Modernizing Foreign Investment in the US: CFIUS and FIRRMA
Those interested in finance and law may be familiar with the blocked $1.3 billion acquisition deal between Lattice Semiconductor Corporation, a U.S. chipmaker, and Canyon Bridge Capital Partners, a reportedly Chinese-backed private equity firm. The deal, following a review and recommendation by the Foreign Committee of Investment in the United States (CFIUS), was blocked by the president before completion. Recently, however, another takeover transaction of Germany’s Bayer for U.S. seeds group Monsanto was approved without any concerns from CFIUS. Both Bayer and Monsanto will complete the deal by early 2018.[i] So, how is it that one transaction was blocked and the other was not? Rising anti-Chinese sentiments have resulted in hostility towards deals with Chinese companies via CFIUS filings, which has, in turn, amounted to legislation strengthening CFIUS.
CFIUS was created in 1988 to be an interagency committee of the Treasury Department that reviews and analyzes takeover deals of U.S. companies by those in foreign countries. CFIUS reviews these transactions (especially mergers & acquisitions) to determine any national security risks that may result.[ii] Filing for CFIUS review is a voluntary process; however, in some cases, it is effectively mandatory. These cases include transactions between companies in specific industries and produce weaponry, critical information, and certain technologies. CFIUS reviews these transactions over the span of 30 or 45 days, and at the end of the review, they either clear the deal, or they recommend that the president block the transaction because it poses a national security risk.
The Lattice block resulted in some backlash from the news agency Xinhua, whose reporters claimed that Trump’s decision was “penny wise and pound foolish” and a “tool to implement protectionism.” It is unusual for Trump to “directly shut down a business deal over national security concerns,” especially since CFIUS blocks are so rare (this was just the fourth block in the last 25 years). [iii] Worried Chinese investors were not alone- after the block, shares of other companies involved with Chinese companies under CFIUS review fell. These companies include MoneyGram (fell 4.4%) and Genworth Financial (fell 2.7%). Supporters of the block; however, point to China’s predatory behavior in trying to acquire sensitive technology, and stress the importance of more scrutiny. They claim that the block was not a political move, but one in the interest of national security.[iv]
Opponents of the block who accuse Donald Trump of using protectionist policies may be valid- since Donald Trump’s presidency, there has been an increased anti-Chinese sentiment in the White House. Throughout his campaign, Trump took to Twitter to disparage China and its trade practices, bragging that he “win[s] against China,” saying “they have destroyed entire industries by utilizing low-wage workers, cost us tens of thousands of jobs, spied on our businesses, stolen our technology,” and he also accused China of “rap[ing] our country.”[v] Trump’s tweets were followed by a promise to toughen trade policies, and recently, there was a report claiming that Trump may begin a trade war with China.[vi] This blatant hostility towards China is correlated with the new legislation to strengthen CFIUS and monitor transactions between China and the U.S.
In a June 13 testimony to the Senate Armed Services Committee, Joint Chiefs of Staff Chairman Joseph Dunford, and Defense Secretary James Mattis argued to expand CFIUS’ purview.[vii] Currently, CFIUS’ process of review is outdated compared to the increasing number of transactions between the U.S. and foreign entities. According to a recent report by White & Case, “China has reportedly committed to investing $150 billion to advance its semiconductor industry,” so Chinese investors are likely to continue considering the U.S. for investment opportunities. In fact, Chinese investment into the U.S. spiked to $45.6 billion in 2016, highlighting the augmented interest.[viii] This interest has manifested itself in many pending transactions that CFIUS struggles to review. The combination of the interest in the United States and the increased uncertainty about national security led to a new CFIUS modernization bill, entitled the Foreign Investment Risk Review Modernization Act (FIRRMA).
