August 28, 2018
On August 13, President Donald J. Trump signed into law the Foreign Investment Risk Review Modernization Act (FIRRMA), which significantly expands the authority of the Committee on Foreign Investment in the United States (CFIUS) to review and restrict foreign investments on national security grounds. FIRRMA empowers CFIUS to review and potentially block a far broader group of “covered” transactions, including certain minority foreign investments in critical technology and critical infrastructure. FIRRMA will have significant regulatory and political impacts on all parties engaged in foreign direct investment (FDI) in the United States, particularly private equity and sovereign wealth funds, entities that previously escaped the intense oversight of CFIUS.
President Trump’s rhetoric that America is losing – in trade, national security, and protecting innovative technologies – has led to his administration pursuing an aggressive, protectionist agenda believed by the Administration to strengthen U.S. competitiveness by renegotiating trade deals, imposing tariffs, and blocking certain foreign investments. While FIRRMA began as a bill focused on modernizing CFIUS’ capacity to guard critical technologies for national security concerns, it also allows the president to exercise broad unilateral authority to stop new classifications of transactions that he deems detrimental to U.S. “security” interests. As the president has said, “If we see something we don’t like – some country is buying something that we don’t want them to be buying – we stop it.” This expanded authority, whether used or not, gives the president significant leverage with other countries as they seek to negotiate trade deals, and access U.S. markets, goods, consumers, and data.
Some pundits believe that foreign entities such as private equity and sovereign wealth funds (and, their respective nation-states) are evading CFIUS and gaining access to intellectual property through targeted, minority-stake investments. To combat this issue, FIRRMA empowers CFIUS to review any foreign minority investment in critical technology and critical infrastructure, with the exception of passive investments, defined as investments that do not provide foreign investors access to non-public information, board memberships, and/or any involvement in company governance beyond voting shares. Under FIRRMA, foreign investments such as the Public Investment Fund of Saudi Arabia’s rumored increased stake in Tesla could fall under CFIUS jurisdiction, if electric vehicles are deemed “critical technology” and depending on how the administration treats future investments by the Saudis.
In addition to its regulatory impact, FIRRMA will cause increased political scrutiny around foreign minority investments. As we have written before, the current geopolitical environment allows lawmakers, businesses, and special interests to leverage the largely opaque CFIUS process to advance their own interests. For example, earlier this year, U.S. chipmaker Qualcomm hired advisors to help scuttle an attempted takeover by Singapore-based rival Broadcom by invoking national security concerns and explicitly asking CFIUS to intervene. A week later, President Trump blocked the deal citing national security.
FIRRMA strengthens CFIUS as a tool in the protectionist arsenal to translate “America First” rhetoric into tangible action, and increased public and political concern over foreign investment in the U.S. strengthens the administration’s argument for its protectionist policies. At the same time, the ability to block certain transactions and allow others to proceed gives the president a personal stake in the decision and leverage in future negotiations, both of which are core to his approach to policymaking.
Foreign investors and sovereign wealth funds are now equally exposed on both the regulatory and political fronts. In preparing for investments in this new environment, foreign entities need to understand, prepare for, and mitigate the risks of how these investments could be perceived by administration officials, lawmakers, influencers and detractors.
FTI recommends that foreign investors prioritize engagement with decision makers and influencers in Washington, D.C., and potentially stakeholders at national and local levels, to demonstrate that their investment is a benefit and not a threat to U.S. national interests. More than ever, foreign companies, private equity, and sovereign wealth funds need to have both a solid legal approach and integrated advocacy program to help mitigate the risks that FIRRMA has made a reality. The best path to success is to present a clear and consistent argument, strengthen relationships with influential stakeholders, and enlist the support of credible third parties. However, even this may not be enough.
The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals. FTI Consulting, Inc., including its subsidiaries and affiliates, is a consulting firm and is not a certified public accounting firm or a law firm.