The United States governmental committee charged with reviewing foreign mergers and acquisitions with U.S.-based companies or affiliates for potential national security concerns may soon be getting a new set of teeth. The question for potential foreign investors: Will this mean a larger bite out of potential U.S. acquisitions leaving fewer opportunities for investment?
PROPOSED EXPANSION OF CFIUS SCOPE
On November 8, 2017, a group of bipartisan lawmakers introduced legislation that would enhance the review process of the Committee on Foreign Investment in the United States (CFIUS), a panel responsible for reviewing transactions that could result in control of a U.S. business or a U.S. affiliate by foreign entities. As part of its review, CFIUS determines the effect of such transactions on the national security of the United States. Members of CFIUS include representatives from numerous U.S. government agencies, including the Departments of Treasury, Defense, State, and Homeland Security.
On Wednesday, Senator John Cornyn, a Republican from Texas, and Senator Dianne Feinstein, a Democrat from California, introduced the Foreign Investment Risk Review Modernization Act of 2017 in the Senate. The proposed bill follows vocal bipartisan concern regarding foreign investors’ -- especially China’s -- access to sensitive U.S. technologies. The lawmakers linked the proposed CFIUS reforms to a recent spate of Chinese acquisitions of American companies.
The proposed bill requires CFIUS to conduct a risk-based analysis of transactions involving foreign entities. The bill adds the following factors for CFIUS to consider in its review process:
- The extent to which the transaction is likely to expose, either directly or indirectly, personally identifiable information, genetic information, or other sensitive data of United States citizens to access by a foreign government or foreign person that may exploit that information in a manner that threatens national security;
- Whether the transaction is likely to have the effect of creating any new cybersecurity vulnerabilities in the United States or exacerbating existing vulnerabilities;
- Whether the transaction is likely to result in a foreign government gaining a significant new capability to engage in malicious cyber-enabled activities against the United States, including such activities designed to affect the outcome of any election for federal office;
- Whether the transaction involves a country of special concern that has a demonstrated or declared strategic goal of acquiring a type of critical technology that a United States business that is a party to the transaction possesses;
- Whether the transaction is likely to result in the increased reliance by the United States on foreign suppliers to meet national defense requirements;
- The potential effects of the transaction on United States international technological and industrial leadership in areas affecting United States national security, including whether the transaction is likely to reduce the technological and industrial advantage of the United States relative to any country of special concern;
- Whether the transaction is likely to contribute to the loss of or other adverse effects on technologies that provide a strategic national security advantage to the United States;
- The degree to which the transaction is likely to increase the cost to the United States government of acquiring or maintaining the equipment and systems that are necessary for the defense, intelligence, or other national security functions;
- The potential national security-related effects of the cumulative market share of any one type of infrastructure, energy asset, critical material or critical technology by foreign persons;
- Whether any foreign person that would acquire an interest in a United States business or its assets as a result of the transaction has a history of complying with U.S. laws and regulations and adhering to contracts or other agreements with entities of the United States government;
- Whether the transaction is likely to facilitate criminal or fraudulent activity affecting the national security of the United States; or
- Whether the transaction is likely to expose any information regarding sensitive national security matters or sensitive procedures or operations of a federal law enforcement agency with national security responsibilities to a foreign person not authorized to receive that information.
The proposed bill gives broad authority to CFIUS and allows it to suspend a proposed or pending transaction that may pose a risk to the national security of the United States while the transaction is under review or investigation. Under the Act, CFIUS may, at any time, refer the transaction to the president who may suspend or prohibit the transaction, or require divestment. The bill authorizes the president, in conjunction with any such action, to take any additional action the president considers appropriate to address the risk to the national security of the United States identified during the review and investigation of the transaction.
The bill also expands the jurisdiction of CFIUS to include certain joint ventures, minority investments and acquisitions of real estate located near military bases or other sensitive facilities. The definition of critical technologies that could trigger a review is expanded to include emerging technologies.
RECENT CHINESE ACTIVITY
In the recent past, CFIUS has approved acquisitions of American businesses by Chinese companies. On October 30, 2014, Lenovo acquired Motorola Mobility, following CFIUS approval. More recently, CFIUS greenlighted the deal allowing Chongqing Casino Enterprise Group’s acquisition of the Chicago Stock Exchange. However, that deal is still pending until it receives clearance by the U.S. Securities and Exchange Commission.
Although CFIUS has approved Chinese acquisitions of U.S. businesses, it is becoming more common for CFIUS to issue a recommendation to the president advising against the deal. On December 2, 2016, following CFIUS concerns, President Obama issued an executive order blocking the proposed acquisition of Aixtron by a group of Chinese investors led by Fujian Grand Chip Investment Fund LP. On September 13, 2017, President Trump issued an executive order prohibiting Canyon Bridge Capital Partners, Inc.’s proposed acquisition of Lattice Semiconductor Corporation, following a recommendation from CFIUS that the transaction be prohibited due to national security concerns.
EARLY ASSESSMENT OF LEGISLATION’S POTENTIAL IMPACT
Given the proposed legislation and general heightened scrutiny surrounding Chinese investment, Chinese and American companies wishing to make a deal can expect to undergo a rigorous CFIUS review process. This may present a challenge for the deals currently pending before CFIUS since the bill will apply to transactions that are proposed, pending, or completed on or after the date of the bill’s enactment. In January 2017, SkyBridge Capital, former White House communications director and investor Anthony Scaramucci’s hedge fund investment firm, agreed to sell to HNA Capital U.S., a unit of Chinese conglomerate HNA group. The deal was expected to close late September according to SkyBridge representatives, but is still awaiting CFIUS approval. Similarly, the sale of Moneygram to Chinese-based Ant Financial is pending, although Ant Financial representatives stated that they are focused on closing the transaction by the end of the year. It remains to be seen whether the pending deals before CFIUS will be greenlighted before the panel gains its new set of teeth.
Bradley will continue to follow this legislation and will update clients on its progress as developments warrant.