January 17, 2018
A wider range of cross-border deals could be subject to US government review through legislation recently introduced in Congress. While foreign investors anxiously watch to see if it becomes law, the proposed regulations signal that lawmakers are becoming more aware that interest in US companies has evolved to include additional investment structures, each offering different advantages.
US Sen. John Cornyn and Rep. Robert Pittenger have proposed identical bills that would expand the authority of the Committee of Foreign Investment in the United States (CFIUS), a government panel that reviews foreign investments for national security concerns. CFIUS reviews typically focus on acquisitions and other deals that result in foreign control of US businesses.
The newly-proposed rules would give the committee greater latitude to vet more types of transactions. This includes smaller deals, such as minority investments in emerging technologies. It also could expand the reasons for reviews beyond defense- and security-related issues.
In addition, the bill proposes that CFIUS take a more critical look at joint ventures (JVs) and other transactions where US technology firms provide intellectual property and technological support to a foreign person. Such a measure would impact US firms investing abroad in addition to the panel’s current focus on overseas investment in the US. And while CFIUS reviews are currently voluntary, the proposed legislation would require dealmakers to disclose certain transactions that are either directly or indirectly linked to foreign governments.
Joint ventures and strategic alliances get a closer look
The bill emerges as Chinese investments in US firms have drawn heightened scrutiny after reaching a record $46.2 billion in 2016. In September, President Donald Trump followed CFIUS’s recommendation to block Chinese-backed investors from acquiring Oregon-based Lattice Semiconductor.
As we noted at the time, the move was rare and signaled that Washington is serious about protecting America’s high-tech industries from economic and military rivals. While the new CFIUS bill may not explicitly target any one country, potential Chinese investments in US tech companies could be more vulnerable to tougher guidelines. This particularly could affect JVs involving US companies that possess sensitive technologies.
More broadly, the proposed bill is a response to the growth of deals beyond M&A, including JVs and other strategic alliances. Increasingly, investors have favored such deals to expand into some of the world’s fastest-growing economies, such as China and India. The agreements typically put companies looking to do business together on a more equal playing field; they also offer flexibility to quickly access new technologies or capabilities with fewer long-term risks. Compared to just four years ago, cross-border strategic partnerships have more than doubled industry wide. The upward trend will likely continue, but the idea of alliances will probably be more endemic to Washington policymakers going forward.
Second thoughts by Chinese investors?
If passed, the bill will likely create new obstacles for foreign investors, at least in the short-term. Some Chinese investors are already concerned about CFIUS. The multi-agency panel, which is led by the US Treasury Department, operates a review process that offers little insight into deliberations over transactions. There are concerns that Chinese investors, who are relatively newer to the US market than their European counterparts, may grow more skittish and consider investing elsewhere, potentially causing the US to lose out on what could prove to be important investments.
What’s more, foreign investors may have to wait longer to get their deals off the ground. Expanding CFIUS’s authority to additional types of deals would demand more resources at a time when caseloads already are heavy and the administration remains short of key people to review applications. Lawmakers have proposed raising application fees, which may help cover additional costs. But until people are nominated to fill the open roles and confirmed by the US Senate, the panel will likely be cautious with any potentially questionable deals. From a purely practical standpoint, the time allowed for the initial review would expand from 30 days to 45 days. The second stage investigation would remain 45 days in length.
The realities of today’s deals landscape
To be sure, it’s worth noting what the bill does not propose. The review process remains largely voluntary, even though a number of officials have urged requiring that all foreign dealmakers file for CFIUS reviews. Also, the panel would remain focused on national security issues, even though lawmakers have proposed a “net benefits” test that would evaluate an investment’s economic impact on the US, as well as a “reciprocity” test that would assess whether a similar investment by a US firm in the acquirer’s country is allowed. While some lawmakers concerned with food safety have pushed to give the US Department of Agriculture a seat on the CFIUS panel, the committee would remain at nine voting members and two non-voting members.
Regardless of the bill’s outcome, US lawmakers have for years sought to adapt CFIUS as the market realities of making deals have evolved. Additional regulations that reflect the different ways foreign companies can invest in the US are certainly possible in the current political climate. Those investors – and US companies that could be their targets or partners – need to consider these potential regulatory challenges in their US growth strategy going forward.
Steve Klemencic, former PwC CFIUS Leader, contributed to this post.