earliest date upon which any ownership interest, including a contingent equity interest, is conveyed, assigned, delivered, or otherwise transferred to a person, or a change in rights that could result in a covered control transaction or covered investment occurs”. This definition, and perhaps CFIUS’s treatment of incremental acquisitions will need to be clarified in the context of Section 138’s reviews of gifts and contracts initiated and/or executed over a 2-year period.
- Nascent technologies that are not yet “critical.” One of the triggers for CFIUS review under Section 138 is whether the gift or contract relates to research, development, or production of “critical technologies,” defined under the CFIUS regulations as items subject to various export controls established and administered by various U.S. government agencies. In the university environment, however, the technologies under development could potentially have sensitive applications, but may not be sufficiently mature to have become the subject of U.S. export controls.
A similar issue arose during the legislative history of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), the most recent CFIUS reform law. In the 2017 version of FIRRMA, critical technologies are defined not only as items subject to certain export controls, but also include items “that are essential or could be essential to national security, identified for purposes of this section pursuant to regulations prescribed by [CFIUS].” This provision was ultimately dropped from the final bill, probably because CFIUS did not want to be in the business (and indeed, may have lacked the capability) of identifying critical technologies. FIRRMA instead adds “emerging and foundational technologies" to the definition of critical technologies – to be identified by the U.S. Department of Commerce pursuant to FIRRMA’s sister legislation, the Export Control Reform Act of 2018 (ECRA).
The Commerce Department has been slow to identify and place controls on emerging and foundational technologies, leading to congressional frustration. But in light of Congress’ concerns with the implementation of ECRA, responsibility for identifying critical technologies in the context of university research may fall into CFIUS’s hands by the time the bill is enacted.
Be sure to watch this space for future updates on the legislative progress of Section 138.