Don’t Shut Down Foreign Investment in the Name of Security

Over the past year, U.S. government national security reviews have been front and center in several large and public international bids for investments in the United States. Members of Congress have increasingly expressed their concern with the implications of many such deals. It is difficult to predict how the incoming administration might review proposed foreign investments. On the one hand, President-Elect Trump’s business background may reflect a belief in the critical importance to the U.S. economy of capital investments, including from overseas investors.  But significantly on the other hand, he has articulated a strong America-first national security and trade policy, and has expressed concerns regarding Chinese trade practices. The president-elect’s 7 Point Plan To Rebuild the American Economy, for example, labels China as a “currency manipulator” engaged in “unfair” and “illegal” practices. These assertions may well reflect a greater willingness on the part of the incoming administration to halt or impose constraints on deals it perceives as creating national-security risks.

One linchpin of such potential changes in approach would likely be the inter-agency U.S. government gatekeeper for foreign investments in U.S. companies called the Committee on Foreign Investment in the United States, or CFIUS. This watchdog body considers the national-security implications of proposed corporate transactions that would export ownership or control of businesses or companies with significant operations within the United States. CFIUS particularly scrutinizes industries with obvious ties to national security, such as aerospace and telecommunications, but it also has examined foreign bids for U.S. agribusinesses, financial institutions and media companies. Of significant concern is the potential transfer of information – both consumer and commercial – that could be misused or exploited by foreign companies and governments, like restricted defense technology or private data on individual Americans stored in credit, healthcare and insurance industry databases.

CFIUS can take steps to mitigate perceived harms – either by imposing limitations or conditions on the closing of any deal, or by vetoing the contemplated acquisition entirely if it believes that no effective limitations or conditions can be imposed. Its decisions are keenly watched in international business; although not formally reported or recorded like case law, they are cited and discussed as if they were.   

While even simple changes to committee personnel (the secretaries of its member agencies: Department of the Treasury (chair), Department of Justice, Department of Homeland Security, Department of Commerce, Department of Defense, Department of State, Department of Energy, Office of the U.S. Trade Representative, and Office of Science & Technology Policy) are likely to change how it scrutinizes transactions, the incoming Administration could also more formally enhance the committee’s authorities in several ways:

First, the new administration could seek to expand the scope of transactions subject to CFIUS review. CFIUS authority currently extends only to transactions by foreign entities that result in ownership or control of U.S. businesses, or international businesses with operations in the United States. CFIUS’s authority could be expanded to reviews of investments in startup businesses in the United States (“greenfield” investments), or investments in foreign companies that, despite having no manufacturing or other on-the-ground presence in the United States, nevertheless sell their goods or services to American citizens. Another new coverage area could be investments that by design do not result in foreign operating control (“passive” investments).

Second, the new administration could seek to change the operating presumptions CFIUS uses to assess individual transactions. CFIUS reviews are currently based on established guidance for identifying and assessing national security risks. This guidance could be expanded to include regulatory presumptions that would put a thumb on the scale of certain transactions, or transactions from certain countries. One such presumption, for example, could direct CFIUS to assume national security risks posed by foreign acquisitions of U.S. semiconductor companies, which then would require mitigating factors or the imposition of mitigation measures, in order to obtain CFIUS approval.  An additional possibility is the imposition of “reciprocity test” for transactions, whereby the committee considers whether a similar investment by a U.S. company in the investor’s home country would be permitted by that home country’s rules. 

Finally, the new administration could instruct CFIUS to adopt an “all battle stations” review, creating an environment in which applicants might have to overcome a generalized presumption of national security risk. A strict reading of current law, in fact, already requires this type of approach in seeking certifications from the assistant secretaries from the agencies represented on CFIUS that there are “no unresolved national security concerns” posed by the transaction (emphasis supplied). But pragmatically, CFIUS currently seeks to “mitigate” national security concerns, not necessarily eliminate them entirely. Regulatory guidance could be changed to require “elimination” not “mitigation” of national security concerns, consistent with a strict reading of governing law. Doing so would make it far less likely that CFIUS would approve certain deals, such as those that involve businesses having a nexus to U.S. critical infrastructure or the defense industrial base.

For now it is anyone’s guess what changes are on the horizon for CFIUS. But the U.S. government should make clear that America remains open to international investments and capital, even as it steps up efforts to protect national security.