A Foreign Entity Wants to Invest in Your Business? How to Comply with CFIUS & FIRRMA Regulations

By: Sarah Zomaya

The Committee on Foreign Investment in the United States (CFIUS, pronounced SIFF-ee-yus) is a government interagency that assesses the national security risks surrounding foreign investment in U.S. businesses. Before the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), CFIUS regulations authorized CFIUS and the President to review any “covered transaction,” which is defined as any transaction “by or with any foreign person, which could result in control of a U.S. business by a foreign person.” The specific nationality of the foreign person is irrelevant.

CFIUS has statutory authority to reviews foreign transactions, impose agreements or conditions that address the national security concerns, and recommend the President block a transaction or order the divestiture of a completed transaction. Regardless of whether the covered transaction is pending or completed, CFIUS has the authority to unwind the deal.

In order to reduce the risk of a CFIUS review or the divestiture of a completed transaction, companies could file a voluntary notice with CFIUS seeking safe harbor clearance for the transaction.

Until recent years, CFIUS has infrequently intervened and rarely halted covered transactions. Whether it is due to the increasing number of acquisitions of U.S. businesses by foreign entities or Trump’s “America First” economic and foreign policies, CFIUS has become a household name (if you’re involved in the foreign investment community, at least!). Even before President Trump signed FIRRMA into law, his mark on CFIUS cases has been unmistakable. In September 2017, CFIUS halted the acquisition of a U.S.-based chipmaker by a Chinese-backed equity firm. In January 2018, CFIUS blocked a Chinese electronic payment company’s acquisition of MoneyGram. And in March 2018, CFIUS prohibited Broadcom’s purchase of Qualcomm.

FIRMA

In August 2018, for the first time in over a decade, President Trump signed into law amendments to CFIUS regulations; namely, FIRRMA. CFIUS regulations were amended due to concerns that critical technologies were being transferred to foreign countries (primarily China) as a result of foreign investment in U.S. businesses. FIRRMA expands CFIUS’ power in 3 critical ways:

1. As mentioned above, CFIUS previously had the authority to review covered transactions that would result in a foreign entity’s controlling interest in a U.S. business. Following the implementation of FIRRMA, CFIUS now has the ability to proactively review covered transactions that would result in a foreign entity’s non-controlling interest in a U.S. business that is related to or potentially affects “critical technologies.” The list of “pilot programs” below covers all critical technologies.

2. The new regulations provide for mandatory filings with CFIUS. Previously, companies involved in a foreign transaction could file a voluntary notice with CFIUS in order to qualify for a safe harbor. Now, “pilot program” businesses involved in a covered transaction are required to file a notice with CFIUS.

There are 27 Pilot Program Industries:

– Aircraft Manufacturing

– Aircraft Engine and Engine Parts Manufacturing

– Alumina Refining and Primary Aluminum Production

– Ball and Roller Bearing Manufacturing

– Computer Storage Device Manufacturing

– Electronic Computer Manufacturing

– Guided Missile and Space Vehicle Manufacturing

– Guided Missile and Space Vehicle Propulsion and Propulsion Unit Parts Manufacturing

– Military Armored Vehicle, Tank, and Tank Component Manufacturing

– Nuclear Electric Power Generation

– Optical Instrument and Lens Manufacturing

– Other Basic Inorganic Chemical Manufacturing

– Other Guided Missile and Space Vehicle Parts and Auxiliary Equipment Manufacturing

– Petrochemical Manufacturing

– Powder Metallurgy Part Manufacturing

– Power, Distribution, and Specialty Transformer Manufacturing

– Primary Battery Manufacturing

– Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing

– Research and Development in Nanotechnology

– Research and Development in Biotechnology (except Nanobiotechnology)

– Secondary Smelting and Alloying of Aluminum

– Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing

– Semiconductor and Related Device Manufacturing

– Semiconductor Machinery Manufacturing

– Storage Battery Manufacturing

– Telephone Apparatus Manufacturing

– Turbine and Turbine Generator Set Units Manufacturing

It is important to note that what goods and services are included (or excluded) in a “pilot program” is a matter of interpretation, and thus subject to litigation.

