The Fate of Chinese Investment and CFIUS in the Time of Trump

by Garvey Schubert Barer
Contact

Over the last few years the pace of Chinese direct investment in the U.S. has increased at a remarkable rate. In 2016 the $45 billion of Chinese acquisition and expansion in the U.S. was three times the amount in the preceding year. The accelerating investment curve in turn has fueled a nine-fold increase since 2009 in the number of Americans directly employed by Chinese-owned firms. It now hovers around 140,000 new jobs. And at the beginning of 2017, another $21 billion in scheduled U.S. acquisitions by Chinese companies was already in the pipeline.[1]

There have been a number of dire predictions that all this Chinese direct investment into the U.S. would be in serious jeopardy under the new Trump Administration. This concern has been fueled by some of President Trump’s attacks on Chinese economic policies during the 2016 presidential campaign and by some proposals from individual members of Congress. In reality, President Trump to date has taken no step to curb Chinese investment in the U.S. Recent statements suggest to the contrary that the Administration overall favors continuation of existing foreign investment policies, while leaving room for minor changes. Even during the presidential campaign last year, Mr. Trump’s opposition to China on the economic front emphasized the unfavorable balance of trade. He did not champion a policy of opposing Chinese investment in the U.S. outright. Once President, he moderated his views on trade with China, as he has openly expressed the importance of easing tensions on the economic front to ensure greater cooperation from China on the national security issues posed by North Korea. Moreover, President Trump recently reversed his views in the campaign, and no longer sees China as a currency manipulator.

The situation requires close monitoring because there are political forces pushing for significant hardening of investment policies towards China, and U.S. restrictions on foreign investment may stiffen around the edges. The threat of a broad new anti-Chinese investment policy, however, appears over stated. In most cases, Chinese investors should not be deterred by fear of opposition from the U.S. government.

Narrow Scope of CFIUS Review
 

The U.S. government controls foreign investment in the U.S. primarily through an interagency committee called the Committee on Foreign Investment in the U.S., or CFIUS. It is chaired by the Treasury Secretary, Mr. Steven Mnuchin. On May 1, he publicly rejected the idea that CFIUS should block foreign investments on the basis of any grounds except national security. And he rejected using the process to target China or any other particular foreign investor. In the face of proposals from members of Congress to increase sharply restrictions on Chinese investment, he hinted that any changes to the CFIUS law should be minor in nature, and none should be targeted specifically at China. In another interview in April, he placed improving the trade balance with China ahead of any concern over investment issues, and said when the Administration does address investment issues it would be to loosen restraints on U.S. investment in China rather than restrict Chinese investment in the U.S.

Key to assessing the threat of unfavorable CFIUS action is understanding its narrow scope. It does not cover every type of transaction, and it does not authorize the U.S. government to block any deal that is covered except on the relatively narrowly defined grounds of national security. As to coverage, the law only applies to foreign acquisitions of control over ongoing U.S. businesses. Importantly, the law does not apply to greenfield investments or deals involving assets that are not considered an ongoing U.S. business (e.g., individual parcel of land, abandoned warehouses, etc.), not does it apply to most types of loans, or to investments that do not involve foreign control (e.g., less than 10% ownership).  Even if a particular transaction is a type covered by the law, CFIUS is interested only if the deal raises national security concerns. This may happen, for example, if the deal gives the acquiring foreign company access to military weaponry, electronics, and other advanced technology with military implications (e.g., advanced computers and semi-conductors). It may raise national security issues if the deal could affect Defense Department access to goods or services of all sorts important to the Department. National security concerns also include possible threats to U.S. protections against espionage or breach of cyber security, the safety of critical infrastructures (e.g., energy, telecommunications, transportation), and other critical industries that may affect national economic security, or homeland security. The law authorizes CFIUS and ultimately the President to block a transaction on national security grounds, or to require the mitigation of a threat to national security before it can proceed.

CFIUS’s Treatment of Chinese Transactions
 

The present law does not single out Chinese investments for more searching review by CFIUS. In addressing the issue last year, the former Deputy Assistant Secretary for Investment Security at the Treasury Department confirmed that CFIUS conducts its reviews of Chinese transactions no differently than transactions from any other country. As noted, Secretary Mnuchin’s recent statements are consistent with that policy. And although the committee is made up of politically appointed heads of federal departments and offices, the working staff of CFIUS are career civil servants who perform their responsibilities without national prejudice.

