The United States is the largest recipient of foreign direct investment in the world. Over the last several years, foreign direct investment in the U.S. manufacturing sector has increased. As this investment has increased, however, many members in Congress have become concerned about foreign acquisitions of U.S. manufacturers that are perceived to be essential to U.S. national and economic security. These lawmakers have called for an increase in the scrutiny of these cross-border investment projects by the Committee on Foreign Investment in the United States (CFIUS), an interagency committee that is authorized to review, investigate and block any transaction or investment that could result in the control of any U.S. businesses or assets by a foreign person that may raise national security concerns or involve critical infrastructure. Also, while the Trump administration has stated that it welcomes foreign investment into the U.S. manufacturing sector, its heightened interest in national security and strong interest in promoting its "America First" agenda have led to even louder calls for increased CFIUS review.
As a result, we have seen bipartisan interest in using the CFIUS review process to curtail certain foreign investment in the U.S. and to expand the CFIUS process to address U.S. "economic security" in addition to national security. These efforts are motivated in large part by the growing number of foreign acquisitions in the U.S., with specific concern for the acquisition of commercial technologies with potential dual-use applications. Recent developments include:
- Almost half of all recent CFIUS filings have been from the manufacturing sector. Through the end of July this year, CFIUS has raised questions in at least nine proposed acquisitions by foreign buyers of U.S. companies, several of which were in the manufacturing sector.
- Pressure on President Trump to block all Chinese transactions currently under CFIUS review as a way to get China to do more about North Korea.
- A new trade proposal to establish a Jobs Security Council to block foreign investments believed to have adverse economic effects on jobs as well as specific industrial sectors or geographic regions of the country. The proposal targets takeovers from countries with state-owned enterprises or which have a poor history of intellectual property enforcement.
- Draft CFIUS reform legislation that would broaden the definition of national security to include transactions involving commercial technologies with potential military applications. The bill also would have CFIUS review transactions that give foreign companies access to U.S. technology –such as joint ventures – in addition to outright changes in ownership. Another legislative proposal would broaden the scope of CFIUS review to include threats to U.S. agriculture and the related food chain – sectors not ordinarily linked to concerns about national security.
At this early juncture, it is hard to predict how all of this will ultimately pan out and impact U.S. manufacturers. However, this uncertainty is causing many potential suitors to rethink investment opportunities in U.S. manufacturers, such as potential Chinese investors backing away from a possible investment in Fiat Chrysler Automobiles or Chinese San'an Optoelectronics Co., Ltd. abandoning its acquisition of Global Communications Semiconductors, LLC. German investment in U.S. facilities has also been affected. In addition, some U.S. manufacturers have rejected foreign suitors only to accept a lower price offer simply to avoid the uncertainty, delay and added expense of a CFIUS review on the proposed transaction.
However, U.S. manufacturers should not lose heart. As of today, Treasury Secretary Steven Mnuchin has not indicated any change to CFIUS policy. Foreign investment remains important to U.S. job growth. Thus, what steps should manufacturers take when contemplating new foreign investment?
- Assess the current tea leaves in Congress, at the White House and with the Treasury Department. Test the current appetite for the investment with your state representatives as well as relevant congressional and executive officials.
- Understand the actual narrow parameters for a CFIUS negative determination. Remember very few transactions are prohibited and transactions can be redefined.
- Examine your ownership structure, your industry and your proposed foreign suitor for potential CFIUS concerns early in the process. And assess management’s ability to stomach the CFIUS review and potential publicity.
- Retain experienced CFIUS legal counsel as soon as possible to help you evaluate potential CFIUS risks and to structure a proposed transaction in order to mitigate these risks.
As of today, the criteria for a CFIUS review has not changed. Therefore, do not automatically discount a possible transaction based on CFIUS fears alone until you have done your homework.
Doreen Edelman (Washington, D.C.) and John Scannapieco (Nashville) are co-leaders of Baker Donelson’s Global Business Team. They represent clients in matters of import and export compliance, foreign investment and global expansion.