3. Last, CFIUS now has additional jurisdiction over real estate transactions located near sensitive government locations, ports, or airports.

HOW TO COMPLY WITH FIRMA & SURVIVE CFIUS REVIEW

CFIUS is committed to maintaining an open investment climate in the U.S., so most businesses will find complying with FIRRMA to be manageable. However, failure to comply with FIRRMA regulations could be disastrous for your pending or completed foreign transactions. There will likely be an attorney involved with the transaction already, but it is important to retain a CFIUS-competent attorney to guide you through the process and to avoid the unwinding of a deal.

The wisest and most conservative option for complying with FIRRMA is to pre-file with CFIUS so that you may ascertain whether the deal will receive CFIUS approval before the business expends tremendous negotiation/transaction costs.

Before engaging in a foreign transaction, a U.S. business should conduct its own review of the transaction, similar to the kind of review CFIUS would conduct. If the U.S. business flags any potential national security risks, the business should develop measures to mitigate those risks, specifically, how the U.S. business would limit foreign control or access to sensitive information or technology. The ability to develop and demonstrate effective mitigation measures could mean the difference between receiving CFIUS approval or having the deal blocked. The business should then develop a compliance plan that reflects the above mitigation measures – be sure to include and implement third party audits!

Finally, U.S. businesses are authorized to bring civil actions challenging a CFIUS action or finding in the U.S. Court of Appeals for the District of Columbia.

With the U.S. being the largest beneficiary of foreign direct investment (FDI), CFIUS is charged with the tough job of ensuring national security while promoting foreign investment. With increasing data breaches, the convergence of military and commercial technologies, and the policies of some foreign countries (particularly China) to displace U.S. technological leadership, the FIRRMA regulations seem like an appropriate, albeit pestering, response.

Sources:

https://www.forbes.com/sites/harrybroadman/2019/01/04/u-s-foreign-investment-policy-gets-a-tougher-but-more-transparent-cfius/#593085861fe6#593085861fe6

https://www.treasury.gov/resource-center/international/Documents/Summary-of-FIRRMA.pdf

https://www.treasury.gov/resource-center/international/foreign-investment/Documents/CFIUSGuidance.pdf

https://www.akingump.com/en/news-insights/the-cfius-reform-legislation-firrma-will-become-law-on-august-13.html

https://home.treasury.gov/system/files/206/Fact-Sheet-FIRRMA-Pilot-Program.pdf

https://corpgov.law.harvard.edu/2018/06/28/firrma-is-coming-how-to-get-ready/

Photo Sources:

https://www.dtsa.mil/SitePages/assessing-and-managing-risk/committee-on-foreign-investement-in-us.aspx

https://www.trevorloudon.com/2018/05/china-is-buying-america-with-and-without-cfius/

https://www.selectusa.gov/FDI-in-the-US

https://medium.com/@sashahodler/the-foreign-investment-risk-review-modernization-act-of-2018-firrma-5809081af194

This post was originally posted here on April 1, 2019, and has been reproduced with Sarah’s permission. 


Sarah Zomaya, at the time of this post, is a third-year law student at Penn State’s Dickinson Law. She is from Southern California and is interested in corporate transactional law. Sarah is currently serving as Vice President of the Business Law Society and as an Associate Editor of the Dickinson Law Review.

 

How to Protect Your Real Estate Investments with an LLC

By: Tom Gish

You’ve made the decision to invest in real estate. Now you are considering the best way to set up your business to protect your new assets. If you are a professional real estate investor, it’s not a matter of if you face a liability issue, it’s a matter of when. Creating a “Limited Liability Company” (or LLC for short) can be an effective way to CYA (cover your assets).

What happens if you own property in your personal name?

For some investors, ownership only feels real if they can see their own name on the title to the property. But is this what ownership really means?

The real benefits come from control of the property and the accompanying income. Does it really matter what the title says if you call the shots and reap the benefits? On the other hand, there is a huge downside to ownership if you are not protected from liability. As an individual owner, you will be held personally liable for anything that goes wrong. This can include debts and lawsuits from tenants or visitors on the property. If you owe more money than the property is worth, creditors or court judgments can take away your personal home, car, or assets. Additionally, any activities that take place under your name will affect your credit.

