CFIUS—the Committee on Foreign Investment in the United States—is the process used to screen investments into the U.S. for national security concerns. Whenever a foreign entity acquires a controlling interest in a U.S. business, it is subject to scrutiny by CFIUS. In recent years, concerns have grown over the scope of foreign investments in critical and sensitive sectors, especially related to China. This concern resulted in the recent enactment of major changes to CFIUS in the Foreign Investment Risk Review Modernization Act (FIRRMA). The new legislation will have a big impact. Going forward, the level of scrutiny on foreign investment will only become more intense and more frequent.
Any company with global ties considering a business deal in the U.S. will have to take note, and engage technical, political, and communications expertise much earlier in the process than before. Savvy companies will engage the main players and opinion leaders well in advance of a high-profile transaction.
The committee is led by the Treasury secretary, and includes representatives from the Departments of State, Defense, Homeland Security, Commerce, Energy, and Justice. Because the U.S. maintains an open investment policy, there is no application process per se for foreign acquisitions. But in order to provide certainty to investors, transactions are often voluntarily filed with CFIUS for review to avoid running afoul of the law and the risk of being unwound after the fact. That means that the CFIUS process is effectively self-enforcing—any deal is potentially subject to scrutiny, but only a fraction of deals get filed and are reviewed. Once a transaction gets the attention of CFIUS, the Committee can conduct a preliminary review, which can lead to a full-blown investigation. Investigations are mandatory when the acquirer is state owned or controlled and the deal could affect national security. Often, questionable transactions are withdrawn and restructured to mitigate the concerns of CFIUS. If concerns remain, CFIUS can send a recommendation to the President, who can block the acquisition.
The international business community raised concerns that the new CFIUS reforms would chill beneficial investment into the U.S. and harm growth. Importantly, the U.S. open investment policy remains unchanged. FDI remains a significant driver of jobs and growth in the U.S. economy. Any successful long-term investment strategy will require a significant investment in U.S. enterprises, because the U.S. still offers among the highest returns on investment, on a risk adjusted basis, and remains the global reserve currency. All the excess savings in Asia and around the globe has to go somewhere, and that somewhere for some significant portion will still be the U.S. For compelling deals for which enhanced scrutiny is unavoidable, technical, political, and communications expertise will need to be engaged much earlier in the process.
In many instances, this will most likely lead to restructuring of investment transactions to adjust to the new law. It will make portfolio strategies and passive investment vehicles in third party countries more attractive. It will make minority stakes more attractive, and it will make small shares of larger transactions more attractive.
And, combined with the new short form declaration, the new law will likely cause a flood of “defensive” filings by cautious dealmakers seeking to show that they took reasonable care to comply with the new law. It would not be surprising to see those filings increase by many multiples.
CFIUS came into the spotlight during the G.W. Bush Administration over the infamous Dubai Ports and CNOOC cases, where political backlash scuttled deals involving the proposed purchase of a controlling interest in U.S. port operations by the UAE state-owned company as well the proposed purchase of energy assets in Alaska by a Chinese state-owned enterprise. Those deals changed the CFIUS game going forward and resulted in changes Congress made in 2007 (FINSA) to codify the CFIUS process. Since then, the number of voluntary CFIUS filings has increased dramatically, to around 200 per year. And recently, CFIUS rulings have prevented several significant transactions, including the takeover of Qualcomm by Singapore’s Broadcom, and Phillips’ attempt to sell a controlling stake in its U.S.-based LED business to a Chinese consortium. However, concerns that CFIUS was still missing potential security threats, especially from Chinese investments, spurred Congress’ interest in additional reforms.
FIRRMA made significant reforms to the CFIUS process. Before FIRRMA, CFIUS only had the authority to review transactions between U.S. and foreign firms that resulted in foreign ownership of a U.S. company. Now, CFIUS’s authority is expanded to cover foreign minority investments in “critical technology” and “critical infrastructure” that do not result in foreign control or ownership. CFIUS will now also cover any investment that “maintains sensitive personal data that, if exploited, could threaten national security.” CFIUS will also now have the authority to review a broader set of transactions for national security implications, including the lease of U.S. real estate in close proximity to sensitive military or government facilities. This seems to suggest that CFIUS reviews will be triggered not only based on the specific companies involved in a transaction, but also by the type of transaction itself. The process for CFIUS filings, though, was streamlined, allowing a “short form” declaration for simple transactions, and clearer deadlines for government reviews.
A number of expansions of CFIUS were considered, but were ultimately judged to be too intrusive, and fell by the wayside. This suggests that Congress was sensitive to the need for some balance between the need for reform and maintaining an open investment climate. For example, earlier versions of CFIUS reform would have applied to outbound investment, but that issue will now remain under the existing Export Control regime. An earlier version would have reinstated U.S. sanctions on the Chinese telecom company ZTE, which President Trump relaxed in June as a part of trade negotiations with China. Those sanctions were dropped. And previous drafts flirted with extraterritorial implications. Finally, the listing of specific “critical technology companies” and “critical infrastructure companies” was dropped, removing potentially thousands of U.S. businesses from the scope of CFIUS review.
Now comes the implementation phase, where the U.S. Treasury will have to issue new regulations and procedures to implement the new law. This will be a critical period for interested parties to provide input and comment to Treasury. Importantly, Congress gave CFIUS new unspecified authority to require mandatory filings in emerging areas of concern. The rulemaking process will need to flesh out the scope of that authority, which could have broad implications. Additionally, the rulemaking will need to address the thresholds for mandatory reviews of foreign investments in “critical technology” and “critical infrastructure” deals, which could also have a wide-ranging impact, for example, on Silicon Valley and other venture capital markets. This could result in the rough equivalent of a new KYC obligation for existing investment vehicles as well as for start-ups.
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