‘America First’ and Its Impact on Cross-Border M&A
The Committee on Foreign Investment in the United States is taking on a greater role in transactions involving foreign buyers and domestic sellers.
The Trump administration’s focus on “America First” and related protectionist policies have been well documented. Secretary of State Rex Tillerson recently warned of the risk of a trade war between the United States and China. What this means for U.S. companies considering a sale to or merger with a foreign company is still playing out among policymakers. But already one important body, the Committee on Foreign Investment in the United States, appears to be taking on a greater role.
CFIUS, established in 1988 under the Exon-Florio Amendment, reviews foreign acquisitions of U.S. businesses to determine if the transaction threatens national security. This government body—chaired by the Secretary of the Treasury—includes representatives from 16 U.S. departments and agencies.
While its reviews are confidential, it has been reported that CFIUS has objected to at least nine proposed acquisitions so far this year, a historically high number. In addition, several companies have publicly announced that they have withdrawn proposed acquisitions because of likely disapproval by CFIUS.
If CFIUS determines a threat, it can recommend that the President block the acquisition or, if already executed, that he order divestiture. Some feel the organization’s mandate should extend beyond national security to the protection of national economic interests.
On the legislative front, Sens. Chuck Schumer of New York and John Cornyn of Texas are reportedly working on proposals to require that CFIUS conduct more extensive reviews of proposed acquisitions from hostile countries such as China, Russia, Iran and North Korea.
“If CFIUS determines a threat, it can recommend that the President block the acquisition or, if already executed, that he order divestiture.”
Meanwhile, Sens. Chuck Grassley and Joni Ernst of Iowa and Sen. Debbie Stabenow of Michigan recently proposed legislation calling for CFIUS to consider the security risk of proposed transactions related to the U.S. food and agricultural systems.
Furthermore, the U.S.-China Economic and Security Review Commission, in its Nov. 2016 report to Congress, recommended that Congress bar all Chinese state-owned enterprises from acquiring or otherwise gaining effective control of U.S. companies.
For its part, the Trump administration has sent mixed messages. Secretary of Defense James Mattis recently suggested that greater restrictions on investments in select types of technologies were necessary. Commerce Secretary Wilbur Ross echoed Mattis, noting the administration was looking at ways to strengthen the CFIUS process. Steven Mnuchin, Treasury secretary and CFIUS chairman, has stated that the organization’s role should continue to focus on national security issues and not discourage foreign investment in the United States. Subsequently, he has proposed a tiered system in which prospective transactions with businesses from hostile countries would face more stringent reviews than companies from friendly countries.
CFIUS has been widely viewed as reviewing acquisitions on a nonpolitical basis. Even so, it is sensitive to the evolving threats to national security and the views of the administration and Congress. If the enabling legislation changes, CFIUS would be required to review future acquisitions in a manner consistent with those changes.
Even without new legislation, it is anticipated that CFIUS will take seriously the views of Congress and the administration on what constitutes threats to national security. This may be especially true with respect to the views of the Departments of Defense and Commerce, both of which are CFIUS members.
Implications for Foreign Buyers and Domestic Sellers
Given the uncertainty regarding how the administration defines national security and hostile countries, and what new legislation might be passed modifying CFIUS’ mandate, there likely will be less foreign investor interest in the near term, especially by investors from China or other disfavored countries.
Certain industries of prime concern to national security, such as technology, are likely to face additional scrutiny, as will transactions involving a material number of jobs being moved offshore that could pose a national security threat. So too will transactions of any kind involving investors from countries that have fallen out of favor.
For proposed cross-border deals, it will be increasingly important for foreign buyers and their U.S. sellers to strategically structure acquisitions to maximize the chances for a favorable determination by CFIUS. Increasingly that structure includes a requirement that foreign investors establish and fund U.S. accounts to guarantee the payment of breakup fees in the event CFIUS disapproves of a proposed acquisition.
Robert L. Bodansky is a corporate partner in the Washington, D.C., office of Seyfarth Shaw LLP and chair of the firm’s institutional investor practice. His practice emphasizes mergers and acquisitions, alternative investments and real estate transactions. He can be reached at (202) 828-3577 or rbodansky@seyfarth.com.
Joseph J. Dyer is senior counsel in the Washington, D.C., office of Seyfarth Shaw LLP. He practices primarily in the areas of government contracts, export controls and international law. He can be reached at (202) 828-3551 or jdyer@seyfarth.com.
