One of the themes of the Trump campaign was the need for enhanced national security. Although the Committee of Foreign Investment in the United States (CFIUS) is not mentioned in Mr. Trump’s 100-day plan, it is highly likely that CFIUS reviews will become more stringent under the new administration. CFIUS reviews are the mechanism by which the U.S. government can vet merger and acquisition (M&A) activity involving the potential transfer of ownership or control of companies or assets to foreign interests.
CFIUS reviews have always been something of a black box. The information submitted to the committee is proprietary and not subject to release to anyone outside of Congress; the deliberations are confidential; and the reasons supporting any approval or disapproval are not released. The decisions are entrusted to the committee with little in the way of judicial oversight, giving the president a great deal of discretion to reshape the process.
This combination of secrecy and discretion in the CFIUS process has led to a great deal of uncertainty regarding potential sales of companies or assets to foreign interests, such as:
To help deal with questions such as these, this client alert presents the “Top Ten” questions that every company engaged in M&A activity with a foreign dimension should be thinking about. This client alert is part of a series of “Top Ten” articles on the future of key international trade and regulatory issues expected to change under the Trump administration. Previously issued client alerts discuss the future of NAFTA and international trade litigation (including antidumping and countervailing duty actions) under the Trump administration. Future client alerts will deal comprehensively with all international trade and regulatory areas, where significant change could occur under the new administration.
Although post-WWII U.S. policy has been to maintain an open posture for foreign investment, the Exon-Florio amendment in 1988 created CFIUS, which provided a mechanism to scrutinize foreign investments and acquisitions to determine if they have national security implications.1 After a controversy regarding the proposed acquisition of the commercial operations of six ports by Dubai Ports World, the Foreign Investment and National Security Act of 2007 (FINSA) increased the scope of transactions subject to potential CFIUS review by adding critical infrastructure investments.2
The Exon-Florio provision, as amended, gives the committee the right to review proposed foreign “mergers, acquisitions, or takeovers” and to present recommendations regarding whether they should be approved by the president, who has the authority to block proposed foreign transactions that threaten to impair the U.S. national security. CFIUS functions as an interagency committee to review the national security implications of foreign investments in U.S. companies or assets.
As per Executive Order 13,456, the committee consists of nine members, including the secretaries of commerce, defense, energy, homeland security, state, and treasury; the attorney general; the U.S. trade representative (USTR); and the director of the Office of Science and Technology Policy.3 The secretary of labor and the director of national intelligence also serve as ex officio members. The committee completes its review based upon jointly provided information regarding the proposed transaction, with the information provided in response to a lengthy set of questions as outlined in section 800.402 and other parts of the CFIUS regulations.4
CFIUS filings are voluntary in nature. Parties go to the time and expense of seeking committee review because, if a voluntary filing is made, and the committee approves it, then the U.S. government loses the ability to challenge a transaction, unwind it, or require mitigating actions. By contrast, any acquisition not reviewed is subject to divestment or other actions designed to address any national security threat inherent in the transaction. Through this carrot and avoidance of a potential stick strategy, parties to M&A activity are encouraged to self-evaluate transactions involving the potential transfer of ownership or control to a foreign person, and to seek a voluntary review where national security concerns potentially arise.
The CFIUS review evaluates the impact of sales to foreign entities, with the Defense Security Service separately reviewing foreign ownership, control, and influence where the National Industrial Security Program is involved. In the campaign, Mr. Trump frequently stated his view that foreign direct investment should be viewed through a national security prism, and was critical of Chinese acquisitions in particular, such as the purchase of the Chicago Stock Exchange. These views are consistent with those of key Republicans in Congress, who have sought to strengthen U.S. government review of transactions with a potential national security impact.
Mr. Trump’s transition team reportedly has determined that the CFIUS process will play an enhanced role in the new administration. The planned nomination of Mr. Lighthizer as the USTR is also potentially significant, as the USTR is one of the nine standing members of the committee. Mr. Lighthizer, who has worked for three decades as a prominent lawyer representing U.S. steel interests in antidumping and countervailing duty actions, and who has prior experience under the Reagan administration as a negotiator of voluntary restraint agreements to protect troubled U.S. companies, is expected to be an active supporter of the international trade themes espoused by Mr. Trump during his campaign for president.
There also have been indications that the new administration will favor an informal “reciprocity” test for foreign investment — i.e., that countries that do not allow a comparable investment in the same sector would not see CFIUS approvals. This is a mindset that could have special resonance for China, which often restricts foreign investment by other countries, including the United States.
The vast bulk of CFIUS filings occur in four sectors:
Although reviews can arise for any country, in recent years they generally involve China, the United Kingdom, Canada, Japan, France, Germany, Switzerland, The Netherlands, Singapore, Israel, and South Korea.5
The Obama administration generally had a hands-off CFIUS approach. Despite the increasing number of filings over the last eight years, including those involving China (which is viewed as a problematic purchasing country), the Obama White House let most matters be resolved at the CFIUS level, without overt action by the White House. As a result, only two transactions were halted or required significant divestments by President Obama (for Aixtron, a semiconductor company, and for Ralls Corp., which was required to divest windfarm assets located near a defense facility). The transactions cleared included controversial transactions, such as the Smithfield Foods acquisition by China’s Shuanghui International Holdings Ltd., which raised concerns about a Chinese company taking over 26 percent of the U.S. hog market and food-processing facilities in more than a dozen states, key U.S. food-processing technology, and Smithfield intellectual property.6 Certain other transactions were abandoned by the parties due to opposition at the committee level.
