On March 13, the Texas Legislature introduced HB 5007, which, if enacted, would establish the Texas Committee on Foreign Investment, the first U.S. state regime tasked with screening foreign investments on national security grounds.
The proposed TCFI is not an entirely new idea; indeed, it closely mimics the responsibilities and purpose of its national regulatory counterpart, the Committee on Foreign Investment in the United States.
Background on CFIUS
CFIUS is an interagency committee of the U.S. government responsible for screening acquisitions by foreign persons of U.S. businesses and real estate to determine whether they raise national security concerns. While most sensitive transactions are brought to the attention of CFIUS through the filing of preclosing notifications, CFIUS maintains an active surveillance group to monitor ongoing and completed transactions for potential review and investigation.
If CFIUS determines that a transaction poses national security concerns, it may propose mitigation measures to resolve the matter. However, if the parties and CFIUS cannot agree on the scope of the mitigation measures, or if adequate mitigation measures are infeasible or unavailable due to the sensitive nature of the U.S. business, CFIUS will request that the parties abandon or unwind the transaction. If they refuse, CFIUS can refer the transaction to the president, who has the authority to suspend or prohibit the transaction or require divestment post-closing.
The jurisdiction of CFIUS was significantly expanded after the enactment of the Foreign Investment Risk Review Modernization Act of 2018 and the promulgation of subsequent regulations. Prior to FIRRMA, its jurisdiction was limited to transactions in which a foreign person was acquiring, or could acquire, control of a U.S. business, and filings with CFIUS were made exclusively on a voluntary basis. FIRRMA extended the jurisdiction of CFIUS to cover certain noncontrolling foreign investments in U.S. businesses involving critical technology, critical infrastructure or sensitive personal data (known as “TID” U.S. businesses) where the investments grant the foreign person access to material nonpublic technical information, board membership or observer rights, or involvement in the business’s substantive decision-making. Furthermore, FIRRMA provided CFIUS with jurisdiction over acquisitions by foreign persons of real estate located in or near certain U.S. ports, military installations and other sensitive areas.
FIRRMA also created a mandatory CFIUS filing regime for three types of transactions. The first category consists of acquisitions of control by foreign persons over U.S. businesses that produce, design, test, manufacture, fabricate or develop critical technologies where a U.S. regulatory authorization would be required for the export, reexport, transfer (in-country) or retransfer of the technology to the foreign persons (U.S. critical technology businesses).
The second category covers noncontrolling investments by foreign persons in U.S. critical technology businesses where the foreign person is also acquiring certain access rights, board rights or substantial decision-making rights with respect to the critical technology.
The final category involves the direct or indirect acquisitions of voting interests of 25 percent or more in TID U.S. businesses by foreign persons in which a foreign government has, directly or indirectly, a 49 percent or more voting interest.
Failure to submit a mandatory filing could subject the transacting parties to a civil penalty not to exceed $250,000 or the value of the transaction, whichever is greater.
Given these requirements, deal parties contemplating foreign direct investment into any TID U.S. business should ensure that a CFIUS analysis, including due diligence on prospective foreign investors, their beneficial owners and controlling persons, is conducted at the earliest potential opportunity.
The Proposed TCFI
Structurally, TCFI is very similar to CFIUS. It would consist of representatives from various Texas state agencies with the power to review and regulate acquisitions by a foreign buyer that could impact “critical infrastructure” in Texas, agricultural land in Texas or sensitive personal data of Texas residents. Critical infrastructure is very broadly defined in the TCFI as including, among other categories, critical manufacturing, dams, defense industrial bases, emergency services, communications facilities, energy, healthcare, food, financial services, information technology, transportation systems, nuclear materials, water systems and government facilities. TCFI authorizes the governor of Texas to screen out certain smaller transactions by setting a minimum dollar threshold for reporting, a feature that CFIUS does not share.
Parties to a transaction meeting the reporting criteria of TCFI must submit a notification to the Texas Attorney General at least 90 days before closing. If parties fail to report these foreign transactions, they may be subject to civil penalties of up to $50,000 per violation.
Other Attempts to Regulate Foreign Transactions by States
The TCFI is not the first attempt by Texas to regulate foreign transactions affecting national security. The Lone Star Infrastructure Protection Act, which took effect in June 2021, prohibits Texas businesses from contracting with entities owned or controlled by individuals from China, Russia, North Korea and Iran, if the contracting relates to critical infrastructure. LIPA defined critical infrastructure as (1) communication infrastructure systems, (2) cybersecurity systems, (3) electric grids, (4) hazardous waste treatment systems and (5) water treatment facilities.
Other states, too, have enacted laws regulating or prohibiting foreign transactions in real estate. In 2023, Arkansas passed Senate Bill 383, which includes a provision prohibiting a “foreign-party-controlled business” from acquiring any interest in any public or private real property within the state. Florida passed Senate Bill 264 in 2023, which requires all foreign principles to register land ownership with the state if it is within 10 miles of a military installation or critical infrastructure.
The Congressional Research Service reports that over 20 states have passed laws regulating foreign ownership of land and infrastructure since January 2023.
Conclusion
While there is still uncertainty on whether and when Texas may implement the TCFI, companies considering transactions, not only in Texas but in other states rapidly enacting similar laws, should make sure to perform the necessary due diligence to identify and comply with these regulations and build in adequate time for closing delays based on mandatory notification periods that may vary by state.