November 8, 2017
Earlier today, Senator John Cornyn (R-TX) and Representative Robert Pittenger (R-NC) introduced bipartisan legislation that would significantly reform the Committee on Foreign Investment in the United States (“CFIUS”). The Foreign Investment Risk Review Modernization Act (“FIRRMA”) would broaden the scope of transactions that must undergo CFIUS review (“covered transactions”), provide additional guidance in determining if covered transactions pose a national security threat, and strengthen the enforcement of mitigation agreements. These reforms reflect a complex geopolitical environment where foreign governments are increasingly relying on foreign direct investment (“FDI”) to generate economic growth, while also responding to the rising tide of nationalism fueled by national security concerns.
An underlying factor pressuring U.S. policymakers to reexamine FDI regulations is China’s rapid emergence as the second-largest global investor, with $140 billion in completed global mergers and acquisitions (“M&A”) in 2016. This financial trend parallels growing political tension between the two countries, primarily over disagreements involving trade, currency valuation, China’s dealings with North Korea, and cybersecurity. Director of National Intelligence (“DNI”) Dan Coats, in recognizing the threat China poses and its FDI strategy to improve its technological and production capacities, encouraged the Senate Select Committee on Intelligence in a May hearing to conduct a review of the CFIUS review process.
The FIRRMA seeks to address these concerns by requiring CFIUS to review transactions that result not just in foreign control of U.S. businesses, but also provide foreign entities with access to key information regarding certain technologies, infrastructure and materials that are vital to U.S. national security. Foreign businesses looking to expand into the U.S. must be able to navigate through an increasingly complex regulatory environment that is often influenced by politics. This memorandum provides a detailed summary of the proposed legislation, an analysis of the challenges the bill faces in Congress, implications for how businesses should communicate to key stakeholders during M&A transactions, and a short background on CFIUS.
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 FIRRMA would broaden the scope of CFIUS by including several new types of covered transactions, such as non-passive foreign investment in critical technologies or infrastructure, joint ventures between U.S. critical technology companies and foreign entities that involve the transfer of intellectual property, any change in a foreign investor’s rights if it results in foreign control or non-passive investment, and the foreign purchase or lease of real estate that is closely located to U.S. military or national security facilities. In most cases, these new factors do not apply to countries that are U.S. allies.
The bill requires CFIUS to make distinctions between certain countries, including those that are treaty allies, have a mutual investment security arrangement, or have a sound CFIUS-like process of its own, and countries designated to be of “special concern.” CFIUS would be authorized to exempt certain transactions for the former category. The bill defines a country of special concern as one that poses a significant threat to U.S. national security interests, but clarifies that no such list would be required to be maintained. CFIUS would be required to consider certain factors when a country of special concern is involved, including their desire to acquire certain technologies and whether the transaction would reduce the relative strength of U.S. technological and industrial advantage.
The bill would add a number of new factors, including whether the transaction is likely to negatively impact U.S. cybersecurity, expose personally identifiable information of U.S. citizens to foreign governments, reduce U.S. technological or industrial advantage, or result in increased U.S. reliance on foreign suppliers to meet national defense requirements.
The bill would give CFIUS additional time to review each transaction. This is intended to reduce the need for parties to withdraw and refile CFIUS notices for transactions that require a more thorough review. In addition, the bill would authorize CFIUS to extend any investigation for one 30-day period in “extraordinary circumstances,” at the request of the lead agency.
The bill would require CFIUS to implement a plan for monitoring compliance of cleared transactions involving a mitigation agreement or condition. Factors would include identifying which department or agency will have primary responsibility for monitoring compliance, how compliance will be monitored, and how frequently compliance reviews will be conducted.
Other provisions in the bill include:
While this proposed legislation seeks to address many of the issues that observers have raised over time, there is a low probability that the FIRRMA will become law in the short-term.
First, there is division on how best to reform CFIUS, both within the Republican Party and between Republicans and Democrats. While some Republicans, such as Senator Cornyn and Representative Pittenger, are pushing a more aggressive, narrow approach that focuses on national security, others prefer a more gradual approach that could involve smaller changes through executive orders in the short-term, with the possibility of substantive changes in the longer-term. The Government Accountability Office (“GAO”) is working to finish its comprehensive review of CFIUS, which is due later this year.
On the other side of the aisle, Senate Minority Leader Chuck Schumer and some other Democratic lawmakers want to broaden the scope of the CFIUS review process and have advocated for the inclusion of an economic reciprocity test. This idea was deemed a nonstarter by Treasury Secretary Steven Mnuchin in an interview with Bloomberg editor-in-chief John Micklethwait. Previously, Schumer sent a letter to President Trump requesting that he use his unilateral authority to block all Chinese deals through CFIUS until the Chinese government works to curb North Korea’s military aggression, potentially complicating further legislative efforts.
