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Committee on Foreign Investment in the United States, a Primer

October 26, 2018
In what was supposed to be one of the largest acquisitions of all time, Broadcom tried to purchase rival tech company, Qualcomm in a $117 billion transaction. The deal would have consolidated the already-small chip making industry and helped Singapore-based Broadcom to challenge Intel more easily. However, this merger fell through when the Trump administration stepped in and blocked the deal. Interestingly, instead of stopping the transaction under the auspices of anti-trust issues, the White House claimed that it posed a grave danger to “national security.” [1] [2]

The Committee on Foreign Investment in the United States (CFIUS) was—until recently—a relatively unknown interagency panel that oversaw foreign direct investment. CFIUS was originally established by President Gerald Ford through an executive order in 1975 “for monitoring the impact of foreign investment in the United States, both direct and portfolio, and for coordinating the implementation of United States policy on such investment.” [3]
While the structure of CFIUS remained largely intact over the years, it became more powerful in 1988 with the addition of the Exon-Florio amendment to the Defense Production Act. According to a Congressional Research Service report, the language gave “the President the authority to block proposed or pending foreign ‘mergers, acquisitions, or takeovers’ of ‘persons engaged in interstate commerce in the United States’ that threaten to impair the national security.” [4] This national security definition gave the President wide latitude in their ability to block deals.

Image: CFIUS Committee Structure Source: Government Accountability Office Report, pg. 9

Image: CFIUS Committee Structure Source: Government Accountability Office Report, pg. 9


The CFIUS committee is an interagency body composed of the heads of the Department of the Treasury, Justice, Homeland Security, Commerce, Defense, State, Energy, Office of the U.S. Trade Representative, and the Office of Science & Technology Policy. The Secretary of the Treasury also serves as the chair of the committee. Additionally, when appropriate, members of the Office of Management & Budget, Council of Economic Advisors, National Security Council, National Economic Council, and Homeland Security Council participate and aid the investigations as well. The Secretary of Labor and Director of National Intelligence also observe but are non-voting, ex-officio members. While the committee typically resolves cases on its own, it also offers the president an opportunity to weigh in on major cases as they deem fit. [5]
There are two ways that the CFIUS process may begin. Parties to a pending or imminent transaction may voluntarily file a notice (or a draft version) with the CFIUS committee explaining the deal and their efforts to preserve national security interests. Alternatively, the CFIUS committee may send a notice to the parties of a transaction notifying them that they are under review. [6] After that, the investigation formally begins. The vast majority have to be and are completed within 30 days. However, in certain circumstances, the committee may use another 45 days to complete their analysis, and when appropriate, the president is given 15 days to weigh in on the decision.
The current administration has increased its use of the CFIUS process in line with its increasingly protectionist views on trade. While only the president may block a deal, the committee can impose nearly endless conditions on a deal—thereby scaring off potential foreign investors. A Bloomberg analysis found that since 1990, only five deals have been blocked by a president. “Barack Obama stopped two deals in eight years in office. Trump has blocked two in six months. Still, CFIUS concerns are often enough to undo a deal. That’s because companies will walk away rather than go to the president and risk being branded a national security threat.” [7] The broad scope of the term “national security” and the lack of an appeal option give Trump and his cabinet secretaries wide latitude in reviewing and stopping international transactions.
The message that the administration has been sending is clear: this White House will take a much more activist role in reviewing and blocking foreign direct investment, especially when it comes to China. According to research conducted by the Rhodium Group, “an unprecedented number of Chinese deals were delayed or abandoned in 2017 as parties failed to obtain approval” from CFIUS. The report points out that “CFIUS seems to have broadened its approach for reviewing Chinese deals, taking into consideration a broader array of criteria when assessing security risks such as state-sponsored M&A activity to obtain certain technologies or concerns about data protection.” [8]

Image: CFIUS Caseload vs. Staff Assigned Source: Government Accountability Office Report, pg. 19

Image: CFIUS Caseload vs. Staff Assigned Source: Government Accountability Office Report, pg. 19
Recently, a bill called the Foreign Investment Risk Review Modernization Act (FIRRMA) made its way through Congress. FIRRMA broadened the Committee’s jurisdiction to cover nearly any investment in “emerging or breakthrough technologies; real estate transactions with access to air, land, … or sea ports or with proximity to sensitive US government facilities; bankruptcy and other default transactions; [and] any other investments which CFIUS deems designed to evade CFIUS review.” [9] The last point offers a carte blanche to CFIUS to review nearly any investment the committee deems fit. Additionally, the bill significantly boosted funding for the Committee, which will help increase the number of staff assigned full-time to investigations. The bill originally passed the Senate (85-10) and the House (400-2 no less) as part of the National Defense Authorization Act. After that, it went through the conference committee process where minor differences were ironed out. What did not change was the enlarged jurisdiction granted to the CFIUS committee.
CFIUS is going to be playing an increasingly large role in the investment sectors of the economy, and any company looking to court foreign investors or do deals with countries like China and Russia are going to face increased scrutiny from the United States government. A bill that sailed through Congress enlarged CFIUS’s jurisdiction to an unimaginable size, and the Committee will have a major role in reshaping the mergers and acquisitions landscape in the years to come.

Student Blog Disclaimer
  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

References


  [1] https://www.bloomberg.com/news/articles/2018-03-12/trump-issues-order-to-block-broadcom-s-takeover-of-qualcomm-jeoszwnt
  [2] https://www.whitehouse.gov/presidential-actions/presidential-order-regarding-proposed-takeover-qualcomm-incorporated-broadcom-limited/
  [3] https://www.archives.gov/federal-register/codification/executive-order/11858.html
  [4] https://fas.org/sgp/crs/natsec/RL33388.pdf
  [5] https://www.treasury.gov/resource-center/international/foreign-investment/Pages/cfius-members.aspx
  [6] https://www.treasury.gov/resource-center/international/foreign-investment/Pages/cfius-overview.aspx
  [7] https://www.bloomberg.com/news/articles/2018-03-23/all-about-cfius-trump-s-watchdog-on-china-dealmaking-quicktake
  [8] http://cim.rhg.com/notes/chinese-fdi-in-the-us-in-2017-a-double-policy-punch
  [9] https://www.natlawreview.com/article/expected-legislation-amending-cfius-will-affect-broad-range-foreign-investments-us

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