The Committee on Foreign Investment in the United States
The Exon-Florio Amendment to the 1988 U.S. Defense Production Act established the Committee on Foreign Investment in the United States ("CFIUS"). CFIUS is composed of representatives of several U.S. Government agencies, including the Departments of Treasury, State, Defense, Homeland Security, Labor and Commerce. The Exon-Florio Amendment gives CFIUS and the President the power to block or order divestitures before approving a "covered transaction," meaning any merger or takeover of a U.S. company that results in foreign control and that threatens to impair U.S. national security. For CFIUS's purposes, foreign control is determined on a case-by-case, functional basis, but in some circumstances even an ownership share as low as 10 percent is sufficient. National security issues are broadly defined to include:
- defense resources or products;
- proximity to a sensitive defense facility;
- technology related to biological toxins, dangerous chemicals or nuclear weapons, advanced or sensitive commercial technology;
- critical infrastructure, including energy, such that loss of operation would have a significant impact on national security; and
- critical resources, including raw materials essential for defense.
CFIUS first gained widespread public attention in 2005 when the outcry preceding a CFIUS filing by China National Offshore Oil Corporation (CNOOC) led to CNOOC's withdrawal of its bid to purchase Unocal from Chevron. Other notable cases where CFIUS action or related publicity prevented proposed deals include the attempt in 2006 by Dubai Ports World to acquire rights to operate certain U.S. ports and the failed investment in 2008 by Bain Capital and its minority partner, Chinese telecommunications giant Huawei, to acquire U.S. defense communications maker 3Com. Huawei was again the losing party in 2011 when it was forced to unwind its plan to acquire U.S. technology company 3Leaf. Huawei's alleged links to the Chinese military proved to be an important factor.
Notwithstanding these widely publicized events, CFIUS, in fact, is only involved in a minority of proposed foreign investments in the United States. No foreign investor is obligated to report its proposed deal to CFIUS, and for most transactions that could not arguably involve national security issues, no notice is filed with CFIUS. For more problematic matters, however, a CFIUS filing – which initiates a review that takes up to 90 days – is well-advised, as it can result in a safe harbor against later investigations or orders to divest. It can also result in mitigation plans negotiated by the investor and the U.S. Government that permit the transaction to proceed.
In 2009 there were only 65 proposed transactions notified to CFIUS; in 2010 there were 93; and in 2011 there were 111. Surprisingly, only a handful of these notifications involved Chinese companies. The United Kingdom, with 30 notified acquisitions in 2011, was the leader by a large margin. There was also a notable increase in notifications involving French interests. Of the 111 notifications in 2011, approximately 35 percent proceeded from CFIUS’s initial 30-day review to a subsequent, more detailed 45-day investigation. In 2011 a total of six requests were withdrawn during CFIUS review or investigation and eight were approved after adoption of a mitigation plan. None was rejected by the President.
President Obama's Authority To Block Foreign Investments on National Security Grounds
Total statistics for 2012 are not yet available, but upon CFIUS’s recommendation, President Obama in September 2012 forced a Chinese wind turbine manufacturer to cease and unwind its acquisition of wind farm sites near airspace used by the U.S. Navy for flight and bombing tests. The blocked Chinese investor appealed to the courts. In response, on February 26 of this year a U.S. District Court affirmed the authority of the President to halt and dismantle a foreign investment found to impair U.S. national security.
The Chinese investor in the case, Ralls Corp., the U.S. subsidiary of the Chinese turbine manufacturer, Sany Group Co., Ltd., did not notify CFIUS in March 2012 as it began to acquire several wind turbine farms in Oregon near airspace used for naval flight testing. When the Navy complained, Ralls initiated a CFIUS notification in June, and on August 2, 2012 CFIUS declared the acquisitions to be "covered transactions." This led to the divestiture orders by CFIUS and ultimately by the President that Ralls challenged in U.S. District Court on substantive, procedural and Constitutional grounds. Most of the Ralls case was dismissed on February 26. Judge Amy Berman Jackson of the U. S. District Court for the District of Columbia ruled that the court has no jurisdiction to review President Obama's decisions under the Exon-Florio Amendment. At most, Ralls might be entitled on due process grounds to a more detailed explanation of the reasons why the President found there to be a potential impairment of national security, but under the law, the court could not second-guess the President's conclusion.
Better Conceived and Executed Chinese Investments Have Passed CFIUS Scrutiny
CNOOC, whose tender to purchase the shares of Unocal from Chevron several years ago had failed to obtain CFIUS approval and was eventually withdrawn, succeeded in February 2013 in obtaining authorization to buy the U.S. assets of the Canadian energy resources company Nexen Inc., including offshore drilling platforms in the Gulf of Mexico. This time CNOOC cleverly leveraged Canadian support for the transaction. It is also possible, although no public confirmation exists, that CNOOC agreed to some form of mitigation whereby Chinese nationals would have economic, but not operational, control of the U.S. assets. In any event, the contrast with CNOOC's earlier foray underscores the importance of careful planning and execution of an acquisition of U.S. assets. In fact, the CNOOC purchase of Nexen is the third recent Chinese transaction to be approved by CFIUS. CFIUS has also cleared BGI-Shenzhen's bid for Complete Genomics and Wanxiang Group's bid for Al23 Systems, a battery maker.
U.S. Suspicion of Chinese Motives Remains High
Notwithstanding the recent string of approvals by CFIUS, another significant development late in 2012 bears watching. In its end-of-year report to Congress, CFIUS reported that the U.S. intelligence community believes with "moderate confidence" that one or more foreign companies or governments is likely engaged in a "coordinated strategy" to acquire U.S. companies involved with critical technologies. This is the first time that CFIUS has made this particular finding, although it has long been required by law to report on whether such a coordinated strategy to acquire critical technologies exists. The unclassified version of the report does not provide information on which specific entities are suspected to be engaged in this coordinated strategy, although a list is likely included in the classified version. Not surprisingly, it is widely assumed that these concerns are directed at China, and recent cyber-attacks originating in China have only heightened such sentiments. The degree of government control of Chinese investors, the existence of targeted technologies where the U.S. has something of value, and the subsidies available to Chinese state-owned entities that give them an economic advantage in bidding for U.S. technology companies are among the risk factors frequently mentioned.
Good Guidance and Smart Planning Are Critical
There is little doubt that economically sound opportunities for Chinese investors still abound in the United States. However, recent developments underscore the need for prudent strategies to avoid difficulties. For example, a greenfield investment, especially one that creates jobs or supports the development of infrastructure, will be more readily accepted than acquisition of a going concern, particularly one with advanced technology. If however, Chinese interests or investors are seeking to acquire a technology company, it would be prudent for the acquiring party to offer safeguards at the outset, such as separation of economic ownership from operational responsibility. The acquiring party may also assuage U.S. government concerns by offering third-party verification of operations, outside expert review of software codes to certify the absence of undisclosed spyware or other attributes, and verifications by independent technology auditors. Hostile bids should be avoided, whereas it is desirable to put Americans on the board of directors and participate in community civic and charitable activities. It is key to demonstrate the highest levels of ethical management, pursue the best practices in corporate governance, adhere strictly to applicable laws and regulations, and promulgate and maintain strong compliance policies and procedures, as all contribute to a more welcoming environment for Chinese or other foreign investment in the United States.