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November 23, 2020

Stroock Client Alert

By: Chris Griner, Shannon Reaves, Gregory Jaeger, Christopher R. Brewster, Jonathan A. Labib, Erin Bruce Iacobucci

The Committee on Foreign Investment in the United States (“CFIUS”) is no stranger to politics.  Originally created by President Ford to head off Congressional initiatives restricting foreign investment, CFIUS found itself in a political minefield in 2006 when Senator Chuck Schumer attacked its decision to clear an acquisition by Dubai Ports World, a UAE state-owned entity, of a British firm that managed six U.S. ports.  The political backlash ultimately forced Dubai Ports to divest the U.S. operations, and Congress followed with new legislation that, among other things, required that transactions be cleared by each member agency at the Assistant Secretary level or above. 

Conversely, when China’s Shuanghui (now WH Group) acquired Smithfield Foods, some critics ridiculed CFIUS review of a transaction involving a pork producer as politically motivated.  When the acquisition was cleared, others argued that CFIUS failed to recognize the national security implications of the deal and pushed to identify the food and agriculture sector of the economy as “critical infrastructure.” 

Seven years later, President Trump’s order requiring China’s ByteDance to divest the entertainment platform TikTok, remains controversial after TikTok’s fate was publicly debated by President Trump and members of his Administration, an unusual action given the confidentiality that governs CFIUS reviews.  Despite bipartisan agreement that Chinese ownership posed a threat to personal data, the public threats against TikTok gave fuel to the notion that CFIUS was being weaponized to punish China for its trade policies.  Even investors from allied countries feared that their investments could be held hostage to unrelated trade disputes or political challenges. 

Nevertheless, it is fair to say that these cases stand out because they are so rare.  Over several decades and hundreds of cases, CFIUS has distinguished itself as a non-political body, laser-focused on the national security implications of the transaction under review, impervious to political entreaties, and maintaining rigid confidentiality respecting its work.   Under President Biden, we expect very little change in the substance of CFIUS reviews.  At the same time, mindful of current controversies, we expect a significant change in style.  Under President Biden, as with past administrations, we think it is highly unlikely that transactions will be publicly debated by Administration officials while they are under review, or that the Administration will seek to link CFIUS reviews to unrelated policy goals.

The United States remains open to foreign investment, even in the national security sector.  At the same time, the reality is that U.S. public policy now recognizes that national security may be threatened by foreign acquisitions outside the traditional defense sector.  For example, in an age of pandemics, we would expect rigorous review of the foreign acquisition of a U.S. company making surgical masks and gowns, a transaction that might not have gotten much attention even five to ten years ago. 

Accordingly, in a Biden Administration, we do not expect CFIUS to step back from aggressive enforcement of its authority to investigate transactions involving significant foreign investment in U.S. critical technology, critical infrastructure, and data collection firms – even when the investment falls short of control.  Nor do we expect any falloff in investigations of real estate transactions involving properties in “close proximity” to sensitive government installations.  These initiatives are the result of statutory directives – not executive orders or policy memoranda -- and interest in the national security implications of these acquisitions transcends political boundaries. 

We expect the Biden Administration to challenge foreign investment, in particular Chinese investment, whenever it is perceived to threaten U.S. national security.  To be certain, most Chinese investments will still be cleared – but they will get close review, especially as they may implicate intellectual property, personal data, and emerging technologies.  In an article written earlier this year, Biden said that the United States “need[s] to get tough with China.”  “If China has its way,” he observed, “it will keep robbing the United States and American companies of their technology and intellectual property. It will also keep using subsidies to give its state-owned enterprises an unfair advantage—and a leg up on dominating the technologies and industries of the future."[1]  Accordingly, Chinese buyers and sellers need to identify and be prepared to mitigate risks associated with acquisitions, including the potential divestment of sensitive business operations.

But Chinese investors are not the only foreign investors who should proceed with caution.  As always, covered transactions that are not reviewed and cleared remain subject to potential review – and divestment orders – in perpetuity.  For all of these reasons, U.S. companies and all foreign investors must consider the CFIUS implications of transactions, especially --

  • Any acquisition that would result in foreign control of a U.S. business that could affect U.S. national security – read broadly.
  • Any acquisition (including leases and concessions) of real estate in close proximity to sensitive government installations.
  • Any significant foreign investment, regardless of control, in the following:
    • U.S. companies involved in “critical technologies” – especially technology subject to certain U.S. export controls.
    • U.S. companies involved in critical infrastructure.
    • U.S. companies involved in any way in sensitive personal data of U.S. persons.

Buyers and sellers concerned about the potential impact of prolonged CFIUS reviews may wish to take advantage of the “declarations” process, which allows for expedited review of transactions that present little or no significant risk to U.S. national security.  Not all transactions are appropriate candidates for declarations, but many are, particularly where the investors are from allied countries and veterans of successful reviews.  Where appropriate, these expedited reviews can provide comfort to lenders and investors alike, and can protect against the risk of later CFIUS intervention.

For more information, please contact any of the following members of the Stroock National Security/CFIUS/Compliance team.

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For More Information:

Chris Griner

Shannon Reaves

Gregory Jaeger

Christopher R. Brewster

Jonathan A. Labib

Erin Bruce Iacobucci

[1] "Why America Must Lead Again: Rescuing U.S. Foreign Policy After Trump" Foreign Affairs March/April 2020

This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.