The biggest change in CFIUS reviews over the Obama administration was the increasing prevalence of Chinese acquisitions. In the most recent three-year period for which data is available (2012 – 2014), the committee reviewed 68 potential acquisitions involving China, whereas in the three years right before the FINSA enactment there were only four. When Congress requested that the Government Accountability Office (GAO), an independent agency that conducts audits and investigations on behalf of Congress, prepare a report regarding the CFIUS process, the request specifically noted that Chinese transactions may pose “a strategic rather than overt national security threat.”7
An additional trend is the increasing use of mitigation measures, which can include such conditions as restricting which persons can access certain technologies/information, establishing procedures regarding U.S. government contracting, establishing corporate security committees to oversee classified or export-controlled products or technical data, requiring divestments of critical business units, providing periodic monitoring reports to the U.S. government regarding national security issues, or giving the U.S. government the right to review future business decisions that implicate national security.8 The increasing prevalence of such measures, as well as the increased staff time required to monitor the implementation of mitigating measures, is one of the key reasons why increased staffing and resources for the committee process are likely under the new administration.
The implication of these developments is that while the number of transactions definitively killed by presidential action may not increase (as it is rare for companies to pursue transactions where the committee indicates strong concerns), it is likely that an increasingly stringent review process will result in more companies backing off of transactions that encounter resistance from the committee. National and economic security concerns will also likely lead to U.S. companies increasingly selling to safe buyers, as sales to U.S. purchasers or those in NATO countries are less likely to run into CFIUS opposition (or may not need CFIUS filings at all .
The current list of factors considered by the committee is established by statute, and consists of the following:
The manner in which these factors are applied in any specific transaction is entirely within the discretion of the committee. In particular, the view of what constitutes a national security issue is amorphous, allowing for the expansion of review to areas of concern not traditionally covered in prior reviewed transactions.
There are a number of ways in which CFIUS reviews could change at the Executive level, even absent any changes to the statutory basis for the reviews:
Congress is not likely to be a passive bystander in the process. Republicans in Congress have been trying for years to alter the scope of the CFIUS review process and likely will view the election of Mr. Trump as an opportunity to enact this agenda. The advantage of action through legislation is that it can overhaul the CFIUS review process in one fell swoop, while implementing long-standing congressional concerns. Items in legislative play include the following:
If filings increase, this could increase the length of time for CFIUS review. Although the regulations provide for a strict 30-day review process (with additional time if a full investigation is needed), the committee has developed ways to stretch out this time period, including by taking a week or more to “log in” filings, requesting that parties provide “pre-filing” (draft) review requests to allow extra time for consideration, and requesting additional information from the parties (which stretches out the time for final decision). Prudent parties leave 90 to 120 days for completion of the process. An increased number of reviews could stretch this time period further.
Additionally, the change of administration could lead to turnover in career CFIUS staff (which is where most of the hard work of analysis occurs). The loss of this institutional knowledge could lead to increased delay, confusion regarding information to be submitted and what information is considered most relevant, additional supplemental questions, and less predictability in results.
Although it is possible the new administration might try to undo previously approved transactions, it is unlikely. The statute provides for undoing previous approvals only if information submitted turns out to be false, misleading, or to have had material omissions. The chance of such misstatements being uncovered is low, given that most participants are careful to provide vetted and accurate information. Further, the ability to check the accuracy of information submitted is difficult because the information is confidential and exempt from Freedom of Information Act requests.19
While an argument could be made that the president has the authority to reopen a transaction under the International Emergency Economic Powers Act,20 the entire basis of encouraging CFIUS filings on a voluntary basis would be undermined if the carrot of no review were put into question. Further, parties who worked through the process likely would mount challenges in federal courts arguing that the rescission of a lawfully granted clearance amounted to a violation of due process or a taking.21 Although one could argue that actions taken pursuant to the International Emergency Economic Powers Act (which an unwinding of a cleared transaction would be) are not subject to judicial review, rather than court this kind of trouble, it is more likely the Trump administration will focus on tightening the standards for new transactions rather than seeking to unwind previously approved ones.
CFIUS practitioners have long benefited from developing a sense as to what types of transactions are potentially problematic, allowing for accurate triaging of the types of deals that should consider filing for CFIUS review. Unfortunately, these finely honed instincts will no longer be of much use. It will take years to establish the operation of the new CFIUS ground rules.
In the meantime, transactions that involve the transfer of ownership or control to a foreign party (including transactions where one foreign company is selling U.S. interests to another foreign company) should be looking carefully at national and economic security interests in every deal and considering whether a CFIUS filing is prudent. Parties to transactions should plan for potentially wide-ranging CFIUS reviews (and the accompanying delay) from the outset for any deal that raises potential national or economic security considerations. Merger contracts for such deals should include contingencies as to what will happen if CFIUS reviews are negative or involve unanticipated conditions, require divestments of key technology or assets, or restrict what purchaser personnel can have access to key technology.
