The recently introduced legislation would establish a new US Department of Commerce review of foreign investment transactions to determine their effect on US economic interests and domestic industry, giving Commerce the authority to prohibit or require modification of such transactions.
Congress has expressed renewed interest in a number of cross-border investments attempted and/or completed over the last few years, often focusing on proposed Chinese investments and acquisitions. This interest has generated congressional hearings as well as proposed legislation. On October 18, US Senators Sherrod Brown (D-Ohio) and Chuck Grassley (R-Iowa) introduced the United States Foreign Investment Review Act of 2017 (S. 1983) to establish a new process for reviews of proposed foreign investments in the United States.
The bill proposes that the Commerce Department undertake a new form of review of foreign investments in and acquisitions of US businesses, which would be separate from, but complementary to, national security reviews conducted by the Committee on Foreign Investment in the United States (CFIUS). The legislation would require the Secretary of Commerce (the “Secretary”) to review certain transactions to determine the effect of the proposed foreign investment on US economic interests and domestic industry. The bill provides the Department of Commerce with authority—based on the results of its review—to approve, prohibit, or require modification of a transaction.
Proposed Review Process
The bill’s review process evokes many aspects of national security reviews of foreign investments undertaken by CFIUS under section 721 of the Defense Production Act of 1950, as amended by the Foreign Investment and National Security Act of 2007 (FINSA). The bill requires Commerce review for transactions that could result in foreign “control” of a “covered transaction” (as those terms are defined in the proposed legislation) and empowers the Secretary of Commerce to block or modify the foreign investment if it is deemed not to be in the “economic interests” of the United States. Notably, placing this authority at the cabinet level is a significant distinction from CFIUS, which places authority for the final decision with the US president, rather than a cabinet secretary.
Unlike CFIUS, which limits action to situations where there is a determination that the investment will harm national security or critical infrastructure, the Commerce review would weigh the following when deciding whether to take action:
- The long-term strategic economic interests of the United States
- The history of distortive trade practices in each country in which a foreign party to the transaction is domiciled, as informed by a report of the Office of the US Trade Representative (USTR) that is required under the act
- Control and ownership of each foreign person that is a party to the transaction
- Impact on the domestic industry, taking into consideration any pattern of foreign investment in the domestic industry
- Any other factors the Secretary of Commerce considers appropriate
The new economic assessment would be subject to notice, public comment, and publication of the actions taken, and would therefore address concerns regarding the lack of transparency in the CFIUS review process. The bill, if made law, would require not only that all written notifications of covered transactions be made available to the public, but that when such transactions require additional time for review, public comments must be permitted, and those comments that are received must be considered in a manner similar to the notice and comment process required by the Administrative Procedures Act. In addition, the bill mandates publication of all decisions to approve, prohibit, or modify a transaction—as well as the justification for each decision.
This bill is similar to CFIUS in that it establishes a regime for reviews of foreign direct investments, but the bill also creates a noticeably different structure than CFIUS on several fronts. First, it identifies a category of transactions that are subject to mandatory review based on dollar value. These reviewed transactions require a 15-day period for initial review instead of the 30-day period allotted to CFIUS. Mandatory reviews of foreign investments applies to those transactions valued at $50 million or more for transactions involving a state-owned enterprise, or $1 billion or more for any other transaction.
If the Secretary requires additional time, the bill would allow for 45 more days, followed by a final extension of 15 days. During this time, Commerce must consult with, and receive a report from, the USTR that addresses at least the following:
- The history of and current issues affecting the trading relationship between the United States and the country where the investing/buying entity is domiciled
- The extent to which the trading relationship between that country and the United States is reciprocal
- Information relevant to the buyer’s home country from annual reports of the USTR
Unlike CFIUS, which counts about a dozen agencies as members, only the US Department of Commerce would review transactions under this legislation. The Secretary of Commerce may, at his/her discretion, “consult” with any other agency deemed necessary and may “coordinate” with CFIUS, although CFIUS retains sole jurisdiction to review the transaction for national security concerns. The bill specifically provides that review of a transaction by the Secretary for US economic impact may be conducted in parallel to, but not in lieu of, any review by CFIUS for national security concerns.
Foreign investors, US sellers, and other concerned parties may soon be required to consider both the national security implications and the US domestic economic impact of their proposed transactions and, where concerns arise, determine how to mitigate those concerns or risk the blocking of the proposed transaction by the US government using this new process.
This bill comes at a time when CFIUS reform is gaining steam and expectations are high that CFIUS’ authorizing legislation, FINSA, may be revised substantially. As a result, no legislation that adds to the conversation can be dismissed. Moreover, this bill, if enacted, would address (and obviate the need for) adding an economic interest test to CFIUS reviews, leaving the purity of the CFIUS national security review process intact while providing a separate process for economic impact review.
As a bill that appears to have at least some bipartisan support, the United States Foreign Investment Review Act of 2017 may have a chance to be included in the likely CFIUS reform that lies ahead—or it may influence that debate toward a more flexible and expansive authority for CFIUS itself.