A bill introduced to the US Senate last month proposes to expand the membership and review scope of the Committee of Foreign Investment in the United States (CFIUS). CFIUS is responsible for assessing the national security threat of foreign direct investments in the US or involving US assets. CFIUS has the authority to negotiate conditions to mitigate any perceived threat, or recommend to the President to block or unwind such investments. While Congress grants authority to CFIUS, CFIUS’ enforcing agencies adhere to the guidelines of the Presidential Administration on which transactions deserve particular scrutiny. This alert describes how the new bill and Administration may affect such future foreign investments.
CFIUS and Recent Trends
CFIUS may review any transaction falling within the broad economic activity categories of critical infrastructure, critical industries or homeland security. Within these categories, CFIUS has identified economic sectors that likely possess a national security concern, such as telecom, energy, cyber and physical infrastructure services, and more recently added in 2013, chemical, food and agriculture, and information technology.
During the Obama Administration, investments in the advanced technology space, specifically semiconductors, were increasingly affected by CFIUS review:
- Proposed acquisition of Aixtron, a German-based semiconductor firm with assets in the US, by a Chinese firm was blocked by Presidential action due to national security risks posed by the military applications of the overall technical body of knowledge and experience of Aixtron;
- Proposed acquisition of Lumileds, a subsidiary of Dutch company Philips NV, by a Chinese consortium was abandoned at the request of CFIUS due in part to Lumileds’ expertise in semiconductor chips using gallium nitride;
- Proposed acquisition of Global Communications Semiconductor by a Chinese firm was abandoned after CFIUS determined that it would recommend the President block the transaction; and
- Proposed acquisition of Western Digital, a computer data storage company, by a Chinese-state owned company was terminated due to intense scrutiny by CFIUS.
Despite being the first President to block a transaction under CFIUS, which he did twice, President Obama generally had a hands-off approach to CFIUS, and promoted an open investment policy. The latest annual official data showed the lowest percentage of transactions subject to the second stage of investigation and mitigation assessment since official data was first made public.
New Bill and Administration
The new bipartisan bill provides the Department of Agriculture and Department of Human Health Services with permanent membership in CFIUS (currently, there are nine permanent members), and expressly allows CFIUS to consider agriculture and food-related criteria in its national security assessment. While these criteria are already within CFIUS discretion, this bill ensures that transactions are specifically reviewed for the potential impact on American food and agricultural systems. If such a bill was in place back in 2013, it may have prevented CFIUS from approving the $7.1 billion acquisition of Smithfields Foods Inc., then holding 26% of the domestic US hog market, by a Chinese firm – the largest takeover of a US company by a Chinese firm to date.
In addition to this new bill, we would expect CFIUS to expand in the following ways as a result of the change in Administration:
- Increase in the extent of CFIUS assessments, and as a result, a potential chilling effect or increased use of CFIUS premiums on acquisitions of US companies or companies with US assets;
- As stated by the Secretary of Treasury (the head Department in CFIUS) in his confirmation hearing, labor and employment effects to become part of the assessment on national security impact; and
- An informal reciprocity test assessing whether a US outbound foreign investment into the country origin of the subject transaction investment would be restricted (particularly implicating China due to their significant foreign investment restrictions).
As a result, we recommend that companies should consider the following:
- Structure of foreign investments — CFIUS’ review takes into account the country and government ownership of investing entities, their voting and board proportion, and their access to certain sensitive business areas of US companies or US assets. The extent and structure of foreign investments into a company, whether such company currently or expects to have US assets, can be managed from the onset with CFIUS in mind, such as through specific ownership and governance structures or CFIUS pricing and covenants.
- Additional time for the CFIUS process — while the review process period is strict, requesting parties typically provide pre-filing review requests. CFIUS may extend this pre-filing period to take into account the steadily increasing number of applications CFIUS is reviewing and the increased effort by CFIUS to identify transactions of interest not voluntarily notified.
Borenius’ lawyers are available to assist in addressing any questions you may have regarding this client alert. Please feel free to contact any of the Borenius attorneys listed in this alert or those with whom you usually work.