The legislation, proposed by Senator John Cornyn (R- TX) and Representative Robert Pittenger (R-NC), overhauls CFIUS by increasing the its scope of review to more companies and types of transactions, creating mandatory review in some cases, and granting CFIUS a larger time frame. Additionally, the new legislation would consider different types of transactions, including joint ventures, in addition to mergers and acquisitions. Many Chinese companies have reportedly bypassed CFIUS review in the past by conducting joint ventures instead of mergers and acquisitions. The legislation, which has garnered bipartisan support, aims to account for these alternative forms of transactions, by including any kind of non-passive investment. FIRRMA’s Chinese opponents argue that their transactions create American jobs, which is in line with Trump’s platform.[ix] However, the growing sentiment against China outweighs the potential for new jobs.
Generally, the lawyers’ insights considering FIRRMA have been to proceed with caution. Those from Skadden Arps argue that some of the new proposals in the legislation are unnecessary, which may be addressed as the bill moves through Washington. Skadden, Covington, and White & Case all mention the new “Countries of Special Concern” clause that is included in FIRRMA that implicitly includes China and adds to the rising caution that the policy is protectionist. Covington’s report concludes that it is likely that FIRMMA will become law, but there may be some amendments along the way. According to White & Case, CFIUS is already overwhelmed with a large amount of deals, and opening its scope will only further exacerbate the review process. For this reason, one of two things will happen: either CFIUS will expand and hire more employees, which by itself takes time and money to recruit and retain, or an amendment will be proposed to narrow the new scope. Though the CFIUS process may be outdated, the new proposal seems to simply be a reaction to increased Chinese investment; one that will create a larger burden for the Committee.
[i] Reuters Staff, “CFIUS clears Bayer’s planned takeover of Monsanto,” Reuters, December 1, 2017, accessed December 2, 2017, https://www.reuters.com/article/us-monsanto-m-a-bayer-cfius/cfius-clears-bayers-planned-takeover-of-monsanto-idUSKBN1DV3UZ.
[ii]“The Committee on Foreign Investment in the United States (CFIUS)”, Department of Treasury, accessed December 3, https://www.treasury.gov/resource-center/international/Pages/Committee-on-Foreign-Investment-in-US.aspx
[iii] Sidney Leng, “Trump ‘unwise’ to block Chinese chip maker deal, Xinhua says,” South China Morning Post, September 18, 2017, accessed December 5, 2017, http://www.scmp.com/news/china/diplomacy-defence/article/2111486/trump-unwise-block-chinese-chip-maker-deal-xinhua-says.
[iv] The Editorial Board, “The Lattice Warning to China,” The Wall Street Journal, September 15, 2017, accessed December 5, 2017, https://www.wsj.com/articles/the-lattice-warning-to-china-1505431750.
[v] Veronica Stracqualursi, “10 times Trump attacked China and its trade relations with the US,” ABC News, November 9, 2017, accessed December 5, 2017, http://abcnews.go.com/Politics/10-times-trump-attacked-china-trade-relations-us/story?id=46572567
[vi] Keith Bradsher, “Trump’s First Major Trade Fight With China Could Be Over Solar Panels, The New York Times, December 1, 2017, accessed December 5, 2017, https://www.nytimes.com/2017/12/01/business/trump-china-trade-solar.html
[vii] William McConnell, “Washington Hellbent on Strengthening Cfius,” The Street, June 24, 2017, accessed December 2, 2017, https://www.thestreet.com/story/14193995/1/washington-hellbent-on-strengthening-cfius.html.
[viii] David J. Levine, Raymond Paretzky, Joel R. Grosberg, Sherry Liu, “Current Trends and Proposed Legislation Pose Enhanced CFIUS Risks and Timing Considerations for Foreign Investment Transactions in the United States,” November 17, 2017, accessed December 3, 2017, https://www.lexology.com/library/detail.aspx?g=b16a0166-dd67-447d-817c-acd276223619.
[ix] Ana Swanson, “Targeting China’s Purchases, Congress Proposes Tougher Reviews of Foreign Investments,” The New York Times, November 8, 2017, accessed December 3, 2017, https://www.nytimes.com/2017/11/08/us/politics/china-foreign-investments.html.