A relatively little-known Federal process has, in the last few years, been playing an increasingly active role in direct foreign investment and cross-border mergers and acquisitions and seems poised to play an even larger one. The particular shape that role takes may well provide a leading indicator of the new U.S. Administration's intentions on how it plans to balance its as yet unclear trade priorities with its declared focus on U.S. national security.
In any case, companies, investors, banks and the lawyers who advise them need to build the increased likelihood of the Committee on Foreign Investment in the United States' ("CFIUS" or "the Committee") review into their M&A/ investment timelines and strategies.
CFIUS is a permanently-staffed interagency process having its genesis in the 1988 Exon-Florio amendment, designed to provide a mechanism for reviewing foreign investments and acquisitions of U.S. assets to determine whether they have implications for national security. As set forth in Executive Order 13456 (2007), the Committee itself consists of the secretaries of Treasury, Commerce, Defense, Energy, State and Homeland Security; the U.S. Trade Representative; the Attorney General; and the director of the Office of Science and Technology Policy. The Director of National Intelligence and the Secretary of Labor sit as ex officio members.
Investments in "critical infrastructure" were added to CFIUS' portfolio of potential concerns by the Foreign Investment and National Security Act of 2007 (in the wake of the Dubai Ports World controversy).
The Committee scrutinizes proposed transactions that are submitted to it voluntarily, although it can, and with increasing frequency does, issue notices to parties to transactions of interest "inviting" them to submit terms for review for national security aspects. CFIUS' internal process is somewhat opaque to outsiders.
Depending upon its review, and information gathered from interagency sources, the Committee may (1) approve a transaction; (2) propose mitigating measures such as structural changes to the terms of the deal, or to the resulting entity (in terms of corporate governance, equity distribution, emplacement of an appointed monitor, or access of certain persons to assets or data of concern); or (3) require divestiture of certain assets, in order to approve the investment or acquisition. Most cases are resolved without specific overt action from the White House. Ultimately, however, under the law it is the President of the United States who has the authority to block a merger, acquisition or investment in the interest of national security.
Surge in Reviews
In 2016, CFIUS reviewed over 170 proposed transactions, leaping past the totals of previous years. The reasons for this upsurge likely include both a revived market for cross-border investment and increased affirmative efforts by CFIUS to identify transactions of interest of which it might otherwise not have been notified. Among the notable factors in the recent record number of cases reviewed is the growing wave of proposed Chinese acquisitions. The Government Accountability Office ("GAO") in a letter to Congress dated September 15, 2016, described Chinese acquisition transactions as "a strategic rather than overt national security threat." In addressing this perceived threat, CFIUS has expanded its interpretation of its jurisdiction to involve deals between foreign companies, albeit with a U.S. nexus (a subsidiary or IP rights).
Specifically, in the past 18 months, several major Chinesebacked transactions where CFIUS raised basic objections were abandoned or blocked. One was a case where a Chinese investment group sought to acquire Lumileds from Phillips, NV (a Dutch company). The deal was abandoned after CFIUS asserted U.S. national security interests. Another, where San'an Optoelectronics Co., Ltd. of China sought to acquire Global Communications Semiconductors LLC, was abandoned in the course of dealing with CFIUS concerns. And in the attempt by a Chinese investor to acquire AIXTRON SE, a German company with an American subsidiary, the parties disagreed with CFIUS and instead had the matter submitted to the President who blocked it, the first pre-emptive prior Presidential blocking of an acquisition in history (others have involved post-acquisition divestitures).
On the other hand, acquisitions permitted in recent years have included the purchase of Smithfield Foods by China's Shuanghui International Holdings Ltd., in which the Chinese acquirer gained 26 percent of the U.S. hog market, food processing technology and plants in a dozen states. Apparently (at least as yet), hog processing facilities are not seen as "critical infrastructure."
As well as expanding its jurisdiction, the shifting political and security environment may have CFIUS on the verge of a new array of standards for review and increased scope of authorities.
Recent proposals floated in letters to Treasury and the White House from Congress have called for strengthening government review of transactions with potential national security impact. President Trump himself stated, during the election campaign, that more attention should be paid to the national security aspect of foreign investment, and has been particularly critical of certain Chinese acquisitions.
Among the proposed revisions to the Committee's scope and standards of review:
- Expanding the concept of national security to include, e.g., "economic security" concern about stability of funding, preserving prevalence in certain markets or the ostensible "hollowing out" of important sectors of the U.S. industrial base;
- Increasing attention to investments in critical infrastructure, especially cyber-related capabilities and security, as well as water and energy infrastructure;
- Including oversight of so-called "Greenfield" investments current law excludes new ventures (as distinguished from the investment in or acquisition of existing companies or assets) from CFIUS review. There is now discussion in Congress about applying CFIUS review to foreign-sponsored start-up enterprises; and
- Introducing a calculation of "net economic benefit" which, among other things, could include consideration of investor-country reciprocity (whether the investing entity's home country would allow a comparable investment in the same sector). This test is reported to be particularly favored by the new Administration, and could have special implications for China, which frequently imposes restrictions on foreign investment.
It remains unknown exactly how the new Administration will deploy its still-forming trade policies and initiatives; and a number of the key personnel critical to that effort have yet to be confirmed in their positions, with some yet even to be named. This president's stated intent is to bring national security interests to the center of American trade policy. At the same time, much of his publicly advertised activity since election has focused on job creation and attracting foreign investment into the U.S. It is clear that, as a process through which those occasionally competing objectives can be resolved, CFIUS' role, and its heretofore mostly low profile, is likely to be enlarged.
Whatever the uncertainties, in view of this likely enlarged role, companies and investors party to transactions involving transfer of a U.S. company or assets, or the U.S. portion of those of a foreign company and those advising them should be prepared for CFIUS review. As a practical matter, that means carefully assessing the U.S. national security considerations (including critical economic, industry or infrastructure considerations) potentially raised in the deal.
Possible delays for review should be built into the deal timeline; contracts should include contingencies for complex possibilities such as key asset divestments, restrictions on access to technology for some persons or other mitigating conditions placed on the deal or for the event of a negative review.
Moreover, in the current environment, there is an inevitable political and public affairs component to supporting such a transaction. Companies and their counsel should be prepared with an effective and coordinated political and public relations strategy to foster political support and assuage public concerns, all in the interest of engendering a favorable outcome.