Some investors take the approach that they don’t need to protect themselves with an LLC because they carry an umbrella insurance policy. While insurance is necessary, it’s not sufficient. Insurance companies are always looking for a way out, and most policies don’t cover intentional torts like fraud. This could include an unknowing misrepresentation that was made at any point from the moment you first interact with another party. If the insurance company denies coverage, you are on the hook personally.

what benefits can an LLC provide?

An LLC can provide protection to its owners (called members) while preserving the control and tax benefits that an individual owner enjoys.

  1. Limited Liability

Owning a property with an LLC insulates the owner from exposure to risk. In general, if an LLC can’t pay its debts, creditors can go after the LLC’s bank accounts and other assets, but not the owner’s personal assets (such as homes, cars, and bank accounts). An LLC owner only risks the amount of money invested in the LLC.

  1. Tax Benefits

Owners of an LLC enjoy most of the same (if not more) tax benefits as someone who owns a property in their own name. Pass-through taxation allows an LLC to keep the tax benefits of personal ownership. Under this structure, income and losses “pass through” the entity onto its owner’s personal tax returns. This is especially helpful for real estate investors who are just starting out. If you are just starting your real estate business, odds are that you have another job that you are using to support yourself and save money for your investments. A new property may need renovations, have vacancies, and have other costs in the form of fees and taxes. The losses that the LLC shows can be passed through onto the owner’s personal tax return to offset tax liability from other sources of income.

In addition to pass-through taxation, the government has created many incentives that allow real estate investors to depreciate capital faster, or in some cases write off expenses as deductions rather than depreciate them.

  1. Financing

An LLC allows you to add another member as an owner or investor who can put money into the business in exchange for a share of ownership. This creates opportunities to bring on investors in a structured way covered by an operating agreement. It also provides the opportunity to add another investor who may have better credit or financial resources to allow you to secure better financing from a bank.

As your portfolio grows, there will come a point where your debt-to-income ratio will prevent a bank from loaning you any more money in your personal name. At that point, commercial financing becomes the way to finance additional projects. An LLC will be one way of meeting the requirements to get commercial financing.

things to keep in mind…

If you have an LLC, you aren’t automatically protected from every scenario. There are still risks. For example, most banks will require a personal guarantee on a loan agreement, especially if your company is new. In that case, the bank has the ability both to repossess the property of the LLC and to seek a judgment against your personal assets in the event of a default.

Additionally, the company will not protect you from torts committed personally. Even if you operate as an LLC, you can be exposed to personal, unlimited liability for actions that you personally take or do not take that cause injury to another. You also risk unlimited personal liability if you negligently hire or supervise employees and another person is injured.

In order to prevent being personally responsible for the liabilities of the LLC, there are a few steps that you should take. First, make sure to keep the LLC’s funds separate from your personal accounts. Otherwise, courts will treat the LLC and your personal assets both as fair game.

Another way to make sure that the protection of the LLC is preserved is to  keep the organizational documents of the company up to date.

Although an LLC won’t keep you immune from all liability, owning property in your own name is much riskier. Considering that the costs and work involved in setting up an LLC are relatively minor, it is well worth it to structure your business professionally to protect your hard-earned assets.

References:

Fishman, S. (2019). Why You Might Choose S Corp Taxation For Your LLC. Retrieved from Nolo.com: https://www.nolo.com/legal-encyclopedia/why-you-might-choose-s-corp-taxation-your-llc.html

Lerner, M. (2014). Should I Buy a Home Using an LLC? The Benefits for Company Owners. Retrieved from Realtor.com: https://www.realtor.com/advice/buy/benefits-buying-home-with-llc/

Smith, S. (2018). Why the Cost of an LLC is Absolutely Worth It for Real Estate Investors. Retrieved from BiggerPockets.com: https://www.biggerpockets.com/renewsblog/why-the-cost-of-an-llc-is-absolutely-worth-it-for-real-estate-investors/

Weaver, J. (n.d.). Forming an LLC for Real Estate Investments: Pros & Cons. Retrieved from LegalZoom: https://www.legalzoom.com/articles/forming-an-llc-for-real-estate-investments-pros-cons

Image Sources:

https://www.nszlaw.com/real-estate.html

Beginning a Actual Property Enterprise

Choosing the right tax resolution firm for your IT company

 

This post was originally posted here on February 1, 2019, and has been reproduced with Tom’s permission. 


