Foreign investment reviews are likely to be the focus of political and legislative attention in 2017. While openness toward foreign direct investment has historically been the policy of the U.S. government, growing investment from China and other countries has raised concerns among members of Congress as well as executive branch officials. It seems increasingly likely that the new Congress will consider legislation to modify the U.S. foreign investment review process.
President-elect Trump’s views are as yet unknown, but his transition team has suggested expanding the scope of reviews conducted by the Committee on Foreign Investment in the United States (“CFIUS”). While CFIUS approves the majority of investments it reviews, the rising political sensitivities underscore that it is important for businesses to engage on CFIUS-related issues early to manage any national security or political risks. Where transactions involve assets in multiple jurisdictions, potentially triggering multiple investment reviews, early engagement is all the more critical.
Traditional national security focus
The U.S. legislation governing foreign investment reviews was first enacted in 1988, and has since the outset been structured to focus on national security risks. The legislative changes of a decade ago reinforced that focus and codified practices that CFIUS had already implemented.
A number of transactions has over the years generated political opposition, with members of Congress sometimes calling on CFIUS and the President to scrutinize specific transactions. Notwithstanding such political pressure, the CFIUS process itself normally stays narrowly focused on national security concerns, even if that process, involving multiple security, intelligence, and foreign policy agencies, is inherently non-transparent. Moreover, even as the CFIUS process has been strengthened in recent years, the past two administrations have issued policy statements emphasizing the openness of the United States to foreign investment.
The current environment is challenging. Quite apart from concerns with China and trade raised in the presidential campaign, there has been a shift in business sentiment towards China. Some traditionally internationalist U.S. companies have grown skeptical of China’s commitment to openness, while U.S.-based internet companies have found it impossible to build businesses in China. Moreover, concerns with investment-related national security risks are not confined to the United States, as demonstrated by a recent German government decision, evidently coordinated with CFIUS, to withdraw its initial approval and reopen its review of a Chinese acquisition of Aixtron SE, a German chip equipment manufacturer with U.S. operations.
Calls for expansion of CFIUS
In September, a group of Congressmen asked the Government Accountability Office, a policy research body reporting to Congress, to conduct a study examining whether CFIUS authorities should be expanded, “especially given the rise in state-owned enterprises and state-controlled enterprises from China and Russia, and other designated countries.” The congressmen note in particular the 2012 recommendation of the U.S.-China Economic and Security Review Commission that the United States “prohibit foreign investment in a U.S. industry by a foreign company whose government prohibits investment in the same industry.” GAO replied that they will begin their analysis in January 2017.
Meanwhile, the Trump transition team has reportedly proposed that U.S. Trade Representative, a CFIUS member, should consider investment reciprocity and food security in foreign investment reviews, even if the current legislation does not provide a basis for such considerations.
Investors need to engage on CFIUS issues early
If the CFIUS jurisdiction is to be expanded, it should be done through legislation. Moreover, if the objective is to promote reciprocity of investment access, the process should be transparent, with prospective effect, in order to encourage policy change by countries whose markets are less open. For example, USTR could prepare reports on other countries’ openness to investment, and the President could make determinations, designating specific markets/sectors that are not open.
Quite apart from possible legislative changes, it is clear that investors need to manage the foreign investment review risks early in a transaction, even in sectors not typically associated with national security risks. Moreover, where a transaction entails assets in multiple jurisdictions, investors need to manage the parallel processes as part of a coordinated regulatory strategy, recognizing the increasing coordination between governments.