In the age of Trump, few issues, much less pieces of legislation, garner support from both sides of the aisle. Two commentators recently asserted that intense polarization has even “alter[ed] the zone of acceptable political behavior.” Regardless of its content, therefore, the recently introduced Foreign Investment Risk Review Modernization Act (FIRRMA) should be hailed as a political marvel. FIRRMA has received wide bipartisan support, including endorsements from Senators John Cornyn (R-TX), Marco Rubio (R-FL), Dianne Feinstein (D-CA), and Joe Manchin (D-WV), congressmen Devin Nunes (R-CA) and Denny Heck (D-WA) and, perhaps most importantly, President Donald Trump.
What could possibly unite the seemingly irreconcilable? Surprisingly, FIRRMA concerns some fundamental issues: national security, international involvement in the U.S. economy, and the discretion of the executive branch. Specifically, FIRMMA aims to revise the review process undertaken by the Committee on Foreign Investment in the United States (CFIUS), an interagency committee housed in the Treasury Department responsible for screening the purchases of U.S.-based assets by foreign firms for national security concerns – possibly the executive branch’s most important tool for policing foreign involvement in the U.S. economy. More surprising still, FIRRMA proposes to make the most sweeping changes to the CFIUS framework in years. While it seems unlikely that FIRRMA will forge broader cooperation in Congress, if enacted, it stands to substantively affect cross border M&A activity in the U.S. and possibly alter the U.S.’ traditional liberal stance toward open investment.
What is CFIUS?
Created by an Executive Order and subsequent legislation in 1973, CFIUS is an interagency committee within the Treasury Department, with membership that includes the Secretaries of the Treasury (who heads the Committee), State, Defense, Homeland Security, Commerce, and Energy, as well as the Attorney General, the U.S. Trade Representative, and the Director of the Office of Science and Technology Policy. Pursuant to power granted to the executive branch in the Exon-Florio Amendment of the Omnibus Trade and Competitiveness Act of 1988, the president can block prospective foreign investments in the U.S. economy provided that the president (1) determines that the transaction poses a credible threat to national security and (2) concludes that other laws are inadequate to protect the U.S. from the threat. President Reagan delegated the responsibility of reviewing proposed transactions to CFIUS, where it has remained since 1988. Foreign firms reportproposed transactions to CFIUS, which triggers an initial 30-day review. If CFIUS identifies any concerns, the Committee can launch an additional 45-day investigation. At the conclusion of the investigation, CFIUS advises the president on whether they believe divestment should be ordered. The final decision then lies with the president.
CFIUS has wielded its authority to disrupt transactions cautiously since 1988. Divestment has only been ordered three times. However, since 2006, investigations have occurred more frequently, which is significant because lengthy reviews tend to be costly for firms. Additionally, CFIUS has recently utilized less drastic remedies to mitigate perceived national security threats, including agreements that allow transactions to go forward provided that the acquirer divests from aspects of the target that implicate national security concerns. Further, the threat of a negative CFIUS review often induces firms to drop acquisitions all together without formal CFIUS action. CFIUS, therefore, poses considerable clout over prospective foreign transactions even though the president’s authority to order divestment is seldom used.
How would FIRRMA change the CFIUS framework?
FIRRMA, like all previous changes to the CFIUS framework, arose out of Congress and some commentators’ concerns that CFIUS does not adequately protect the U.S. from modern national security threats. Since the passage of the Exon-Florio Amendment in 1988, Congress has raised similar concerns two other times – 1991 and 2008 – and succeeded in passing minor adjustments to the CFIUS’ framework. However, the present amendment will perhaps be the most drastic since 1988.
While FIRRMA’s co-author, Senator Cornyn from Texas, claims the bill is not intended to overhaul CFIUS, it will still leave an indelible mark on the review process. The initial review will be expanded to 45-days from 30-days and, at the discretion of the Committee, investigations could be extended by an additional 30-days. In total, therefore, CFIUS review will now last up to 120 days. Adding to the headache for foreign firms, FIRRMA authorizes CFIUS to impose a filing fee which will be capped at the lesser of 1% of the value of the transaction and $300,000.
In addition to these measures, CFIUS’ jurisdiction will be expanded to new types of transactions. For the first time, CFIUS will be able to investigate transactions beyond that of a traditional merger or acquisition. For example, real estate acquisitions and business leases near sensitive U.S. government facilities would fall under CFIUS’ jurisdiction. Therefore, CFIUS would be permitted to review, and the president able to block, basic commercial leases involving foreign parties – the first time this power has been triggered without a formal foreign investment. Additionally, limited business engagements, such as joint ventures, would now fall squarely within CFIUS’ purview. For traditional M&A transactions, CFIUS will also have expanded jurisdiction over deals concerning critical technology and infrastructure companies.
FIRRMA also expands the factors CFIUS can consider in its assessment of proposed transactions. Most importantly, CFIUS would be authorized to review transactions based on their tendency to reduce the U.S.’ global technological or industrial prominence, increase U.S. reliance on foreign suppliers of goods related to national security, heighten transaction costs imposed on the U.S. government, and elevate the likelihood that sensitive information would be revealed to foreign firms.
Further, under FIRRMA, CFIUS would have access to new mitigation agreements, such as interim agreements that could be imposed while a review is ongoing and arrangements that could be enforced even if a transaction is voluntarily dropped. Additionally, FIRRMA will authorize the President to undertake “additional actions” unrelated to the reviewed transaction – a potential carte blanche to insulate the U.S. economy based on national security concerns revealed in the CFIUS’ review process. The elasticity of these provisions will likely expand the executive’s ability to undo prospective transactions and take additional remedial actions to protect national security.
What effect will these changes have on foreign investment in the United States?
At best, FIRRMA will modestly strengthen the executive branch’s hand in thwarting national security threats by expanding CFIUS’ jurisdiction to transactions involving critical industries and broadening the availability of mitigation remedies. At worst, FIRRMA amounts to pure protectionism – a poorly guised instrument to chill certain international involvement in the U.S. economy. Many of FIRRMA’s provisions, the filing fee, lengthened review period, and “additional actions” provisions most prominent among them, point to the latter conclusion. These objectives seemingly ignore economic realities realized generations ago. Even President Reagan detested restrictions on open investment by noting the obvious: “The fact is we live in a global economy.”
Still, CFIUS’ hallmark is its flexibility. Utilization of expanded jurisdiction and potentially abusive review times and filing fees is largely left to the discretion of CFIUS and, ultimately, the policy preferences of the president. Unfortunately, given the current President’s misapprehension of globalization, FIRRMA will send a clear message: Foreign investors beware.