Second, the recent surge of Chinese acquisitions of U.S. businesses — a factor that could spur movement on legislation — appears to be cooling, at least temporarily. In recent months, China has increased its efforts to staunch the flow of outbound investment by tightening the enforcement of its strict limits on how much money can move across borders. As long as Chinese FDI is not controlling the headlines, Washington will continue to focus on pressing issues of the day, including tax reform, healthcare, infrastructure investment, and funding the federal government. Despite the low probability of final enactment, we do believe concepts in the FIRRMA will serve as a foundation for future changes to CFIUS.
In the absence of legislative approval, President Trump can still increase scrutiny of FDI and, in fact, he has shown his willingness to take unilateral action that reflects the concerns implied by the legislation. In September, Trump used the CFIUS process to block the acquisition of a semiconductor manufacturer by a firm reportedly funded by the Chinese government. According to the National Law Review, there are also a number of ways in which CFIUS could change at the executive level, including tightening discretionary review, expanding the definition of what constitutes a “national security” issue, increasing the use of mitigation measures, and increasing scrutiny of China and other countries viewed as problematic. Given President Trump’s selection of cabinet secretaries with strong foreign business ties, such as Treasury Secretary Steven Mnuchin and Commerce Secretary Wilbur Ross, CFIUS will include experts in FDI with firsthand experience of the regulatory process.
The FIRRMA is just one example of a growing trend where nations continue to expand their sovereignty over domestic and foreign affairs, particularly as it relates to issues of economic and national security. Given this current geopolitical landscape, foreign acquirers must overcome much bigger hurdles today – far beyond the traditional antitrust review process. Corporate executives must also take into account the transaction’s implications on employees, suppliers and local communities. When businesses fail to adopt a strategic communications approach to deal approval, stakeholders often express their frustrations to federal, state and local representatives, which often increases regulatory scrutiny of the acquisition. In order to prevent this common scenario from occurring, businesses should consider revising their strategy to include a robust communications plan that will validate their license to operate in the US.
As highlighted in a previous CFIUS Insight piece, 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.
CFIUS is a federal inter-agency committee that reviews the national security implications of FDI and provides recommendations regarding whether these transactions should be approved by the President. The committee is chaired by the Secretary of the Treasury and receives input from the heads of several departments, including Homeland Security, Commerce, Defense, Energy, Justice, and State. Since its creation by President Ford in 1975, CFIUS has evolved alongside the changing and increasingly complex economic and security landscape. For example, in the years following the terrorist attacks in 2001, lawmakers expanded congressional oversight of CFIUS under the Foreign Investment and National Security Act of 2007 (“FINSA”). The bill passed in the wake of the controversial sale of six major U.S. seaports by a state-owned company based in the United Arab Emirates (“UAE”), commonly referred to as the Dubai Ports World controversy.
National security concerns resulted in the enactment of FINSA – today, economic concerns are contributing to another round of potential changes to CFIUS. In the first half of 2016, Chinese investments in the U.S. reached a record $18.4 billion, more than triple the amount invested in the first half of 2015. This trend, in conjunction with the high degree of Chinese influence over its domestic companies and China’s protectionist barriers to U.S. market access, has caused serious concern among key decision makers in Washington. During the campaign, President Trump repeatedly emphasized a tough approach towards China and appeared to criticize a Chinese bid for the Chicago Stock Exchange. While the bid received CFIUS approval in December, SEC Chairman Jay Clayton recently put the deal on hold, as many fear it would give the Chinese access to critical technology and personal data of Americans.
Lawmakers have taken a more aggressive approach toward China’s trade and investment practices. Following ChemChina’s $43 billion bid for Syngenta, Senate Judiciary Committee Chairman Chuck Grassley (R-IA) introduced legislation in July 2016 that would permanently add the U.S. Department of Agriculture to CFIUS and clarify that agricultural assets are considered national security infrastructure. In response to a wave of Chinese investment in Hollywood, Senate Minority Leader Chuck Schumer urged CFIUS to adopt aggressive enforcement measures if China does not remove protectionist barriers to U.S. market access. Additionally, Schumer recently wrote a letter to the President, suggesting that he block all Chinese deals through CFIUS until the Chinese government increase their efforts to combat North Korea. Lastly, the Government Accountability Office (“GAO”) at the behest of several House lawmakers initiated a review to determine whether CFIUS authorities may need to be expanded, “especially given the rise in state-owned enterprises and state-controlled enterprises from China and Russia.”
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 “China’s Rise in Global M&A,” White & Case
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