A new bill which could potentially replace the existing regime on foreign investment scrutiny will consider the economic impacts of inbound transactions
|1 Minute read|
|The proposed 2017 Foreign Investment Review Act (Fira) could prove to be one of the most important expansions of the US government’s foreign investment oversight and clearances regime in decades.|
Fira would require the Secretary of the Department of Commerce (DoC) to evaluate the potential adverse economic effects of any acquisition of US assets by a foreign government-sponsored entity. Importantly, the Act does not replace Cfius’ current national security review regime, but complements it by having the DoC and the Treasury coordinate their oversight of non-US entity-led transactions. While it remains to be seen if Fira indeed becomes law, some of its features are worth examining.
On October 18 2017, senators Sherrod Brown (D-OH) and Chuck Grassley (R-IA) introduced the United States Foreign Investment Review Act of 2017 (Fira). If enacted, Fira would reflect the most significant thematic expansion of the US government's foreign investment clearance regime since the passage of the Foreign Investment and National Security Act of 2007 (Finsa), which codified the legal authority and current review process for the Committee on Foreign Investment in the United States (Cfius).
Fira would amend the Trade Act of 1974 to require the Secretary of the Department of Commerce to review certain foreign acquisitions of US businesses to determine the economic effects of such acquisitions on the US. Explicitly targeted at mitigating the perceived adverse economic impacts of foreign government-sponsored investments, Fira would require mandatory review of deals above certain dollar thresholds, and empower the Department of Commerce and the United States Trade Representative, each of which currently sits on Cfius, to take a more active, economic gatekeeping role in foreign investment.
Importantly, Fira is not designed to replace Cfius review or affect Cfius' jurisdictional ambit. Instead, Fira contemplates that review by the Secretary of Commerce would complement Cfius' national security review – run in parallel with Cfius' review of a transaction – and that the Departments of Commerce and the Treasury would coordinate reviews of transactions that were notified concurrently. That being said, Fira's sponsors have been among the most active members of Congress in calling for changes to Cfius in order to meet new and different challenges of foreign investment in the US, and it is not surprising that they would seek an alternate legislative channel outside of Cfius to implement their stated priorities.
At this point in time, Fira is unlikely to become law anytime soon, if at all. However, even if it does not become law, it reflects key congressional concerns that are noteworthy, and warrant careful consideration in buy- and sell-side transaction planning and public messaging, particularly if a transaction would warrant a Cfius filing under the existing legal regime. There are five primary features of Fira as compared to their current Cfius counterparts, and related key takeaways for boards and investors to consider.
Economic thresholds: many transactions would be subject to mandatory review
Fira: It would require the Secretary of Commerce to review transactions that would result in foreign control of US businesses involving participation by foreign investors above certain dollar thresholds. The draft bill does not clarify how transaction value should be calculated. This would presumably be addressed in regulations to be issued by the Secretary of Commerce to implement the legislation. These are:
- $50 million for deals involving state-owned enterprises (eg sovereign wealth funds, public pension funds); and
- $1 billion for deals involving private buyers.
Fira would also empower the Secretary of Commerce to independently initiate review of a transaction of any size if requested by the ranking member of the Senate Finance Committee or the House Ways and Means Committee.
Cfius: Can – and does – review deals of any size. Current public transactions in which the parties have made or will make a Cfius filing range from approximately $12 million to over $20 billion.
Takeaway #1: In larger deals, the $50 million benchmark is not difficult to meet or surpass. This threshold in particular may have an outsized impact on syndication and co-investment opportunities to which governance rights would attach, particularly if prospective foreign co-investors hold limited partnership interests in the investing fund or a stake in the general partner or management company.
Takeaway #2: Members of Congress increasingly perceive state-affiliated investors as threatening. However, we would anticipate that, if Fira passes, the Department of Commerce would weigh the risk profiles of state-affiliated investors differently, depending on their countries of origin. Senator Brown's comment that '[f]oreign investments should lead to good-paying jobs in Chillicothe and Chesterville – not huge payouts for the Chinese government' suggests that investments from Chinese state-affiliated investors would carry the most deal risk.
Takeaway #3: Fira would change transaction parties' decision calculus regarding whether to file with Cfius, which is currently a voluntary process.
Control: while only control transactions would be subject to review, control would likely be interpreted more broadly than in a conventional corporate law sense
Fira: Fira defines control broadly, and in functional terms. The proposed definition largely tracks the definition in the Cfius regulations: control may be found through contractual arrangements and board representation as well as 'any other means…to determine, direct, make decisions, or cause decisions to be made, with respect to important matters affecting the entity'.
