POLL: the changing face of Cfius

Author: John Crabb | Published: 27 Mar 2018
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The US government is blocking inbound M&A at levels never seen before. What is the reason behind this unprecedented change in approach?

IFLR publishes its monthly poll question on iflr.com and Linkedin group page iflr.com/LinkedIn. Throughout the month, IFLR’s editorial team gather the responses and interview selected respondents. The next poll is online now.

On March 12 President Trump took steps to intervene in the $117 billion acquisition of Qualcomm by Singapore-based rival Broadcom. The move is the latest in a number of evasive steps to be taken by Trump and his administration to prevent acquisitions that threaten to jeopardise national security in the US in the 14 months since his inauguration.

This particular decision was unusual in that the agency that monitors the space, the Committee on Foreign Investment in the United States (Cfius), generally tends to hold off reviewing deals until they have been formally announced. On this occasion, the government stepped in during the early stages while the acquisition was still being negotiated, leading many to question the motives behind the judgement.

Is the new direction being forged by Cfius tantamount to a rise in economic protectionism or is it a necessary safeguard? On one hand there are clearly types of acquisitions that present complex national security risks that are of grave concern for the US government. On the other, it certainly does appear that Cfius is increasingly becoming part of the US political apparatus.

The conversation is no longer just about defence orientated technology from megalithic companies: areas like artificial intelligence are now being developed by startups with only a handful of employees, which is completely pushing the envelope.

Traditional approaches to managing these types of technologies are yet to be captured in the Cfius process. There is an increasing recognition from a national security and an economic security standpoint that these technologies are at an inflection point, where soon they are going to become very important to the US economy, and to US national security more generally.

With this in mind, IFLR has polled a number of its readers this month on whether they think that Cfius is becoming a tool for the US' economic protectionist agenda, or whether it remains a necessary safeguard for the protection of the country.

Does Cfius promote economic protectionism or is it a necessary safeguard?

A necessary evil

Fifty-five percent of respondents felt that ramped up use of the Cfius mandate is a necessary safeguard to protect the interests of the US.

Ama Adams, partner at Ropes & Gray in Washington, DC, said that Cfius is necessary to protect the complex national security risks of the US government. At this point there may not be alternative mechanisms to deal with those risks, outside of the Cfius paradox.

"People often to point to export controls as one way to address national security risk, either as a compliment or an enhancement to the Cfius process," she said. "But even with as robust and comprehensive of an export control regime as the US currently has – and there is an effort underway to enhance and improve on that structure – you still run a risk of missing certain types of transactions that might not perhaps present an export control risk but do raise other national security considerations that the US government should consider through the Cfius process."

Export control is very much focused on the export of technology and software, but not every transaction has issues that present national security concerns.

Using Cfius as a vehicle for economic protectionism would be an incomplete policy lever. The cross-departmental committee does ultimately not review that many cases, and the ones that it does look at tend by definition to be a US business that seeks to be party to a transaction. So in that sense, it is an over inclusive tool.

One could criticise the efficiency of a Cfius review, or whether Cfius staff and decision makers have adequate resources to crunch through the cases as expeditiously as possible. In principle, a review would need to ensure that weapon sensitive, energy sensitive or personal sensitive information is not acquired by certain states.

"In general administrations like approving deals, in general you have a presumption in favour of market transactions by sophisticated players who can protect their own interest," said a US-based lawyer.

Looking at transactions that Cfius tends to take notice of, they are not huge from a trade perspective, but they are important from a business perspective. Administrations are reluctant to impede free market business transactions, so using Cfius as a way to impact free business isn't necessarily the best use of the tool.

The elephant in the room

When Cfius is discussed, it doesn't take long for China to be mentioned. In fact it surprising that in this article the country is yet to surface. Another reason that it is unfair to call the Cfius process pure economic protectionism, and why it can be considered a wholly necessary safeguard, is that it has become increasingly important to maintain parity with the 'Made in China 2025' policy that has seen the country make great strides to become dominant players in industries such as microelectronics and alternative energy.

"I don't think this is just rank protectionism, China is using both the size of its market and the desire of US companies to do business there," said Ivan A. Schlager, partner at Skadden, Arps, Slate, Meagher & Flom in Washington, DC. "They are leveraging their market to get companies to licence their technologies, and I think that the recent change in tone is an attempt to address what the Chinese are successfully doing."

Cfius: putting American technology and American national security first

Blurred lines

One in four of our respondents were hesitant to go in either direction, largely citing uncertainty in the definition of national security itself.

The Foreign Investment Risk Review Modernization Act (Firrma) is a pending attempt to modernise the Cfius mandate, and while it is not known for sure the actual changes that the act will bring, it is likely to modernise and strengthen certain aspects under the auspices of maintaining national security risks. There are fears that these changes will negatively impact inbound M&A and foreign investment levels.

Rick Oehler , partner at Perkins Coie, agreed that national security is a broad term. He pointed out that when Cfius was enacted, its regulations intentionally did not define national security. A premise that remains true today. It is hard to draw a line between national security, and economic protectionism.

"Cfius may consider a number of factors in determining whether a proposed transaction may threaten to impair national security including impact on the US economy, impact on US critical infrastructure, and threatened loss of the personally identifiable information of US persons," he said.

Despite the changes within Firrma that seem to indicate a move towards protectionism, even the most fervent advocates really expect it to stick to protection of national security in a fairly narrow way. Even though they are expanding into the realms of expert controls, not many would say that expert controls are unrelated to national security.


Finally, one in five of the respondents to the poll went as far as saying that the Cfius process is increasingly probing into the realms of economic protectionism. Clifford Chance partner Joshua Berman suggested that, now more than ever, the Cfius review process is becoming part of the the political apparatus of the US. It is not the primary thinking, the other Cfius control processes haven't gone, he said, but it does now seem to be an important part of the analysis.

"Part of the current administration's global economic approach is America first; it is part of the campaign and part of the economic policy," he said. "Hand in hand with that economic policy is a focus on protecting American technology and protecting American national security while keeping an eye on traditional challengers to US strength abroad."

There are many areas where policies can be put in place or tightened to protect US interests. Cfius is only one of a number of places where this is currently playing out.