Congress Toughens Foreign Deal Reviews With China in Crosshairs
(Bloomberg) -- Congress sent President Donald Trump legislation that broadens national-security scrutiny of foreign investments in U.S. firms, imposing new hurdles for technology and real-estate transactions.
The Senate gave final approval to the measure Wednesday on a 87-10 vote, capping months of wangling by lawmakers and administration officials worried about Chinese acquisitions of U.S. technology. It was part of a $717 billion defense policy bill that passed the House last week and which Trump is expected to sign.
Trump embraced the Foreign Investment Risk Review Modernization Act in June as a way to curb Chinese investment rather than relying on a rarely used national-emergency law.
The legislation gives the Committee on Foreign Investment in the U.S., which is led by the Treasury Department, broader authority to scrutinize and potentially block foreign deals on national security grounds. It promises to heighten Trump’s standoff with China, which the administration accuses of widespread violations of U.S. intellectual property rights.
Although the bill doesn’t single out nations deserving special scrutiny, investors from some countries, particularly China, will have a harder time winning approval for deals in critical technology and other businesses identified by Congress as deserving comprehensive review, said Anne Salladin, a lawyer at Stroock & Stroock & Lavan LLP in Washington who advises companies on CFIUS reviews.
"The bill would significantly broaden CFIUS’s power and scope," she said. "The practical import of this is that acquisitions in some areas from some countries such as China will be subject to intense scrutiny and certain areas may effectively be off limits."
The legislation could also mean a tougher road for foreign investors outside of China as reviews become longer and encompass even minority investments in critical technology, infrastructure and businesses that handle sensitive personal data. Among pending deals that need approval from CFIUS is T-Mobile US Inc.’s proposed purchase of Sprint Corp. Both wireless carriers are owned by foreign companies.
Daniel Rosenthal, a former Obama administration counter-terrorism official and co-chair of Kroll’s CFIUS practice, said some firms already doing deals subject to CFIUS review may benefit from the law while others, notably in the real estate sector, will be now subjected to new risks and delays.
Depending on how the law is implemented, CFIUS could start reviewing office space leases in northern Virginia neighborhoods near the Pentagon, he said. While CFIUS now has authority to examine acquisitions of buildings, the bill expands that jurisdiction to include real estate purchases, leases and concessions if the properties are near military facilities or ports.
"The volume of deals being reviewed could easily double," Rosenthal said.
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CFIUS, which includes officials from the Defense, Justice and Homeland Security departments in addition to Treasury, already has significant power. It can impose changes to deals to protect national security and can recommend that the president block a transaction.
Only five deals have been blocked by presidents on the panel’s recommendation, but often just the threat of a presidential order is enough to scuttle a deal because the companies walk away. Since Trump took office last year, at least a dozen deals have collapsed due to opposition from CFIUS, most of which were acquisitions by Chinese investors.
There was fear among some members of Congress that China was getting access to American technology, often through startup investments and joint ventures, that weren’t reviewed by the committee. CFIUS reviews are now limited to transactions affecting control of U.S. businesses, though that can include minority stakes if they carry significant governance rights.
Although the bill doesn’t call out China, lawmakers said CFIUS "may consider" in its reviews whether the deal involves a country of "special concern that has a demonstrated or declared strategic goal of acquiring a type of critical technology or critical infrastructure that would affect United States leadership in areas related to national security." That appears to target China and its “Made in China 2025” plan to become globally competitive in strategic industries like robotics and aviation.
While the final bill was watered down from earlier versions, the measure would broaden technology deals reviewed by the panel to include emerging technologies that would be defined later by officials. It also gives CFIUS authority to review investments in companies that hold sensitive personal data of U.S. citizens.
While CFIUS reviews are technically voluntary, the legislation also requires mandatory reviews of deals in which a foreign government will hold a "substantial interest" in critical technology, critical infrastructure or a firm with personal data.
With key terms still to be fleshed out by officials, it will take time to for companies to learn just how aggressive CFIUS will be in using its new authorities in the legislation, according to lawyers.
"It casts a wider net for the committee," said Brian Fleming, a lawyer at Miller & Chevalier in Washington who previously worked at the Justice Department’s national security division. "It’s not really going to be until there’s a track record to know how the committee will work and where the boundaries are."
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