As a general matter, most deals submitted voluntarily to CFIUS are approved without condition. According to the Treasury Department in 2014 (the most recent year for which figures are available) less than 9% of the 147 deals submitted to CFIUS did not proceed either because of CFIUS opposition or for commercial considerations.[2] In another 6% of the deal CFIUS required adoption of measures to mitigate the national security concerns before they proceeded. As in deals involving other countries, the relatively few Chinese deals that encounter trouble at CFIUS typically present straightforward national security issues. Illustrative are several recently terminated transactions involving Chinese companies seeking to acquire businesses engaged in the development of semiconductor and related LED technologies—Lumileds (a Dutch company with a division in the U.S.), Aixtron SE (a German company with a U.S. subsidiary), and Global Communications Semiconductors, LLC (a U.S. company)—because of apparent concerns of CFIUS about the military applications of that technology. Two potential transactions currently attracting headlines also raise national security issues. A proposed $2.3 billion bid by Zhongwang USA, a Chinese-owned business, to acquire Aleris Corporation, a U.S. sheet metal producer, has provoked public attention and CFIUS scrutiny. Aleris produces and develops aluminum and other materials used in military airplanes generally, and in particular produces ballistic-resistant aluminum with national security implications. In another developing matter, the Trump Administration has made it clear that CFIUS would take a critical look at any direct or indirect Chinese involvement in the acquisition of Westinghouse Electric, Inc., a maker of nuclear reactors for electric utilities, because of the military and civilian application of the company’s nuclear technology. 

Recent Proposals for an Expanded CFIUS Mandate
 

Various members of Congress who are dissatisfied with the relatively narrow, national security focus of CFIUS are campaigning to broaden the law’s scope. Some are aimed at changing the scope of CFIUS concerns to include threats to specific sectors not ordinarily associated with national security concerns, such as a March 2017 legislative proposal to include concerns about the security of U.S. agricultural and the related food-chain. Others have focused more specifically on Chinese investment, as both Senate Minority Leader Schumer and Senate Majority Whip Cornyn are reportedly working on different proposals to broaden the scope or extent of CFIUS’s national security review of Chinese transactions. This is in the wake of a proposal last November by the U.S.-China Economic and Security Review Commission to bar Chinese state-owned enterprises from acquiring effective control of U.S. companies.   Other members of Congress recently asked the research arm of Congress (the Government Accountability Office) to review whether legislation should require CFIUS to review all transactions involving Chinese state-owned businesses, require CFIUS to assess the net economic benefit of foreign acquisitions, or take into consideration whether the acquiring company’s government allows foreign investment from the U.S. to the same extent. For example, in testimony during his confirmation hearings, Commerce Secretary nominee Wilbur Ross Jr. highlighted complaints that while Chinese firms are moving to acquire U.S. firms in the entertainment and media sectors, the Chinese government largely bars U.S. firms acquiring Chinese companies in the same sector.

Steps to Take to Protect Against Problems with CFIUS
 

Overall, important factors are likely to encourage the U.S. government to protect Chinese investment. Continued open access to foreign investment in American industry provides a quick and welcome return on the new Trump Administration’s central policy tenet of improving job prospects for workers in the U.S. And billions of dollars in direct investment by Chinese-owned companies bring more and better-paying domestic jobs and improved economic conditions in almost every congressional district. The value of this will not be lost on the Administration or congressional policy makers. As we have seen, Treasury Secretary Mnuchin has expressed Administration support only for very limited amendments to the CFIUS law. Nevertheless, the variety of legislative proposals being considered in Congress reflect significant congressional interest in tightening the CFIUS process, especially with respect to China. The position of the Trump Administration on targeted changes that would adversely affect Chinese investment is uncertain, and the uncertainties and tradeoffs inherent in the legislative process always makes it possible that broader legislation harmful to China could emerge from Congress.

Given the political climate in the United States, it is more important than ever that Chinese-owned businesses and investors that wish to expand their holdings in the attractive U.S. marketplace proceed from the outset with a thorough understanding of the processes and factors that CFIUS will use to evaluate, modify, or possibly unwind a transaction based on perceived threats to the national security apparatus and infrastructure of the U.S.

Anyone considering the possibility of a U.S. acquisition should monitor policy developments in the Trump Administration and Congress that could impact those goals. When a Chinese investor comes closer to achieving acquisition of a U.S. company, the deal negotiations should proceed with careful attention to the issues posed by the authority of CFIUS to block or require changes to a proposed deal. By conducting an intelligent CFIUS assessment, structuring perceived security risks at the beginning of a transaction, and considering risk-mitigation measures as necessary throughout the process, Chinese investors can navigate CFIUS review in most cases with high expectation of success.

A variety of procedures are available that can and often do dispose of concerns that the U.S. will block a transaction on national security or critical infrastructure grounds. Up front, investors should examine whether the proposed deal is in fact a covered CFIUS transaction under the law. That may not always be obvious, but a decade of experience since the prior amendment to the law provides guidance on where the fault lines may be found. It also will be critical to structure the transaction with care as to how control and direction of the new venture will be distributed among foreign and domestic owners. It may be advisable to include terms requiring CFIUS approval and addressing contingent losses in the event CFIUS recommends withdrawing a transaction, or imposes risk mitigation requirements. Investors should also give advanced consideration to public messaging about a transaction to help curb calls from interest groups or Congress for closer CFIUS scrutiny. A strategic approach to these concerns are essential to any Chinese investment that might touch on national security or critical infrastructure issues.

 

[1]               Report of the National Committee on U.S.-China Relations & Rhodium Group, New Neighbors: 2017 Update (Apr. 2017).

[2]               CFIUS 2014 Annual Report to Congress, dated by the Committee, February 20, 2016.

Written by:

Garvey Schubert Barer
Contact
more
less

Garvey Schubert Barer on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.