Congress Seen Adding Clarity to Tricky Path for Foreign Deals

Legislation to overhaul how the U.S. reviews foreign investments could bring greater clarity to an otherwise mysterious process that has become a critical factor in corporate deal-making, attorneys told Bloomberg Law.

Congress is close to passing legislation to update the Committee on Foreign Investment in the U.S., which reviews foreign acquisitions of U.S. companies for national security risks. The bill would focus CFIUS’s attention on “countries of special concern,” for example.

The bipartisan effort, a top priority for both Congress and President Donald Trump, is largely driven by worries about technology-related investments from China.

The legislative details and any resulting regulatory guidelines could make it easier for businesses to understand the CFIUS review process, which is closed to the public, according to lawyers who specialize in foreign investment issues.

“The system is very opaque,” Doreen Edelman, a global trade attorney in the Washington office of Baker Donelson, told Bloomberg Law. “None of us are on the inside of these discussions when they’re made.”

It’s the first such overhaul in about a decade for a government panel that has significantly expanded its focus, raising the stakes for both U.S. businesses and foreign investors. In recent years, the caseload at CFIUS has surged, and a growing number of deals have been blocked or abandoned after a review.

“It used to be that we would look at deals and conclude eight times out of 10 that they had nothing to do with national security and wouldn’t likely raise CFIUS issues,” Judith Alison Lee, an international trade partner at Gibson, Dunn & Crutcher LLP, told Bloomberg Law. “Now, we have to look at these questions much more carefully.”

The legislation, dubbed the Foreign Investment Risk Review Modernization Act, would spell out new requirements and codify existing CFIUS practices in some cases. That would help increase awareness about how the process works, according to Nate Bolin, a partner at Drinker Biddle and Reath LLP.

“Investors like predictability and knowing the costs” of deals, he told Bloomberg Law.

The House overwhelmingly passed a version of the bill June 26, by a 400-2 vote. The Senate’s version is part of a broader defense policy bill. The two versions are expected to be reconciled as part of the House-Senate conference committee on the defense authorization bill.

Trump urged Congress in a June 27 statement to send him the CFIUS bill as quickly as possible. He said he plans to direct his administration to implement it “promptly and enforce it rigorously.”

Broad Authority

CFIUS, an interagency body led by the Treasury Department, has broad authority to address national risks posed by foreign investments. In addition to ordering conditions to mitigate security concerns, the committee may advise the president to block or suspend transactions. It can also take steps to unwind deals after the fact when the companies involved haven’t submitted the transaction for review.

“The stakes are huge,” Reid Whitten, a London partner at Sheppard Mullin LLP, told Bloomberg Law, referring to the authority the panel has and its expanding focus.

CFIUS was established by a 1975 executive order. It first came under the national spotlight in 2006 amid concerns about the proposed acquisition of commercial operations at six U.S. ports by Dubai Ports World. The controversial deal led to the 2007 Foreign Investment and National Security Act, which codified CFIUS and updated its procedures, with new congressional oversight provisions.

Over time, CFIUS’s view of what constitutes a national security risk has expanded to reach a wide range of deals, including those that could jeopardize U.S. economic security, attorneys said.

“What we’re seeing is the exponential expansion of CFIUS’s asserted jurisdiction — not so much the basis for the committee’s views, but what they’re interested in,” Whitten said.

In January, CFIUS concerns prompted Ant Financial, a Chinese company, to walk away from its proposed tie-up with MoneyGram International Inc. U.S. lawmakers warned that the deal would have harmed national security by giving China access to the nation’s financial infrastructure. Trump’s decision in March to block Singapore-based Broadcom Ltd.’s proposed acquisition of Qualcomm Inc. was based on concerns about Chinese advancing past the U.S. in 5G wireless technology.

Beyond Mergers

The legislation would codify CFIUS’s practice of looking at deals that aren’t necessarily full mergers. It would cover non-controlling minority investments, for example. It would add several factors to be considered in a CFIUS review, including whether a transaction is likely to release sensitive personal data of U.S. citizens to a foreign entity that could exploit it.

Whitten said the legislative effort is a mixed bag for businesses. It could help clarify the types of deals that CFIUS is concerned about, but it would also result in new regulatory burdens, such as filing fees and mandatory notification of certain transactions, he said.

Despite the new requirements, the bill enjoys strong support from business groups such as the U.S. Chamber of Commerce, particularly after lawmakers agreed to drop a provision that would have exposed joint venture deals to more rigorous scrutiny.

“With the joint venture change, I think a lot of the concern from the business community has died down,” Lee said.

The CFIUS review process has become time-consuming, largely because CFIUS doesn’t have adequate staff to deal with its growing caseload, Lee said. The proposed filings fees are intended to address that problem.

“I think the existing process has been very difficult for the business community to navigate,” she said. “So, anything that would modernize the process and help to expedite things would be good for companies.”

— With assistance from Jacob Rund.

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