CFIUS: The Little-known Multi-Billion-Dollar Deal Killer
Vol. 37 Associate Editor
On February 23, 2016, Tsinghua Unisplendour Corporation of China abandoned its attempted $3.78 billion purchase of a 15% stake in Western Digital, an American computer data storage company. Tsinghua didn’t abandon the deal because it lost interest in the deal, and it wasn’t because it couldn’t get the financing; it was because of a decision by the Committee on Foreign Investment (“CFIUS”) to review the prospective deal. What is this committee that can scare off multi-billion dollar deals just with a threat of review? The CFIUS was organized in 1975 and charged with the duty of “monitoring the impact of foreign investment in the United States.” At first, CFIUS’s powers were limited to requesting foreign governments to file reports about their foreign investment activities and to monitor investments. This changed in the late 1980’s at a time of great fear in America about Japan’s economic rise. In 1987, Fujitsu, a Japanese informational tech company, proposed to purchase an 80% stake in Fairchild Semiconductor, a U.S.-based company, for over $200 million, but the deal was ultimately called off due to heavy pressures from the U.S. government. Following this, in 1988, Congress passed the Exon-Florio Amendment. Exon-Florio responded to the perceived shortcomings of CFIUS and granted the President the authority to block takeovers, mergers, and acquisitions that could impair national security. Exon-Florio was amended in 1992, following a French state-owned company’s proposed takeover of a U.S.-based steel company, with the Byrd Amendment. The amendment requires CFIUS to investigate proposed mergers, acquisitions, or takeovers when 1) “the acquirer is controlled by or acting on behalf of a foreign government; and 2) the acquisition results in control of a person engaged in interstate commerce in the United States that could affect the national security of the United States.” This amendment has particularly impacted investors from China, where 150,000 state-owned enterprises hold $16 trillion in assets, and many more enterprises have ties to the government or military. The CFIUS has emphasized that it “focuses solely on any genuine national security concerns raised by a covered transaction” and not political or other national interests. The term “covered transaction” refers to transactions including, but not limited to transactions: 1) that result or could result in a U.S. business being controlled by a foreign person; 2) in which a foreign person conveys control of a U.S. business to another foreign person; and 3) transactions such as a joint venture in which one person contributes a U.S. business resulting in this business being controlled by a foreign person through the joint venture. Once CFIUS determines that a transaction is a “covered transaction,” the CFIUS must conduct an investigation and take “any necessary actions . . . to protect the national security of the United States.” The term “national security” has not been defined. Despite the lack of a definition, there are factors that are taken into account including: “(1) domestic production needed for projected national defense requirements, (2) the capability and capacity of domestic industries to meet national defense requirements, including the availability of human resources, products, technology, materials, and other supplies and services, (3) the control of domestic industries and commercial activity by foreign citizens as it affects the capability and capacity of the United States to meet the requirements of national security, (4) the potential effects of the proposed or pending transaction on sales of military goods, equipment, or technology to any country . . . ; (5) the potential effects of the proposed or pending transaction on United States international technological leadership in areas affecting United States national security; (6) the potential national security-related effects on United States critical infrastructure, including major energy assets; (7) the potential national security-related effects on United States critical technologies; (8) whether the covered transaction is a foreign government-controlled transaction . . . (10) the long-term projection of United States requirements for sources of energy and other critical resources and material; and (11) such other factors as the President or the Committee may determine to be appropriate, generally or in connection with a specific review or investigation.” The factors don’t clear up much of the vagueness surrounding what constitutes “national security,” and this vagueness has perhaps rightfully led to concerns of the politicization of foreign investment. To give an example of how broad the term could be, CFIUS investigated a transaction between a Chinese and an American food company indicating that even the meat industry is a part of national security. Critics have argued that CFIUS has been inconsistent, lacks transparency, and lacks sufficient oversight and accountability. Recent statistics on CFIUS activity is not dispositive of political motives but is certainly telling. In 2011, China had 31 direct investments in the U.S. with three being valued at over $100 million. CFIUS deemed 10 of these 31 to be covered transactions. Japan and Canada combined for 61 direct investments over $100 million (and many more below this amount), but CFIUS deemed only nine of these to be covered transactions. Unsurprisingly, in 2011, China adopted its own national security review of foreign investments that largely mirrors the CFIUS. National security is certainly important but until more objective criteria can be established and the criteria are more fairly applied, thus improving fairness and business predictability, both Chinese and American companies will pay the price. Not only will businesses be penalized under the current framework, but Chinese-American relations will also be given an additional contact point for conflict. Perhaps the United States, as an avid purveyor of free market principles, ought to be the one to take the first step to improving the consistency, transparency, predictability, and accountability of CFIUS.