With the range of potential mitigating measures including conditions on ownership and governance, the establishment of security committees to oversee controlled technical data, goods, patents, or intellectual property, potentially intrusive monitoring requirements, and other mitigating measures, the possibility that the committee could impose conditions that significantly impair the rationale for the transaction needs to be taken into account from the outset. Incorporating such considerations into the contract, the value assigned to the U.S. business, and into the timing of the deal can avoid unanticipated commercial issues that could kill an otherwise mutually acceptable deal.
Most CFIUS reviews have been relatively non-political. This may change in the new administration. Companies should accordingly consider the public and government relations aspects of transactions from the outset. The CFIUS process may play out in a new and more public/political fashion, especially if proposals to give Congress more of a role in the process are realized. Having sophisticated government and public relations teams at the ready to coordinate with the CFIUS legal and transactions team may turn out to be important in future reviews. Having a coordinated strategy to deal with various contingencies from the start offer the best chances for a favorable outcome.
The type of transactions that will merit consideration of filing for a CFIUS review are in flux, for all the reasons noted above. Nonetheless, there are certain recurring situations that likely will merit serious consideration of a CFIUS filing. These include sales with the following attributes:
The entire international regulatory scheme is potentially in play under the new administration, especially so in the area of CFIUS reviews. While the contours of how the reviews will change is as yet unknown, in some ways, the prospect of change is a self-fulfilling prophecy. Because CFIUS reviews are voluntarily requested when the parties believe there is a chance the deal could come under post-transaction inquiry, rumors of increasingly close scrutiny by the U.S. government, in and of itself, will increase the number of voluntary filings made by risk-averse investors. This will result in the committee having increased clout as the number of transactions where review is sought increases.
U.S. companies looking to sell to foreign interests, or foreign interests looking to purchase U.S. companies or assets, should closely consider the potential national or economic security aspects of their transactions, with the level of concern and likelihood of seeking a CFIUS review rising as the country of acquisition moves away from the relative safe haven of NATO and similar-level countries. One thing is clear: the CFIUS process is likely to change, and potentially to a large degree. Prudent companies will not want to be on the wrong side of the evolving standards for CFIUS clearance.
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The international climate for U.S.-based multinational companies and non-U.S. based companies that sell into the United States has never been more uncertain. The Foley Export Controls & National Security Practice is here to help. This client alert is the third in a series of client alerts that are being prepared to help companies navigate the uncertain international trade and regulatory environment. In addition to the already published articles on the future of NAFTA and international trade remedies (antidumping and countervailing duty proceedings), future “Ten Question” articles will cover Office of Foreign Asset Controls (OFAC) economic sanctions and export controls, the Foreign Corrupt Practices Act, U.S. Customs and Border Protection, white collar enforcement, cybersecurity, and general compliance expectations. You can contact the Foley Export Controls & National Security Practice at email@example.com or 202.945.6149, if you would like to be added to the mailing list for these client alerts or if you have any questions regarding international trade or regulatory developments.
1 50 U.S.C. app. § 2170, transferred to 50 U.S.C.A. § 4565.
3 See Exec. Order No. 13,456, Further Amendment of Exec. Order No. 11,858 Concerning Foreign Inv. in the U.S., 73 Fed. Reg. 4677 (Jan. 23, 2008).
4 See Dep’t of the Treasury, Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons, 73 Fed. Reg. 70,702 (Nov. 21, 2008).
5 Id. at 27.
6 Id. at 12.
7 See Letter from Robert Pittenger et al., Member of Cong., to Hon. Gene L. Dodaro, Comptroller General, U.S. Gov’t Accountability Off. (Sept. 15, 2016).
8 See Cong. Research Serv., RL33388 (2016) at 27-28.
9 See 50 U.S.C. App. § 2170(f), transferred to 50 U.S.C.A. § 4565(f).
10 See Exec. Order No. 13456, Further Amendment of Exec. Order No. 11858 Concerning Foreign Inv. in the U.S., 73 Fed. Reg. 4677 (Jan. 25, 2008).
11 See Letter from Robert Pittenger to Hon. Gene L. Dodaro, supra note 3, at 1.
12 Pub. L. No. 107-56, Title X, § 1014, October 26, 2001; 42 U.S.C. § 5195c(e).
13 42 U.S.C. § 5195c(b)(2).
14 42 U.S.C. § 5195c(b)(3).
15 See Cong. Research Serv., RL33388 (2016) at 13.
16 Id. at 16.
17 See Letter from Robert Pittenger to Gene L. Dodaro, supra note 3, at 1.
18 Id. at 1-2.
19 See 50 U.S.C. App. § 2170(c), transferred to 50 U.S.C.A. § 4565(c).
20 50 U.S.C. §§ 1701-1707.
21 See Ralls Corp. v. CFIUS, 758 F.3d 296 (D.C. Cir. 2014).