Tom Gish, at the time of this post, is a third-year JD/MBA student at Penn State Dickinson School of Law. He is focused on business law, real estate, and other issues that affect entrepreneurs. He has years of experience as the operations manager of his family’s small business, as well as the managing member of his own real estate investment company, Greenacre Properties LLC. He lives near Hershey, Pennsylvania with his wife and daughter.

Setting the Tone for a Successful Landlord-Tenant Relationship

By: Tom Gish

As a landlord, it is important to know your legal rights and responsibilities so that you don’t get in a bad situation when an issue with a tenant arises. The beginning of the relationship is critical, because it sets the tone and lays the groundwork for how issues will be resolved when they do arise.

Screening tenants 

Choosing the right tenant is a big consideration for a landlord, because they want someone who will pay on time, take good care of the property, and follow the rules of the lease. However, there are some legal restrictions that landlords need to follow when screening tenants.

The Fair Housing Act creates protected classes for tenants, including race, color, religion, national origin, familial status, age, disability, and sex. A landlord can not advertise or make a statement that indicates a limitation on a protected class. This means that a landlord cannot set more restrictive standards for selecting tenants or refuse to rent to members of a certain group. According to the Fair Housing Act, a landlord also may not falsely deny that a rental unit is available.

Even though landlords need to stay away from discriminatory questions, they can still thoroughly screen tenants by asking the right questions. As a general rule, it is ok for landlords to ask questions that would objectively indicate the tenant’s ability to pay rent as long as it doesn’t include superficial information that wouldn’t be relevant to the tenancy. This means that a landlord should be asking about things like income, credit history, and criminal record in order to determine whether the applicant would be a good fit. Landlords can deny an application based on these criteria, but can’t withhold from the tenant the information that caused denial.  In addition, a landlord can check for nonverbal signals, like how the tenant maintains their vehicle, in order to get an idea of how they will take care of the property.

The lease

What goes into the lease is essential for a good landlord-tenant relationship because it creates the authority for how a landlord can control the tenant’s behavior and establishes the legal basis for eviction if it becomes necessary. Every situation will require unique provisions to be included in the lease, but there are a few components that every lease should have to protect the landlord legally:

  • Named parties on the lease.

This is important to include because it defines who the agreement has authority over. It also creates liability for each individual tenant to be responsible for the entire agreement if one of the tenants defaults.

  • Term of the tenancy.

This provision controls how much notice each party needs to provide before ending the relationship. This should be considered carefully by the landlord because it establishes how long the tenant has the right to stay.

  • Rent

The lease should clearly describe how much rent will be, when it is to be paid and how it should be paid. The terms need to be specifically described so that there is no room for debate if a dispute ever arises. The landlord also must be consistent when enforcing late rent policies so that the tenant doesn’t have the excuse that the landlord let it slide before. Being specific and consistent will help a default be clear and actionable if it needs to be resolved in court.

  • Repairs and Maintenance

The lease should clearly describe whose responsibility repairs and maintenance of the property will be. This creates the basis for the landlord to use the security deposit to cover costs if necessary. It also allows the owner to make sure that they know what’s going on inside their property. That way the landlord can be the one making decisions about who is doing what work, instead of the tenant making modifications to the property without permission.