 Steven Davidoff Solomon, Chinese Deals Feel the Chill From Washington, N.Y. Times, July 24, 2013, http://www.nytimes.com/2016/02/24/business/dealbook/chinese-deals-feel-the-chill-from-washington.html?_r=0.  Id.  James K. Jackson, The Committee On Foreign Investment In The United States (CFIUS), Cong. Res. Serv. 2 (2016), http://www.fas.org/sgp/crs/natsec/RL33388.pdf.  Joanna Rubin Travalini, Foreign Direct Investment in the United States: Achieving a Balance Between National Economic Benefits and National Security Interests, 29 Nw. J. Int’l L. & Bus. 779, 783 (2009).  See Eduardo Porter, O.K., Japan Isn’t Taking Over the World. But China…, , N.Y. Times, July 3, 2005, http://www.nytimes.com/2005/07/03/weekinreview/ok-japan-isnt-taking-over-the-world-but-china.html.  David E. Sanger, Japanese Purchase of Chip Maker Canceled After Objections in U.S., N.Y. Times, Mar. 17, 1987, http://www.nytimes.com/1987/03/17/business/japanese-purchase-of-chip-maker-canceled-after-objections-in-us.html.  An Act to Enhance the Competitiveness of American Industry, and for Other Purposes, Pub. L. No. 100-418, § 5021, 102 Stat. 1107, 1425 (1988);  Jingli Jiang & Gen Li, CFIUS: For National Security Investigation or for Political Scrutiny?, 9 Tex. J. Oil Gas & Energy L. 67, 70 (2013).  Jackson, supra note 3, at 6.  See Enda Curran, State Companies: Back on China’s To-Do List, Bloomberg Businessweek, July 30, 2015, http://www.bloomberg.com/news/articles/2015-07-30/china-s-state-owned-companies-may-face-reform; Joshua C. Zive, Unreasonable Delays: CFIUS Reviews of Energy Transactions, Harv. Bus. L. Rev., July 25, 2013, http://www.hblr.org/2013/04/unreasonable-delays-cfius-reviews-of-energy-transactions.  See Guidance Concerning the National Security Review Conducted by the Committee on Foreign Investment in the United States, 73 Fed. Reg. 74,568 (Dec. 8, 2008).  31 C.F.R. § 800.301.  50 U.S.C. § 721(b)(1)(B), (2)(A).  Hearings Before the Subcomm. on Econ. Stabilization of the H. Comm. on Banking, Fin. and Urb. Aff., 102d Cong., 2d Sess. (1992) (“We have not defined national security. I think the intent of Congress was very clear, that national security should be looked at in a broad sense” and that defining national security would allow parties to structure transactions around the definition).  See George Stephanov Georgiev, The Reformed CFIUS Regulatory Framework: Mediating Between Continued Openness to Foreign Investment and National Security, 25 Yale J. on Reg. 125, 130 (2008).  Saabira Chaudhuri, U.S. Review of Smithfield Takeover by Shuanghui to Run Longer, Wall St. J., July 24, 2013, http://online.wsj.com/article/SB10001424127887324110404578625691595981114.html.  See Joseph Mamounas, Controlling Foreign Ownership of U.S. Strategic Assets: The Challenge of Maintaining National Security in a Globalized and Oil Dependent World, 13 L. & Bus. Rev. Am. 381, 393 (2007).  Jiang & Li, supra note 8, at 96.  Lester Ross & Kenneth Zhou, China Adopts its Own “CFIUS” Regulations, WilmerHale, Feb. 28, 2011, https://www.wilmerhale.com/pages/publicationsandnewsdetail.aspx?NewsPubId=92913.