The election of Donald Trump as President of the United States is expected to significantly transform U.S. foreign policy, particularly with respect to trade and economic sanctions. Among the economic tools available to the President for protecting U.S. national security is the Committee on Foreign Investment in the United States (CFIUS). CFIUS, acting under the direction of the President, has the power to suspend, prohibit or seek modifications to proposed investments by foreign persons in U.S. companies and assets which raise specific national security concerns. In recent years, CFIUS has made headlines for its involvement in several high-profile transactions by foreign firms, including notable cases involving Chinese investors.
As under previous administrations, foreign investors should consider the potential U.S. national security implications of any proposed investment in the United States. This includes direct investment in critical infrastructure and noncritical infrastructure that raises questions of information security, geography, major suppliers or other factors related to U.S. national security.
Thus far, the incoming administration has not made any specific proposals with respect to CFIUS. It is also unclear to what extent the President-elect will follow through with aspects of his campaign rhetoric in regard to foreign trade and investment. Policy changes are likely to crystallize rapidly during the first few months of the new administration starting on 20 January 2017.
Under the Foreign Investment and National Security Act of 2007 (FINSA), the President is authorized to review mergers, acquisitions and takeovers of U.S. companies or assets by any foreign person where the transaction could result in foreign control of a target company or asset which is engaged in interstate commerce (collectively, “covered transactions”). FINSA calls for additional investigation of covered transactions involving foreign government-controlled entities, potential threats to U.S. national security or critical U.S. infrastructure, as defined in the act.
FINSA tasks the Director of National Intelligence with performing an analysis of any threat to U.S. national security posed by any covered transaction. CFIUS’s members include the heads of the Departments of Treasury, Energy, Commerce, Homeland Security, Justice and Defense, as well as the U.S. Trade Representative and the Director of the Office of Science and Technology Policy, among others. Any party to a covered transaction may initiate a review by submitting written notice to CFIUS. However, CFIUS may also unilaterally review any covered transaction, whether proposed or completed, that did not undergo CFIUS review or that previously underwent CFIUS review on the basis of false or misleading information or where a party has breached an agreement with CFIUS pertaining to a transaction.
CFIUS reviews follow a three-step process with deadlines as defined in FINSA. The first step is a 30-day review of any covered transaction, which does not begin until after a formal filing. The second step is a 45-day investigation of any covered transaction involving a foreign government-controlled entity or which could impair U.S. national security or result in foreign control of critical U.S. infrastructure.
Additionally, parties to a covered transaction typically engage in informal discussions with CFIUS members in advance of submitting a filing for review. These informal discussions provide an opportunity to gauge objections and conduct preliminary negotiations over changes to proposed investments needed to satisfy CFIUS members’ concerns regarding U.S. national security considerations.
The President has 15 days after the conclusion of an investigation to publicly announce a determination. The President may only block a covered transaction where there is credible evidence that the transaction will impair U.S. national security and where other U.S. laws are inadequate to address the perceived risks. These laws include, for example, the Export Administration Regulations and International Traffic in Arms Regulations.
As of 2016, the President has exercised authority to oppose a covered transaction in only one case. That case involved the 2012 acquisition of a wind farm in Oregon by Ralls Corporation, whose owners included Chinese nationals. Although the parties did not submit a filing to CFIUS prior to the acquisition, CFIUS determined, after the acquisition, that the transaction posed a threat to U.S. national security due to the wind farm’s proximity to a U.S. Navy training facility. On 28 September 2012, President Obama issued an executive order calling for Ralls to divest itself of the wind farm. (The U.S. Court of Appeals for the District of Columbia largely upheld the President’s order in July 2014.)
Negative publicity surrounding CFIUS investigations or congressional opposition may, in some cases, be sufficient to result in the termination of a proposed covered transaction. This was the case, for example, with China National Offshore Oil Corporation’s proposed acquisition of Unocal in 2005 and China-based Northwest Nonferrous International Investment Corporation’s proposed acquisition of Firstgold in 2009. In 2011, Huawei abandoned its proposed acquisition of 3Leaf, a U.S.-based server company following scrutiny from CFIUS. In 2013, in response to CFIUS’s concerns, Japan’s SoftBank and Sprint Nextel reportedly agreed to drop Huawei as a supplier for certain mobile projects in connection with Softbank’s acquisition of Sprint Nextel. In 2016, members of Congress called on CFIUS to review Chongqing Casin Enterprise Group’s proposed takeover of the Chicago Stock Exchange.
Most recently, in November 2016, CFIUS reportedly objected to the acquisition of Germany-based Aixtron SE by a subsidiary of China-based Fujan Grand Chip Investment Fund LP due to U.S. national security concerns. Although CFIUS does not have formal jurisdiction over foreign transactions, the committee has occasionally opined on overseas acquisitions involving suppliers to U.S. defense contractors or sensitive technologies.
Despite these high-profile cases, CFIUS has approved the vast majority of covered transactions it has reviewed, including acquisitions of U.S. firms by Chinese investors. These include, for example, Shuanghui International’s acquisition of Smithfield Foods and Wanxiang Group’s acquisition of A123 Systems, both in 2013.
Looking forward, CFIUS may serve as a focal point for discussions concerning foreign investment controls under the new administration. At this time, we recommend that clients take a wait-and-see approach to this and other issues. As a best practice, clients may choose to designate staff members who are responsible for monitoring and communicating U.S. legal and regulatory updates to internal stakeholders. Clifford Chance will provide updates and analysis to our clients as developments warrant.