Eviction

A landlord may terminate a tenant’s right to remain on the rental property, but only if the legal basis is appropriate. Just like screening tenants, the decision to terminate tenancy can’t be based on a discriminatory reason. The legal basis for eviction comes from a breach or default of the lease agreement. Before evicting a tenant, the landlord has to give proper notice and allow the tenant an opportunity to fix the default. If forcible removal is required, the landlord should follow these steps:

  • File a complaint or petition with the local court, which includes paying a filing fee.
  • The tenant must be served with the court documents.
  • If the tenant fails to file a written notice or answer, the landlord will prevail without a hearing.
  • In some jurisdictions, a tenant may request a jury trail to determine whether eviction is appropriate, or
  • The court will hold a hearing to determine whether the tenant should be evicted. The court will take into account any defenses that the tenant may raise.
  • The court may grant monetary awards for rent owed, attorneys’ fees and costs.
  • The court may grant a writ for possess of the premises in favor of the property owner.
  • Tenant has the opportunity to leave voluntarily.
  • Once the writ is issued, it may be executed by law enforcement officials.

A landlord may never enforce a writ themselves. When a landlord takes action into their own hands, such as by changing the locks on the house, the eviction is illegal. These actions called “self-help” are outlawed in nearly every state and can result in liability for the landlord, even if the underlying reasons for eviction were valid. In order to perform an eviction successfully, a landlord should follow all the legal steps. Setting out the terms in the beginning will help the legal process go smoother or be avoided altogether. The best way to lay the groundwork is by carefully screening tenants through legal methods and including all the necessary provisions in the lease. This can create a long and trouble-free relationship that benefits both the landlord and the tenant.

Photo Sources:

Rent Sign

Lease photo

https://assuredlockandkeyservices.com/

This post was originally posted here on March 31, 2019, and has been reproduced with Tom’s permission. 


Tom Gish, at the time of this post, is a rising third-year JD/MBA student at Penn State Dickinson School of Law. He is focused on business law, real estate, and other issues that affect entrepreneurs. He has years of experience as the operations manager of his family’s small business, as well as the managing member of his own real estate investment company, Greenacre Properties LLC. He lives near Hershey, Pennsylvania with his wife and daughter.

Tom Gish, Arther Hart & Chris Riley | Law Student Entrepreneurs | August 2019

By: Elikem Tsikata
Chris Riley, Arther Hart, Tom Gish

I had the opportunity to speak with three of my peers for this month’s “Entrepreneur of the Month” feature. Tom Gish ’20, Arther Hart ’20, and Chris Riley ’20 are all in the final year of their law school career here at Dickinson Law. Simultaneously, the three panelists are in the early stages of their own entrepreneurial ventures.

Chris Riley and Arther Hart are co-founders of MetaShift Gaming LLC.  Both are third-year law students at Dickinson Law.  MetaShift focuses on creating the infrastructure of esports from the amateur level through the professional level. Chris and Arther recognize that esports has become a huge point of interest for investors as it has grown into a worldwide phenomenon. MetaShift aims to be part of this growth and part of the foundation of esports as a whole.

Chris is from California and has his Bachelor’s Degree in Communications, with an emphasis in film media.  In law school he has shown interest in cyber security law.

Arther Hart is originally from Millville, Utah. He has his Bachelor’s Degree in Biological Engineering. Arther currently lives in Carlisle, Pennsylvania, with his wife and daughter. Through MetaShift Gaming, Arther is hoping to establish an esports bar in central Utah.

Tom Gish is a Pennsylvania native who lives in Hershey with his wife and two children. He has his Bachelor’s Degree in Business Management and is currently a member of the Penn State JD/MBA program. Tom is the founder of Greenacre Properties, LLC, a real estate investment company. The company purchased its first property earlier this year, a 4-unit apartment building. Once the renovation of the building is complete, Tom plans to use the equity in the property to purchase another apartment building.

Subtle Beasts

The HBO mini-series The Night Of coined the phrase “Subtle Beast” in its second episode. I’ve always viewed the term, “subtle beast” as one of respect, if not endearment. It’s an acknowledgment of the type of person whose work ethic and drive are aggressive, yet their demeanor is poised and controlled.

I believe that the three panelists personified this term in their entrepreneurial pursuits. Each carries composed confidence coupled with tamed excitement about the future of their individual ventures. I gained an appreciation for the passion and self-assurance displayed for their entrepreneurial processes.

Refusal to be Bound

When asked what motivated each student-entrepreneur to where they are currently, all three echoed an idea seemingly present in most great entrepreneurial minds: A refusal to be one dimensional. While each member mentioned the value of their legal training, they emphasized the importance of professional versatility as entrepreneurs.

