July 11, 2017
Ten years ago today, the 110th Congress amended the Committee on Foreign Investment in the United States (CFIUS) to require greater scrutiny of foreign direct investment (FDI) impacting the U.S. This shift in policy, triggered by Post-9/11 concerns regarding U.S. national security, the congressional uproar over the proposed acquisition by a Dubai-owned company of a series of U.S. port terminals, and China’s proposed 2005 acquisition of the Union Oil Company of California (UNOCAL), significantly altered the ways in which foreign companies approached making investments in the U.S. Over the past decade, this process has been the domain of lawyers and a closed-door CFIUS Committee that has largely stayed above the political fray. This is no longer the case. CFIUS approval is becoming an issue that requires a campaign strategy and execution to manage effectively.
Today, U.S. lawmakers are considering another round of changes to CFIUS, this time primarily driven by China’s strategic investments in U.S. technology. And politics is as central to this effort as policy. “National security” is being redefined as elected officials face an increasingly hostile combination of populism and nationalism in the U.S. Gridlock in the legislative process means narrative, politics, and regulatory mechanisms are the only levers available to politicians who are eager to be responsive to public demands for “America First.” Given the relevance of this topic and the impact on multinational corporations (MNCs), we have prepared the following report that provides a short summary of the last major overhaul of CFIUS, an analysis of what to expect in the next round of changes, and thoughts on how MNCs pursuing cross border M&A should approach the challenges and opportunities in this new political environment.
In mid-2005, a state-owned company in the United Arab Emirates (UAE), Dubai Ports World (DPW), retained a powerful legal team and quietly approached the U.S. government about the possible acquisition of a British firm, Peninsular & Oriental Steam Navigation Company (P&O) that had terminal operations at six American ports. DPW’s lawyers, Thomas Crocker and Jonathan Weiner, spent the following months negotiating with CFIUS to address any national security issues that were initially flagged by the agency. By the time the deal was announced in February 2006, CFIUS was no longer concerned about DPW’s purchase of P&O, and the transfer of ownership was later approved.
While DPW’s legal strategy was executed flawlessly, its communications strategy, or lack thereof, led to the eventual downfall of the deal. When DPW filed its formal CFIUS application, Eller & Company, a water transportation and cruise ship company with two joint ventures with P&O, sought to block the deal. Eller & Company launched an aggressive public affairs campaign to pressure Members of Congress to block the proposed acquisition, and a few days later, the Associated Press, after several discussions with Eller & Company’s lawyers, ran a damaging story about the deal. In response, Democratic Senator Chuck Schumer (D-NY) followed the AP story with a press conference, where he stood with 9/11 families and called for a review of the deal by the Department of Homeland Security (DHS).
Despite DPW’s attempt to quickly respond with a team of their own powerful lobbyists, the damage was already done, and momentum against the deal continued to grow. In March 2006, one month after the company received CFIUS approval, DPW relented to bipartisan pressure from Congress and dropped the proposal. This contentious transaction, coupled with another controversial deal involving a Chinese government-owned oil company’s failed bid to buy UNOCAL, created a fertile breeding ground for increased congressional scrutiny of FDI, leading to the eventual passage of legislation to reform CFIUS.(1)
On July 11, 2007, less than eight months after introduction, the Foreign Investment and National Security Act (FINSA) was unanimously approved by Congress. The bill was signed by President George W. Bush a short time later.
While FINSA left in place the basic substance and timelines for CFIUS review of FDI, it imposed several new policy changes that sought to address many of the issues that were raised in the previous year. As requested by several lawmakers during the DPW controversy, the bill included an increase in agency accountability in the decision making and ensured the Director of National Intelligence was involved in the CFIUS process as it relates to national security threats.
While the passage of FINSA was a result of public outrage over a few controversial transactions in the name of national security, tensions eventually cooled, and companies adjusted to the new regulatory environment and focused on the economic rationale of deals.
However, in recent years, China’s significant investment in U.S. assets is causing lawmakers to reexamine the national security implications of FDI. Since 2007, for example, China’s investment in the U.S. has surged by over 12 times — from $356 million in 2007 to $46.2 billion in 2016.(2) Similar to what happened a decade ago, lawmakers are again seeking to change CFIUS. The major difference between then and now is the geopolitical landscape driving this appetite for change.
