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International Trade – Navigating Increased Oversight of Foreign Investment in the U.S.

February 27, 2019

Contributors: Alan W.H. Gourley and Maria Alejandra del-Cerro.


Federal law has long provided the president with the authority to review and block foreign investment in sensitive sectors of the American economy. Originally focused primarily on the aerospace and defense sectors, the scope of national security has expanded through law and practice to include critical technologies and infrastructure. At the behest of Congress, the governing rules are being rewritten to help maintain the United States’ status as a leader in the development of key technologies with global applications. The new rules could protect American innovation—but they could also hinder foreign investment and collaboration that would foster the development of new technologies.

“This is the most significant revision of the United States’ foreign investment review process in the last decade,” says Alan Gourley, a partner in Crowell & Moring’s Government Contracts Group. “The rules now capture a broader realm of businesses and investors and make mandatory notice of investment in certain sectors.”

A bipartisan bill enacted in August 2018 expanded the scope of investments that may be reviewed by the Committee on Foreign Investment in the United States, or CFIUS. Made up of members of the State, Defense, Justice, Commerce, Energy, and Homeland Security departments and led by the Treasury secretary, CFIUS reviews transactions and—when mitigation of national security concerns cannot be achieved—sends its findings and recommendation to the president, who can block the deal.

In some ways, the new law merely codifies the more aggressive stance CFIUS was already taking under the Trump administration in challenging investments, particularly those involving Chinese investors.

CFIUS has until February 2020 to implement the new law. It has started with a pilot program, imposing “mandatory declaration” in connection with a pending deal involving critical technologies within any of 27 industries. The list includes military-centered technologies such as guided missiles but also computer device storage, electronic computer manufacturing, ball and roller bearing, and aluminum refining. “Critical technologies” also includes a new category called “emerging and foundational technologies,” which is still being defined (see sidebar below).

In the past, CFIUS limited its review to mergers and acquisitions where a foreign investor might acquire a controlling stake. Under the pilot program, CFIUS may review investments of any size if the investor could gain access to key technical information or would be given board representation or other involvement in substantive decision making related to the critical technologies. In practice, this means CFIUS could have purview over some venture capital and private equity investments in which the foreign investor has as small as a one percent stake. There is a limited exception, implemented in the pilot program, that excludes indirect (and passive) investment through qualified investment funds, Gourley says.

"The rules now capture a broader realm of businesses and investors and make mandatory notice of investment in certain sectors."
Alan Gourley

New Hurdles for Foreign Investment

A potentially positive feature of the law is that it provides CFIUS additional resources and expands the strict deadlines for CFIUS to come to a decision, which might mean a more predictable timeline for dealmakers eager to close. Once the new filing fee has been implemented, CFIUS may be able to hire and train even more staff to conduct the expanded reviews. In the interim, prospective investors and their targets can expect CFIUS staff to be distracted by the need to develop implementing regulations and handle the new mandatory declaration workload.

But the law is also likely to accelerate the recent downturn in Chinese foreign direct investment in the U.S., Gourley says. The trend has been fueled in part by concerns about Chinese investors not following through on their pledges and China’s own measures aimed at controlling outbound investment, The Wall Street Journal reported last year. But greater assertiveness by CFIUS over the past two years has also played a part.

“You need to file for committee review for a much broader range of deals, and that might scare off some potential investors,” Gourley says. “A U.S. target might be interested in a foreign investor but concerned with the uncertainty and additional timing engendered by a voluntary or mandatory review. It might be easier to find financing elsewhere.”

Sometimes CFIUS recommends blocking a deal entirely; other times it requires mitigation measures for the deal to move forward. For example, a company might have to agree to forbid the foreign investor from accessing sensitive information, or
to maintain certain facilities or technologies within the United States. In extreme cases, the foreign investor can be excluded from having any real voice in management, Gourley says.

Early Planning Helps

CFIUS deliberates in secret, and its reviews are confidential. That’s a necessity, given that the reviews involve trade secrets, sensitive technologies, and classified government threat assessments. That makes CFIUS something of a “black box,” Gourley says, but there are ways to get a sense of how its members might respond to a potential deal.

Prior to filing a CFIUS notice, Gourley and his colleagues sometimes meet with CFIUS agency staff to sound them out informally. The goal is to glean useful information from which to plan and propose mitigation in sensitive cases. Through experience, Gourley also has a sense of the issues that concern the committee. The trustworthiness of the foreign investor and its activities elsewhere in the world are factors to be considered in addition to the sensitivity of the U.S. business.

To the extent possible, he says, U.S. executives should vet foreign investors interested in their companies. What businesses are they engaged in? What kind of dealings have they had with the U.S. government? What is their reputation among U.S. officials? Have they been involved in countries sanctioned by the U.S.? What kinds of issues might send up a red flag?

Well before any deal is signed, potential foreign investors should assess and investigate the concerns CFIUS might raise. “There could be an array of mitigation options, some of which you can’t foresee,” says Gourley. “The sooner you plan for those possibilities, the better you can allocate the risk of mitigation in the deal documents.”

"Given the level of interest from U.S. industry and the challenges inherent in this process, it may be some time before Commerce introduces new controls under the new law."
Maria Alejandra del-Cerro

The Accompanying Export Control Reform Authority

The Export Control Reform Act, signed last August, provides permanent statutory authority for Export Administration regulations (EAR), which control the cross-border transfer of U.S. origin “dual-use” items.

Much of the new law codifies the agency’s existing export control practices. One provision goes further, however, as a result of the effort to strengthen control over foreign investment in the United States. It directs the Commerce Department to establish an interagency process, subject to a public notice and comment period, for the identification of “emerging” and “foundational technologies” that “are essential to the national security of the United States.” Companies dealing in these technologies would be subject not only to export controls but also to reviews of investment deals by the Committee on Foreign Investment in the United States, or CFIUS.

The Commerce Department’s Bureau of Industry and Security kicked off the process with the issuance of an advance notice of proposed rulemaking (ANPRM) in November 2018 that identifies certain broad categories of emerging technologies, including artificial intelligence, biotechnology, microprocessor technology, robotics, and data analytics. The ANPRM seeks recommendations on how to define specific technologies within these categories, the development status of these technologies in the U.S. and other countries, whether these or other categories are important to U.S. national security, and the potential impact of such controls on U.S. technological superiority.

BIS will likely need time to review industry feedback, as well as classified information, information developed from the CFIUS process, and information developed by BIS’s technical advisory committees to focus the interagency review process and formulate proposed controls. The precise wording of any new proposed controls will also require a notice and comment period prior to implementation.

“Given the level of interest from U.S. industry and the challenges inherent in this process, it may be some time before Commerce introduces new controls under the new law,” says Maria Alejandra (Jana) del-Cerro, counsel at Crowell & Moring in the International Trade Group and a member of the firm’s CFIUS team.

Alan W. H. Gourley
Partner – Washington, D.C.
Phone: +1.202.624.2561