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The New Rules Of Foreign Investment
by Winter Casey
The U.S. government has boosted its ability to review and regulate foreign entities looking to invest in U.S. industries by directing more attention to the security implications of foreign investments, especially those made by government funds.
John Veroneau, currently the Deputy U.S. Trade Representative, wrote in 2005 that "if you represent a non-U.S. client considering acquiring a U.S. company, or a U.S. company being considered for such an acquisition, be aware of the closer scrutiny that these transactions may experience in the current political climate." He added that "acquisitions by Chinese investors are now being subject to particular scrutiny."
Fundamental Change
The inter-agency Committee on Foreign Investment in the United States was originally established in 1975 to evaluate the impact of foreign investment in the United States. In 1988, the president was given the ability to prohibit foreign acquisitions or mergers seen as threats to national security.
The inner workings of the committee are not transparent or publicly available. It reviews acquisitions from various nations involving numerous industries, including those focused on critical infrastructures.
A Treasury Department official said that for CFIUS to have authority, a transaction would have to result in foreign control of a U.S. company. However, the official said "CFIUS regulations provide a definition and guidance as to what control means. Simply put, it means the power to determine core business matters affecting a company."
Following a state-owned Arab company's attempt in 2006 to assume control of operations at some U.S. ports, President Bush in July signed into law a bill that created new procedures and requirements for the group charged with reviewing foreign investment in U.S. entities.
Experts note that other countries also have mechanisms for reviewing or regulating foreign investment in the name of national security. In the European Union, for instance, member countries may restrict foreign, direct investments on the grounds of public safety or tax administration, so long as the actions taken are compatible with other aspects of European law.
According to Edmund Rice, president of the Coalition for Employment through Exports, CFIUS is undergoing fundamental changes regarding how it evaluates the security concerns of potential transactions. The committee is considering if even a small foreign investment in a U.S. entity is going to result in the transfer of sensitive technology, Rice said.
Balancing Security And Economic Interests
The new law requires CFIUS to provide specific information to Congress annually on investment cases where critical technologies could be involved. The body also must tell Congress about the "possible foreign acquisition of U.S. companies involved in the research, development or production of critical technologies, as well as possible industrial espionage activities."
The statute asks the president to consider whether transactions would have security-related effects on U.S. critical technologies or would be controlled by foreign governments. The law seeks, among other things, "to reform the process by which such investments are examined for any effect they may have on national security."
Claude Barfield, a resident scholar with the American Enterprise Institute, said industry believes the law strikes a balance between the "government scrutinizing a select amount of foreign investments without damming up the process" and preventing open investment. He said it is good that the law took effect before the recent speculation grew over the possibility that foreign governments could strategically invest sovereign wealth funds for their interests.
"Some observers have raised concerns that even minority interests in U.S. firms held by foreign governments could pose national security issues," Rep. Carolyn Maloney said, and the issue was on the New York Democrat's agenda while the law was being deliberated. "The definition of 'control' for purposes of CFIUS review is and needs to be broad and flexible to take into account the persuasive power that a government shareholder could have."
Before the bill's passage, the U.S. Chamber of Commerce said the measure was designed to ensure that proposed foreign investments meet U.S. security objectives "while preserving an open, fair and non-discriminatory investment environment." According to the chamber, foreign, direct investment supports employment for 5.1 million Americans, and investment from abroad supports 19 percent of all U.S. exports.
Concerns remain, however, particularly as it relates to China. The Wall Street Journal reported last Monday that "politicians from Washington to Berlin have fretted about possible Chinese purchases of strategic assets."
China has said it plans to form a state investment company that will manage money to achieve high returns. "China's entry into the game has added to the enormous sums controlled by these often-secretive sovereign funds," the Journal said. The newspaper reported that people familiar with the proposed company said it is not likely to spend its money on large equity stakes in foreign companies. One reason could be that "officials in several countries have voiced concerns about the actions of sovereign wealth funds in general -- and China's in particular."
Keeping Watch On China's Investments
Michael Wessel, a member of the U.S.-China Economic and Security Review Commission, mentioned concerns that China could influence corporate outcomes in the United States even if it does not have controlling interests in U.S. firms. He questioned whether foreign entities with such interests in technology companies and others could pose security concerns.
Wessel raised the issue in July 13 testimony. "I know that [Department of Defense] participates in the CFIUS process and the overall analysis of leakage of U.S. technologies, et cetera, into China," he said. "Has the department or others in the process looked at private equity and how we might be going outside of the CFIUS scope ... and whether China is now making strategic investments to fill the gaps where gaps exist in military modernization?"
Michael Danis, a senior intelligence officer with the Defense Intelligence Agency, responded that "this is not the first time the Chinese have done something like this. Over the past 30-something years, they have looked [at] and have purchased U.S. companies, and some of these have been more contentious than others, and it's not just companies in the United States."
Danis continued, "your question is more along the lines of the funding, capital funding, as a means of going around this process, and I would say that this is an issue that is on the minds of individuals within the U.S. government on working this, and there are some meetings that are going to occur over the next several weeks dealing with how we are working this process."
DIA did not respond to a request for further comment by deadline.
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