Cfius: In practice, Cfius interprets control very broadly. Board representation of any kind almost always confers sufficient control to make an investment subject to Cfius' jurisdiction, and board observer rights may raise questions.
Takeaway: If Fira becomes law, its initial interpretation of control will likely mirror Cfius' historically expansive construction of the term. In line with Fira's mandate, the Department of Commerce's assessment may give more weight in practice to foreign investors' rights that may touch on the economic effects of the investment under consideration.
Confidentiality: Fira contemplates that decisions about transactions would be made public
Fira: Fira would require the Secretary of Commerce to make all decisions to approve, deny or impose mitigation measures on cases public, as well as justifications for such decisions. Such case-by-case disclosure would be supplemented by an annual report with aggregate details and analysis of investment into the US by sector, country of origin and transaction type.
Cfius: Cfius cases are confidential and are not subject to Freedom of Information Act requests.
Takeaway: While transparency in the Secretary of Commerce's decsions could help foreign investors benchmark the likelihood that their deals would receive approval and shape their arguments, transaction parties would need to consider how public disclosure – particularly of adverse decisions regarding foreign parties – could impact both their reputations in the market as well as the practical effect of Cfius' cloak of confidentiality.
Covered transactions: Fira contemplates a large universe of transactions that would be subject to review
Fira: Fira would authorise review of 'any merger, acquisition, takeover, or investment, or the establishment of a new entity'.
Cfius: Cfius is not authorised to review most transactions involving the establishment of a new entity, unless the new entity is a joint venture to which one party contributes a US business. Fira's expansion of transactions subject to review to include greenfield investments would create a class of investments subject to review by the Secretary of Commerce, but not by Cfius.
Takeaway: The inclusion of greenfield investments reflects general consensus among US government stakeholders that such transactions should be subject to greater scrutiny. However, there does not seem to be the same degree of agreement regarding whether the Cfius process is an appropriate vehicle for review, and recent Cfius legislation proposed by Senator John Cornyn (R-TX) and Representative Robert Pittenger (R-NC) did not propose adding review of greenfield investments. Regardless of whether Fira passes, it would not be surprising for Congress to consider enhanced measures for governmental review and approval of new investments.
Factors for review: the assessment under Fira would be holistic, but focused on US economic priorities
Fira: Fira would authorise the Secretary of Commerce to consider 'any economic factors' including:
(1) the long-term strategic economic interests of the United States;
(2) the history of distortive trade practices in each country in which a foreign party to the transaction is domiciled, as informed by [a report on such country to be submitted to the Department of Commerce from the US trade representative];
(3) control and ownership of each foreign person that is a party to the transaction; and
(4) the impact on the domestic industry, taking into consideration any pattern of foreign investment in the domestic industry.
Cfius: Cfius' review focuses squarely on national security matters. The relevant legislative history makes clear that national security is to be construed broadly. Nevertheless, the concept within Cfius reviews is not boundless, despite the administration's rhetorical and policy propensity to link economic and national security considerations. Secretary of the Treasury Steven Mnuchin emphasised this point in June, stating:
'Fundamentally[,] we want to keep Cfius as a national security review and we want to deal with economic issues separately. We don't want to confuse those issues.'
Similarly, Secretary Mnuchin demurred when asked in an April interview for his view on the value of considering reciprocity in evaluating foreign investment.
Takeaway: Senators Brown and Grassley have squarely positioned Fira as addressing a perceived gap in the US investment clearance framework. While certain other proposals for expanding Cfius' jurisdiction that have been floated since Finsa have included a net benefit or reciprocity test, none have been enacted.
It remains to be seen whether Members of Congress will consider economic matters as warranting an alternate review process, separate and apart from Cfius, and what types of potential economic benefits for the US (eg job creation) could move the needle towards approval in a close case.
In this regard, it is worth noting that the parties to the recent failed acquisition of Lattice Semiconductor reportedly proffered arguments about job growth in taking the decision on the case to President Trump after Cfius recommended that the transaction be prohibited. President Trump blocked the acquisition on September 13 2017.
Widespread and vocal bipartisan angst about foreign investment is likely here to stay. Looking forward to 2018 and beyond, corporate boards and investors should account for the increasingly fraught policy and political climate, and how this climate may impact deal feasibility, certainty, timing, , and cost.
|Mario Mancuso, P.C.|
Partner and head of international trade and national security practice
Kirkland & Ellis (Washington DC)
Kirkland & Ellis (Washington DC)
Kirkland & Ellis (Washington DC)
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