Tougher Security Reviews for Foreign Investors Buying US Companies

Nov. 8, 2017
The proposal follows a spree of Chinese deals in the U.S. that has triggered warnings about threats to American security.

Foreign investors seeking to buy U.S. companies would face higher hurdles for winning regulatory approval under new legislation that seeks to toughen national security reviews of their investments.

House Republican lawmakers on Nov. 8 introduced legislation that would broaden the government’s authority to scrutinize overseas investment in the U.S. and establish additional criteria to weigh the security threats of deals.

Treasury Secretary Steven Mnuchin has urged for closer vetting of foreign acquisitions by the security-review panel he chairs, the Committee on Foreign Investment in the U.S. Known as CFIUS, the panel meets in secret.

The bill “strengthens and modernizes CFIUS to give the government the necessary tools to better track and evaluate Chinese investment,” said Republican Representative Robert Pittenger of North Carolina, one of the sponsors of the legislation. Rising Chinese investment is evidence of “state-driven efforts to target critical American infrastructure and disrupt our defense supply chain requirements,” he said.

The proposal follows a spree of Chinese deals in the U.S. that has triggered warnings from Republicans and Democrats about threats to American security. Lawmakers say the current framework for reviewing deals needs to be updated to broaden reviews and consider new threats to U.S. security.

The legislation would expand investigations by CFIUS to include minority investments in “critical technology” or “critical infrastructure” and joint ventures where technology companies contribute intellectual property, according to a copy of the proposal seen by Bloomberg.

While CFIUS reviews are technically voluntary, the bill would require foreign investors that are at least 25% owned by foreign governments to go through CFIUS when they are acquiring at least a 25% stake in a U.S. business.

Administration Support

The Treasury has been closely involved in drafting the legislation. Congress has been trying to secure the administration’s full support before proposing it, along with a companion bill on CFIUS set to be introduced in the Senate.

When considering national security risks of deals, CFIUS would need to weigh whether sensitive personal data of U.S. citizens could be exposed, according to the bill. Senate Minority Leader Chuck Schumer urged the Treasury Department in October to closely scrutinize deals involving personal data because the information could be used for intelligence purposes by foreign governments.

CFIUS also would have to examine if a deal would give a foreign government the capability to engage in cyber attacks against the U.S., “including such activities designed to affect the outcome of any election for federal office.”

Chinese Concern

The Defense Department has raised concerns about Chinese investors financing American startups that are developing leading-edge technology in sectors with military applications like artificial intelligence, augmented reality and robotics. Those types of investments generally avoid CFIUS scrutiny because they’re not full acquisitions. The bill outlines that investments in “emerging technologies” should be considered by the panel.

For Congress and the Trump administration, broadening CFIUS isn’t meant to slow investment. President Donald Trump’s economic agenda relies on increasing foreign direct investment, which the administration is striving to increase with a cut to the corporate tax rate in tax-reform legislation. Mnuchin has consistently encouraged foreign investment, saying any changes to CFIUS will be for national security reasons only.

Still, the timing of the CFIUS bill could fuel U.S.-China trade frictions during Trump’s trip to Asia. Several Chinese deals have fallen apart this year after encountering objections from CFIUS, indicating the Trump administration is already taking a more restrictive approach under the current law. The panel is led by the Treasury Department and includes officials from the Defense, State and Justice departments among others.

While CFIUS can impose changes to deals, only the president can block them. In September, Trump blocked the sale of chip-maker Lattice Semiconductor Corp. to a Chinese-funded investment firm. In stopping the deal, the U.S. in part cited the Chinese government’s role in supporting the acquisition. The Chinese government criticized that decision and warned that CFIUS shouldn’t be used as a “protectionist tool.”

Yet lawmakers remain worried that deals that pose a risk to U.S. security aren’t getting a proper vetting and that China deserves special scrutiny. Several acquisitions by Chinese buyers are in the pipeline awaiting approval.

Pending deals include Ant Financial’s $1.2 billion takeover of MoneyGram International Inc., Genworth Financial Inc.’s $2.7 billion sale to China Oceanwide Holdings Group and a bid by chipmaker Broadcom Ltd., which has headquarters in Singapore as well as San Jose, Calif., for Brocade Communications Systems Inc.

Chinese conglomerate HNA Group Co. is also trying to buy a stake in SkyBridge Capital LLC, the fund-management firm founded by Anthony Scaramucci, who was briefly Trump’s White House communications director.

By David McLaughlin and Saleha Mohsin

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Licensed content from Bloomberg, copyright 2016.

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