“I didn’t want to be limited.” – Tom Gish

As a member of a dual JD/MBA program, Tom knew early in law school he wanted to supplement his legal training with a business background. He felt that he had an opportunity to increase his professional value by combining the two skill sets.

Interestingly, all three panelists were raised with entrepreneurial ties within their families. Both Chris and Arther grew up with fathers who owned businesses, which shaped their entrepreneurial spirits at early ages.

“My Dad was always about helping others with their needs, helping solve problems. I think that just passed onto me.” – Chris Riley

Balancing Act: Being a Student while Starting a Business

As law students, the idea of being perpetually busy is not a foreign concept. Weekly readings, lectures, research, memos, externships, student organizations, and outlining are found in the average week. It would be naïve to believe that the pursuit of a JD wouldn’t be a tasking experience. But to embark on this endeavor while simultaneously starting your own business? That requires a serious level of juggling ability.

“Pursuing my MBA and JD at the same time can be challenging, but I don’t consider it to be a burden. I have to think in terms of embracing this challenge, rather than worrying about it.” – Tom Gish

Tom’s words capture the panel’s mindset of balancing education and business aspirations. At no point during our conversation did any panelist speak in a manner that made me believe they felt burdened. I was surprised by the subtle confidence in their words. Not arrogance at how easy starting a business would be. Not fear at the daunting risks ahead of them. Quiet, steady confidence. Subtle beasts.

Why Law School?

There is still a misnomer in today’s world that going to law school and not ultimately practicing law is abnormal. However, while the tools and training that students receive over three years of law school are rooted in the study of law, they are beneficial in so many other fields.

“The legal education is invaluable for anybody who wants to get into a highly regulated field. The field we want to get into is involved in esports, but it is also involved in alcohol. It is very, very difficult to navigate all of the regulations and laws that come with those sorts of things. Having that legal training really can be invaluable when drafting out a plan to move forward or learning how to deal with government agencies. The skills that you learn in law school are fantastic. As a budding entrepreneur, I wanted to make sure I had set myself up the best I could.” – Arther Hart

“There’s a lot of skills that you pick up in law school. A lot of habits and abilities that will contribute towards being a successful businessman. So, I thought it really tied in with the entrepreneurial spirit I’ve grown up with and thought it could be a good jumping-off point for me.” – Chris Riley

Class Recommendations

The panelists spoke positively about their experiences with the business classes at Dickinson Law. Specifically, all three specifically talked about the Entrepreneurship Law: Company Creation course. The course is described as follows:

“Students survey the legal issues confronted by entrepreneurs and develop the practical skills to effectively and ethically represent them. This occurs through simulations where students interview, counsel, plan, draft, collaborate and negotiate. Students also draft relevant blog posts, client correspondence and memoranda typical of those that surface in small business and entrepreneur representation. This course is designed for anyone who wants to be an entrepreneur or represent one.”

Additional classes mentioned as particularly beneficial include Business Entities I and II, Cyberlaw, and experiential learning classes in general.

Advice for Student-Entrepreneurs

The biggest lesson this panel taught me is that ambition and mindset are everything.  “Take Action. I think that’s something that plagues someone with a legal brain that’s rational and reasoned. It’s counter-intuitive for us to want to take a risk. If you’re going to be an entrepreneur, you have to be comfortable with some extent of that.” – Tom Gish

Hear more directly from the students by clicking here.

Book Recommendations

Arther: Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers, by Alexander Osterwalder

Tom: The 10X Rule: The Only Difference Between Success and Failure, by Grant Cardone

Chris: Bobby Kennedy: The Making of a Liberal Icon, by Larry Tye


Elikem Tsikata, at the time of this post, is a 2L at Penn State’s Dickinson Law. He is a Ghanaian-American from McLean, Virginia, and a graduate of Miami University (OH). Elikem is pursuing a certificate in Entrepreneurship Law with a Transactional concentration. He is interested in corporate transactional law and international development, specifically in African countries. Elikem is currently serving as the Vice President of the Student Bar Association.