The Welcome Committee for Foreign Investment in the United States
The national security, economic, and other strategic policies of the United States are advanced publicly and privately by a host of well-known U.S. government agencies and departments, like the Departments of State and Commerce, the Central Intelligence Agency, and many more. But there are other, less familiar government bodies involved in U.S. national security. One such body is an inter-agency panel called the Committee on Foreign Investment in the United States (CFIUS). CFIUS is responsible for reviewing the national security implications of foreign investments in U.S. companies or operations. Recent calls for a review of CFIUS’ authority may present a opportunity to ensure it has the tools it needs to properly evaluate transactions in a world of complicated corporate structures and evolving technology, but such calls also present a risk of imposing protectionist—and likely partisan—view on a government body under the guise of providing additional tools and remedies.
The Secretary of the Treasury is the chairperson of CFIUS and various other agency heads sit on the panel, including but not limited to heads of the Department of Justice and Department of Defense. The review process typically begins with the filing of a voluntary notice by parties to the transaction, following which CFIUS may decide as part of its review to conduct an investigation. If CFIUS finds that a covered transaction (i.e. “any merger, acquisition, or takeover that is proposed or pending after August 23, 1988, by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States”) presents national security risks not otherwise addressed by law, CFIUS can impose conditions on the transaction parties or refer the transaction to the U.S. president.
On September 15, 2016, sixteen U.S. lawmakers, anxious about recent Chinese acquisitions in the United States, sent a letter to the U.S. Government Accountability Office (GAO) questioning whether CFIUS has sufficient statutory and administrative authorities to do its job. Just two weeks after sending this letter, Delaware corporation Lexmark International, Inc. disclosed in a September 30, 2016 SEC filing that CFIUS approved the proposed buy-out of Lexmark by a Chinese consortium.
Of particular note, the lawmakers asked the GAO to explain whether special consideration ought to be given to companies under state control, particularly those in China or Russia. State ownership or foreign government control of an enterprise is a factor in CFIUS’ consideration, but the fact that the foreign person at issue is controlled by a foreign government does not always mean there is a corresponding national security risk posed by the transaction. Notwithstanding the potential governance and value issues with an enterprise run by a state, state-owned-enterprises (SOEs) are unlikely to disappear from the economic landscape anytime soon. Further, a careful review of CFIUS’ 2014 Annual Report to Congress (the latest one available) shows that the number of notices of covered transactions filed by China has remained relatively steady over the last few years—23, 21, and 24 notices in 2012, 2013 and 2014, respectively.
Although not raised by the sixteen U.S. lawmakers, perhaps the GAO should focus its inquiry on the role of the president in the CFIUS review and decision-making process. Some commentators speculate that the true ability of CFIUS to stop a transaction appears to primarily flow from a threat that CFIUS may refer a transaction to the president for further action. In other words, the negative publicity associated with a CFIUS referral appears to be a driving factor behind foreign investors’ decisions to withdraw from certain deals. To the extent that it is true, it makes sense to evaluate the need for additional statutory authority to ensure consistent CFIUS-related actions undertaken by subsequent presidential administrations with different values and mindsets. However, according to CFIUS data, between 2008 and 2012 there was only one presidential decision on a CFIUS referral. According to its 2014 Annual Report to Congress, CFIUS received 627 notices of covered transactions between 2009 and 2014. Of that number, 20 notices were withdrawn during the review stage and 47 notices were withdrawn during the investigation phase.
CFIUS serves an extremely important function in the national security space. An analysis of CFIUS’ effectiveness presents a great opportunity to ensure it has adequate resources and authority in an age of technology deals, evolving threats to the United States, and increasing foreign investment in the United States. However, if such inquiries are simply the result of protectionist mindsets and general suspicion—without statistical substantiation—of widespread and risky foreign intrusion into the U.S. economy, then the GAO should conduct its review of CFIUS carefully and in accordance with its mandate as an independent, nonpartisan agency.