On the campaign trail, President-elect Trump adopted a contentious approach towards foreign trade, focusing on Chinese “theft of American trade secrets” and suggesting, at times, potential isolationism for U.S. businesses. His statements since the election, including confirming that the United States will withdraw from the Trans-Pacific Partnership once he is in office, have highlighted that the president-elect may employ various tools to aggressively protect the U.S. economy from foreign influence.
One of the primary tools President-elect Trump will have at his disposal is the Committee on Foreign Investment in the United States (CFIUS or the Committee). As discussed below, President-elect Trump is gaining authority over the Committee at a time when CFIUS has assumed a more powerful role in foreign acquisitions through increasing demands for filing notices of transactions involving Chinese acquirers, as well as taking a broad view of transactions that fall within CFIUS’s purview.
This update provides an overview of various ways that the president-elect may try to use CFIUS as a foreign policy tool during his term and practical considerations for the business community once the president-elect takes office.
Role of the President on CFIUS
CFIUS is a multi-agency committee, chaired by the U.S. Department of the Treasury, that reviews transactions involving a foreign acquirer of a U.S. business that may affect U.S. national security. The Committee’s authority to review transactions is particularly broad because “national security” is intentionally left undefined in the CFIUS regulations in order to encourage parties to submit voluntary notices for transactions.
Although the president does not sit on the Committee, the president has control over CFIUS membership. The Committee includes Cabinet members such as the Secretary of Treasury, as Chair, the Attorney General and the Secretaries of Homeland Security, Commerce, Defense, State and Energy.
Additionally, the president is able to designate by executive order other senior officials as members of the Committee. For example, President Obama designated the U.S. Trade Representative and the Director of the Office of Science and Technology as members of the Committee and also created observer roles for various government officials, such as the Assistant to the President for National Security Affairs.
From the agencies appointed to CFIUS by the president, the Treasury Department designates a lead agency (or agencies), which works to review the transaction and to negotiate any mitigation measures to ensure protection of U.S. national security interests. This is a key role, as the lead agency’s actions, including through mitigation recommendations, often dictate whether parties decide to move forward with a transaction.
Finally, while the Committee can review and investigate transactions, it cannot block a transaction. If a transaction is not capable of being resolved through mitigation measures, the Committee can only recommend that the president block a transaction. The president can exercise the authority to block a transaction in his discretion.
Growing Role of CFIUS
As President-elect Trump enters office, CFIUS already has a significant role in the review of foreign acquisitions. Foreign acquirers can use the CFIUS process as a way to gain deal certainty for transactions. Without a CFIUS filing, the Committee can reopen a transaction after it has closed, causing a difficult unwinding process as seen in the Ralls Corp. transaction involving the acquisition of wind farms in Oregon in 2012. CFIUS may also initiate the process unilaterally if a completed transaction in which a voluntary notice was not filed comes to the Committee’s attention, and it believes the transaction raises national security risks.
As more transactions are being submitted for review by CFIUS, the Committee has become a watchdog for threats to national security, with a particular focus on Chinese acquirers and transactions in the technology space. There has been an increase in filings of more than 200 percent since 2009, which is when CFIUS began publishing an annual report on transactions it reviewed that year. Acquisitions by Chinese entities represent the largest percentage of filings for the past three years. At a time when President-elect Trump may focus on creating more stringent review of transactions by Chinese acquirers, CFIUS is already engaged closely in monitoring such transactions.
Over the past year, CFIUS has recommended blocking two transactions by Chinese acquirers. Of particular interest, the Committee recently recommended that President Obama block the acquisition by Fujian Grand Chip Investment Fund LP (FGC) of the German company Aixtron SE. While Aixtron is headquartered in Germany, the transaction fell under CFIUS’s purview because of the inclusion of Aixtron’s U.S. subsidiary in the transaction. On December 2, 2016, the president issued an executive order blocking the acquisition of the U.S. subsidiary. Shortly thereafter, FGC announced that it was not moving forward with the transaction.
Although CFIUS review is quite broad, Congress has requested that the Government Accountability Office (GAO) assess whether the authority of CFIUS has kept pace with the growth of foreign acquisitions in important U.S. sectors. GAO expects to begin its review in 2017.
CFIUS and President-elect Trump
Based on CFIUS’s role in foreign acquisitions and the president’s control over the Committee, we highlight below how CFIUS may play an important role in President-elect Trump’s administration:
Attention to CFIUS appointees: Appointees to various Cabinet positions and additional new members of CFIUS could shift the national security focus of the Committee. President-elect Trump’s administration will certainly continue to focus on technology transactions, but it also may focus on the manufacturing industry (including the potential loss of jobs in the U.S.), cybersecurity concerns and food safety concerns; and
Final authority over transactions reviewed by CFIUS: President-elect Trump will have final discretion on deciding to block or allow transactions that are sent to him for his review. This can be a powerful tool in negotiating with foreign countries and companies with respect to their investment in the United States. This also may be a tool for use by the president-elect if other countries, such as China, decide to block acquisitions by U.S. acquirers.
Practical Considerations for Business Community
Given the current power of CFIUS, we recommend the following consideration for the business community during President-elect Trump’s term:
Careful planning around international transactions: Even transactions that indirectly involve U.S. business (e.g., U.S. government suppliers) should be carefully considered for the timeline required for CFIUS approval. Parties will benefit from analyzing in advance the potential applications of CFIUS.
Monitoring trade developments: New export control rules or sanctions may serve as an early indicator for how CFIUS may interpret its national security review process. If President-elect Trump decides to lift any sanctions against countries such as Russia or bring forward new sanctions, it may suggest additional difficulties in gaining CFIUS approval of transactions involving acquirers from those countries.
Increased hurdles for Chinese transactions: It is unlikely that President-elect Trump’s administration will shift the focus of CFIUS from China. Deal structures involving Chinese acquirers will want to allow for flexibility to address potential mitigation measures or questions raised by CFIUS.
Broad scope of CFIUS Review: As seen by CFIUS actions in the Aixtron transaction, the president-elect’s appointees may continue to focus on transactions involving non-U.S. entities that nonetheless have an impact on U.S. national security. European/Chinese transactions that include U.S. defense suppliers may continue to be a high priority for CFIUS, especially as President-elect Trump looks to move more U.S. business operations back to the United States.