Increased Scrutiny of Foreign Investment in the United States Creates Deal Risk
Since introducing legislation in late 2017 seeking to expand the jurisdiction of the Committee on Foreign Investment in the United States, Congress has continued to evaluate the proposed , or “FIRRMA.” Although FIRRMA still has a long way to go before it becomes law, recent CFIUS actions point to increased risks for transactions involving non-US entities. CFIUS has been subjecting transactions to critical scrutiny, with particular attention to concerns over US consumer data security and the protection of national security interests.
In late 2017, legislation was introduced that sought to expand the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS). We previously reported on the scope of that proposed legislation which, as we noted, likely would increase scrutiny of transactions involving non-US entities and US companies with “technology, components, or technology items that are essential or could be essential to national security.” In addition to increasing CFIUS enforcement, the legislation would reform the CFIUS review process by increasing the initial review period from 30 to 45 days and requiring mandatory filings for transactions involving acquisitions of 25 percent or more of the voting interests in US businesses by foreign entities held in part by foreign governments. Since that time, Congress has continued to evaluate the proposed reform bill, the Foreign Investment Risk Review Modernization Act (FIRRMA). The Trump Administration publicly announced its support for FIRRMA, lauding the bill’s efforts to address national security concerns while “preserving the longstanding United States open investment policy.”
Although FIRRMA still has a long way to go before it becomes law, recent CFIUS actions point to increased risks for transactions involving non-US entities. CFIUS has been subjecting transactions to critical scrutiny, with particular attention to concerns over US consumer data security and the protection of national security interests. The following table demonstrates CFIUS’s recent high level of activity:
CFIUS reported conducting 79 investigations in 2016, up from 66 in 2015 and 51 in 2014, continuing an upward trend in the number of CFIUS investigations conducted every year since 2009. A similar surge appears in the number of notices withdrawn and refiled (from 7 in 2014, up to 15 in 2016) and in the number of transactions abandoned for failure to receive CFIUS approval (from 2 in 2014, up to 5 in 2016). We expect CFIUS to continue to be very active under a Trump Administration skeptical of the increasing threat from China to US national security interests.
Following are details on recent CFIUS actions:
- In September 2017, following a 75-day CFIUS review, President Trump issued an order blocking Chinese-government backed Canyon Bridge Capital Partners from acquiring Lattice Semiconductor Corp. This is only the fourth time a transaction has been blocked by a US president pursuant to the CFIUS statute; all four transactions involved Chinese investors.
- Recently, on January 2, 2018, Ant Financial, controlled by Alibaba founder Jack Ma, abandoned its contemplated merger with MoneyGram International Inc., a US-based company, after the deal failed to obtain CFIUS approval amid concerns over US consumer data security and privacy.
- It has also been reported that CFIUS will block Chinese buyer HNA Group Co. from investments in two separate transactions, one for a majority stake in the hedge fund firm SkyBridge Capital LLC and the other involving the US-based petroleum products storage and logistics business of Glencore, should HNA fail to provide sufficient information on its shareholders.
Despite CFIUS’s recent increased activity, Congress is actively considering the FIRRMA legislation. At hearings on January 18 and January 25, several US senators expressed support for FIRRMA, specifically pointing to concerns about Chinese investment in the United States and the possibility of inappropriate access to US technology and know-how. The Trump Administration also has expressed support for FIRRMA in its current form.
Other policymakers have expressed concerns about the jurisdictional scope of CFIUS under the draft FIRRMA legislation. Scott Kupor, chair of the National Venture Capital Association and managing partner at the venture capital firm Andreessen Horowitz, testified, noting that FIRRMA, if passed, would raise “significant questions when a US startup accepts foreign investment, even if that investment is for a small stake in a startup or when co-investing with US investors.” Kupor also noted his concern about CFIUS filing obligations under FIRRMA for US-based venture capital funds that have “any amount” of foreign investors. While others expressed concern that if FIRRMA is passed, “[f]or the first time, CFIUS would review outbound international commercial activity, including many thousands of non-sensitive [intellectual property] and technology licensing transactions, even with friendly nations.” Policymakers further cautioned that “FIRMMA would turn CFIUS into a supra-export control agency, duplicating long-standing US export control regimes and unilaterally limiting the ability of American firms to do business around the world.” It was recently reported that Congress is considering amendments to address these concerns.
While it is presently unclear how FIRRMA will evolve in Congress, the legislation likely will advance in 2018, potentially becoming law by year’s end.