CFIUS and the New Trump Administration: Your Top Ten Questions Answered

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:

• What types of deals will receive heightened scrutiny?
• Will it become more difficult to get clearance for acquisitions that raise national security concerns?
• Will the review process become a tool to halt Chinese acquisitions?
• Will the Trump administration use the CFIUS process as leverage to ensure reciprocal access by U.S. investors to foreign countries?
• Will the committee give a more prominent role to economic security issues instead of only focusing on national security, as is the current case?

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.

The Top Ten CFIUS and Foreign Investment Questions Answered (or Is This the Dawning of the Age of the CFIUS?)

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:

1. Manufacturing
2. Finance, information, and services
3. Mining, utilities, and construction
4. Wholesale and retail trade

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...