United States: 2018 Trends For CFIUS Reviews

The Committee on Foreign Investment in the United States ("CFIUS") is an interagency body which has the authority to assess the national security implications of transactions that could result in control of U.S. businesses by a foreign person. The CFIUS is chaired by the U.S. Secretary of Treasury and includes representatives from 16 U.S. departments and agencies.¹ Over the last thirty years, the CFIUS has advised the president concerning foreign investment, particularly with respect to transactions that, for one reason or another, the CFIUS believes the president should review in the interest of national security. Under the CFIUS's guidance, U.S. presidents have only blocked a total of five transactions, two of which have happened in the last six months under President Trump. This article provides a brief summary regarding recent cases and proposed legislation that will impact foreign investment in the United States.

1. The members of CFIUS include the heads of: the Department of Treasury, the Department of Justice, the Department of Homeland Security, the Department of Commerce, the Department of Defense, the Department of State, the Department of Energy, the Office of the U.S. Trade Representative, and the Office of Science and Technology Policy.

The Cases of Canyon Bridge Capital Partners and MoneyGram

On September 13, 2017, President Trump blocked Canyon Bridge Capital Partners Inc., an investment firm backed by Chinese investors, from acquiring Lattice Semiconductor Corporation, a publicly traded semiconductor company based in Oregon. Typically, the CFIUS review process begins when the parties to a transaction make a voluntary filing to CFIUS. Frequently, parties will submit a joint voluntary notice to CFIUS, which will be updated and resubmitted as a final voluntary notice upon receipt of feedback from CFIUS. In this case, the parties updated their voluntary notice two separate times based on feedback from CFIUS. Ultimately the case was blocked. In blocking the transaction, the U.S. government cited national security risks including: the potential for the transfer of intellectual property to a foreign party; the Chinese government's role in the transaction; the importance of the semi-conductors in the U.S. government; and the use of Lattice products by the U.S. government.

Similarly, on January 2, 2018, Ant Financial, a Chinese company owned by Alibaba, announced its proposed acquisition of MoneyGram International was being blocked by the CFIUS. MoneyGram provides financial services around the world. The fact that this transaction was blocked was surprising because Alibaba and Ant Financial had received CFIUS clearance in previous transactions and MoneyGram arguably does not deal with particularly sensitive information from a national security perspective. Unlike the Canyon Bridge case, MoneyGram does not operate in the defense sector nor does it deal with critical infrastructure, such as semiconductors. Additionally, both MoneyGram and Ant Financial offered several amended proposals to help mitigate the concerns of CFIUS. Ultimately, the proposed transaction was denied because the Chinese government holds a 15% stake in Ant Financial, and it was feared the data held by MoneyGram could be used by the Chinese government to target activists, journalists, and others.

New Developments in CFIUS Legislation

On November 8, 2017, Congress introduced the Foreign Investment Risk Review Modernization Act of 2017 ("FIRRMA"). The FIRRMA is designed to modernize and strengthen the CFIUS to more effectively guard against the risk to national security of the United States posed by certain types of foreign investment. The FIRRMA will allow CFIUS to more closely vet foreign acquisitions; grant a broader definition of "national security"; and expand CFIUS investigations to include minority investments in "critical technology," "critical infrastructure," and joint ventures. Additionally, while CFIUS reviews are usually voluntary, the legislation would require foreign investors that are 25% or more owned or controlled by foreign governments to go through CFIUS review when acquiring a 25% or more stake in a U.S. business. While a 25% stake in a U.S. business could result in "control," if that stake were to be the largest single stake, it could be a minority interest also, which represents an important expansion of CFIUS's influence. The CFIUS would also block the deal if the transaction would give foreign governments the capability to engage in cyber-attacks against the U.S. Additionally, the legislation focuses on CFIUS's ability to review investments in "emerging technologies," which along with other developments, would drastically impact Chinese investment.

On January 18, 2018, in the latest development, FIRRMA hearings were held by the Committee on Banking, Housing, and Urban Affairs. These hearings took a broader look at CFIUS. These hearings focused on: (1) CFIUS's role in the U.S. national security structure; (2) the changing nature of national security threats to the U.S.; and (3) opportunities for CFIUS to address those threats. Additionally, these hearings touched on China's efforts to compete with the U.S. economically, militarily, and politically. Finally, there was also a focus on Chinese policies in key sectors, including semiconductors, and the challenges these policies pose to U.S. national security. FIRRMA currently has a low probability² of being enacted in its entirety; however, it is possible that certain provisions could be enacted by themselves.³

Impact on Future Investment

Following the blocking of the Lattice and MoneyGram acquisitions and subsequent proposed legislative reforms, industry experts expect foreign investment deals to be more closely scrutinized by the CFIUS. While CFIUS does not release data related to its filings until more than a year after the covered period, it is expected that CFIUS reviewed more than 200 transactions in 2017, surpassing the 172-benchmark set in 2016.⁴ The mark set in 2016 was a 20% increase from the 143 notices submitted to the Committee in 2013.⁵ Similar to 2016, most of the 2017 transactions likely involved Chinese investment. However, historically CFIUS has also been concerned with investments from other countries such as France, Canada, the United Kingdom, and the Netherlands. While most of the problematic transactions have historically occurred in the manufacturing sector, the CFIUS will also continue to focus its attention on any transaction potentially impacting national security and involving businesses that maintain or have access to potentially sensitive data. Other industries, such as artificial intelligence, innovative military technology, semiconductors, and anything that could help a foreign government cyber-attack the U.S., will continue to face higher scrutiny when reviewed by the CFIUS in 2018.

If you are concerned about how a future investment will be affected by the new CFIUS proposals, or simply seek more information about CFIUS filings, we encourage you to contact us. We will continue to report on CFIUS developments in future articles.

Footnotes

1. According to Skopos Labs, FIRRMA has a 26 percent chance of being enacted. GovTrack, Foreign Investment Risk Review Modernization Act of 2017, https://www.govtrack.us/congress/bills/115/s2098 (last visited February 15, 2018).

2. In the most recent development, the scope of the bill was under review due to concerns the changes would be too expansive.

3. U.S. Department of Treasury, Resource Center, Covered Transactions, Withdrawals, and Presidential Decisions 2014-2016, https://www.treasury.gov/resource-center/international/foreign-investment/Documents/CFIUS_Stats_2014-2016.pdf (last visited January 22, 2018).

4. U.S. Department of Treasury, Resource Center, Committee on Foreign Investments in the United States: Annual Report to Congress, https://www.treasury.gov/resource-center/international/foreign-investment/Documents/Unclassified%20CFIUS%20Annual%20Report%20-%20(report%20period%20CY%202015).pdf (last visited January 22, 2018).

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