Who’s Afraid of TikTok?

By: Hannah Weiss

TikTok

TikTok.com

 

US officials are conducting a national security review of TikTok, a popular app that allows users to share short videos and video clips.  This is part of a growing trend of high-profile transactions being reviewed for national security conflicts as foreign companies seeking to invest in the United States are facing increasing scrutiny.   Evincing this, in 2018, President Trump signed off on the Foreign Investment Risk Review Modernization Act (FIRRMA).

The law expanded the powers of the Committee on Foreign Investment in the United States (CFIUS).  “CFIUS is an interagency committee that reviews . . . transactions involving foreign investment in the United States,” and assesses the effects of those transactions on US national security.  If the committee determines that a transaction poses a security risk, it can impose conditions on it or require the parties to enter into a mitigation agreement before allowing the deal to continue.  The committee can also refer transactions to the president, who has the authority to block them from going through.  Though unusual, CFIUS can initiate reviews of transactions that have already been completed – and can even require that they be undone, as happened to the company that purchased the dating app Grindr.

FIRRMA makes several significant changes to CFIUS, including:

  • expanding the support structure of the committee;
  • expanding its jurisdiction;
  • adjusting timelines and other aspects of the review procedure;
  • creating new remedies for security concerns; and
  • increasing reporting requirements.

Of biggest concern for foreign-owned entities like TikTok and Grindr is the expansion in CFIUS’s jurisdiction.  Under the previous incarnation of the committee, it could review “covered transactions,” which were defined as “any merger, acquisition, or takeover by or with a foreign person . . . which could result in foreign control of any person engaged in interstate commerce in the United States.”

Control,” under FIRRMA, has retained the same definition, referring to the power to “determine, direct, or decide important matters affecting an entity.”  But the definition of a “covered transaction” has expanded to include some “non-passive but non-controlling investments.”  This expansion means that FIRRMA provides for review of some transactions that do not result in a US entity coming under foreign control.  In addition to CFIUS’s already existing jurisdiction, “covered transactions” now include:

  • purchases or leases of real estate by foreign persons near US ports, military facilities, and some other government property;
  • non-passive foreign investment in any company that deals with “critical technology,” “critical infrastructure,” or “sensitive personal data of United States citizens that may be exploited in a manner that threatens national security”;
  • changes in existing ownership rights that could result in ownership or control of a US business by a foreign person; and
  • transactions structured to evade CFIUS review.

There is some debate over the significance of FIRRMA.  Some contend that it “greatly alters the landscape for inbound foreign investment transactions” and that “[a]ny company involved in international mergers and acquisitions, private equity, fund formation, or US real estate transactions” needs to be aware of it and understand its implications.  While this may be true, what seems more questionable is whether the statute actually achieve its purpose.

Congress’s intention in passing FIRRMA was to protect American national security primarily by reviewing Chinese investment in US companies.  Chinese investment in the United States has increased significantly in recent years, and policymakers are concerned that such investments are part of larger plans by the Chinese government to “advance China’s military modernization and diminish America’s technological advantage.”  To invest in China, foreign companies generally must agree to technology transfers, joint ventures with Chinese companies, or other arrangements that benefit Chinese companies by allowing them to gain access to foreign intellectual property.  FIRRMA is intended to help curtail this by expanding the types of transactions that receive scrutiny and the factors that the committee can consider when conducting reviews.

But in the case of countries like China forcing transfers of US technology, such transactions will continue to fall outside of CFIUS’s jurisdiction.  “[O]utbound licensing and outbound investment are the main methods of forced technology transfer,” but these out-bound transfers occur in other countries, while CFIUS has only the jurisdiction to review in-bound investment.  In addition to concerns such as a lack of appropriately qualified personnel and a poorly defined mission, it seems doubtful that FIRRMA will actually enable CFIUS to keep up with the concerns it is intended to address.

Hannah Weiss is a second-year law student at Wake Forest University.  She completed her Bachelor’s degree at the University of Florida and a Master’s degree at the University of Virginia and spent several years in public service before law school.  After graduation, she intends to practice international trade law.