This substantial increase in Chinese FDI has caused concern among lawmakers and Trump administration officials who are calling for reforms that protect the United States from risky foreign investments. As Senator John Cornyn (R-TX) recently pointed out in a speech at the Council on Foreign Policy (CFP), lawmakers are not only concerned about the volume of Chinese FDI, but also the type of investment … primarily in advanced technologies. The New York Times recently reported that, since 2010, Chinese investors have poured nearly $30 billion into early stage U.S. technologies; a trend that Senator Cornyn and others worry could erode the nation’s technology gap and undermine the U.S. defense industrial base.(3)
To prevent such an outcome, Senator John Cornyn and Representative Robert Pittenger (R-NC) will soon introduce bipartisan legislation, the Foreign Investment Risk Review Modernization Act (FIRRM). Among other provisions, the FIRRM Act aims to modernize CFIUS to more effectively address China’s “investment-driven transfer” of leading edge technology that China is currently pursuing. While text of the bill is not yet public, Senator Cornyn provided a top-line summary of what to expect in his bill. The FIRRM Act, according to Cornyn, is narrowly focused on national security and does not seek to require CFIUS to consider investment reciprocity or economic security in its analysis. Instead, it will seek to enable CFIUS to increase scrutiny of certain transactions that involve nations that pose a clear threat to national security, particularly for investments involving advanced technologies. Three ways in which the bill could seek to accomplish this include:
Currently, CFIUS reviews any merger, acquisition, or takeover by or with a foreign person or entity that could result in foreign control of any entity engaged in interstate commerce in the U.S. The bill could expand the scope of CFIUS reviews to include any merger, acquisition, or takeover that provides foreign persons with access to key information regarding critical technologies, foundational technologies, and/or critical infrastructure.
The bill could require CFIUS to make a determination on the foreign buyer’s country of origin. If the buyer is located in a nation that poses a clear threat to national security, then CFIUS could either increase scrutiny of the transaction, or suspend/prohibit it altogether. Note — Senator Cornyn recently said the process of identifying the countries of most concern would be classified and based solely on national security criteria.
Such factors could include: whether the transaction is likely to expose the personally identifiable information of Americans to a foreign government; whether the transaction is likely to reduce U.S. technological or industrial advantages as it pertains to any countries of special concern; and the cumulative market share of any one type of critical technology or infrastructure by all entities from countries of special concern.
While the FIRRM Act will address many of the issues that observers have raised in recent months, it is unlikely the bill will become law as quickly as its predecessor (FINSA) for two reasons. First, there is division on how to best reform CFIUS, both within the Republican Party and between Republicans and Democrats. While some Republican lawmakers, such as Senator Cornyn and Representative Pittenger, believe that major changes through immediate legislation is the best approach to reform CFIUS, others prefer a more gradual approach that could involve small changes through executive orders in the short term with the possibility of more substantive changes in the longer-term; but only after the Government Accountability Office (GAO) finishes its comprehensive review of CFIUS, which is due later this year.
Democratic lawmakers such as Senate Minority Leader Chuck Schumer (D-NY) would also like to include an economic reciprocity test in the CFIUS review process. However, Republicans have already suggested this notion is a non-starter.
Second, unlike the steady rise of public opposition to the DPW controversy, the key driver for this round of changes — Chinese FDI — appears to be cooling. In recent months, the Chinese government has cautioned companies to curb the flow of outbound investment. If Chinese FDI does not drive headlines in Washington, then lawmakers will likely focus on more pressing issues of the day such as healthcare, tax reform, infrastructure, increasing the debt ceiling, and funding the federal government.
Regardless of whether the legislation is approved in the short-term or longer-term, there will be no shortage of public dialogue around CFIUS, particularly on specific transactions. As DPW learned the hard way, competitors will use CFIUS as a tool to protect their own self-interest. Today’s politicians are hard-pressed to deliver a “win” on anything. CFIUS provides an outlet and a path for elected officials to be heard and to look engaged. Opposing or supporting a major deal makes for good theater in Town Hall meetings and in press conferences. The currency of the news cycle and the politicization of CFIUS should not be underestimated or ignored.
MNCs interested in cross-border M&A must not just have a good legal strategy, but also a comprehensive campaign that includes communications, public affairs, and government relations strategies that will empower them to tell their own story before others tell it for them, engage key stakeholders, and address political concerns as part of any CFIUS impacted M&A advocacy plan.
An effective strategy must include proactive engagement with not only Wall Street and Washington, but also with states and local communities that influence the political and regulatory environment. Media and key influencers must be approached early and often to set the narrative, understand points of weakness and strength and to create the echo chamber needed to drive the politics and perceptions of a deal.
Given the above factors, it is more important than ever for MNCs to build trust and credibility with regions in which they plan to operate by effectively communicating how their local presence will enhance the interests of key stakeholders. For example, MNCs should be developing narratives that highlight their contribution to the supply chain, their payment of payroll taxes, their investments in local communities, and opportunities for new and good-paying jobs, all of which will help to maintain their freedom to operate. Similarly, the problems with a competitor’s deal can also be inventoried and exploited.
Validators are critical to a successful effort. Reinforcing the potential harm of a problematic deal by a competitor or the benefits of a desired transaction must be organic and translatable to both populist and policy audiences. Today’s political arena and media environment is hyper-focused on the impacts of transactions and the implications for various audiences and special interests. Given the smashmouth nature of our current political discourse, it is vital to maintain a campaign-style vigilance and approach to any full-scale effort to enter the CFIUS process.