The administration of President-elect Joe Biden and Vice President-elect Kamala Harris will break sharply from the policies of the Trump Administration in many ways. But one area where we expect more continuity than change is the recent, steady growth of regulatory scrutiny of foreign investments in the United States.
Two current trends make clear that foreign investment scrutiny through the Committee on Foreign Investment in the United States (CFIUS or Committee) will continue to require significant attention by all parties involved with deals resulting in the acquisition by foreign persons of equity interests in US businesses.
First, the COVID-19 pandemic, the serious supply chain vulnerabilities it has exposed and widespread agreement in the government that foreign ambitions to control next-generation technologies will disadvantage the United States have cemented a bipartisan consensus around more rigorous government reviews of foreign investments into critical technologies and related fields.1 While a Biden Administration may seek to lower the temperature and restore regular order to the Sino-American relationship, President-elect Biden has expressed no interest in curtailing the foreign investment review process.
During the campaign, Biden called for new approaches to supply chain security so that neither the United States nor its allies will be dependent on critical supplies from China and Russia.2 Biden also authored an article for Foreign Affairs magazine laying out his foreign policy vision and calling for the United States “to get tough with China.” He warned:
If China has its way, it will keep robbing the United States and American companies of their technology and intellectual property. It will also keep using subsidies to give its state-owned enterprises an unfair advantage—and a leg up on dominating the technologies and industries of the future.3
Incoming Biden Administration officials have echoed these positions. For example, intended Secretary of State nominee Anthony Blinken said in September 2020 that the United States must work with allies to set similar policies on investment restrictions, technical standards and export controls to ensure an “ecosystem that protects and promotes liberal democratic values.”4 And National Security Advisor designate Jake Sullivan wrote last year that the United States needs to “safeguard its technological advantages in the face of China’s intellectual property theft, targeted industrial policies, and commingling of its economic and security sectors.”5 Doing so will entail “enhanced restrictions” on “technology investment and trade in both directions.” He added, though, that “these efforts should be pursued selectively rather than wholesale, imposing curbs on technologies that are critical to national security and human rights and allowing regular trade and investment to continue for those that are not.”6
These are not outlier views in Washington. In December 2020, US Senators from both parties raised the alarm that Chinese state-backed funds are scouring the United States for investments in critical technologies, notwithstanding recent legislation (discussed below) to make such deals harder.7
Second, with the passage of 2018 CFIUS reforms, Congress started a process through which the bureaucracy focused on national security review of foreign investment in the United States has grown substantially, and CFIUS has been given greater authority to conduct such reviews.
With more government officials focused on national security threats arising from foreign investment, more deals will be impacted by CFIUS activity, and the risk of CFIUS attention on any particular deal will generally increase for the foreseeable future. As such, nearly all corporate transactions with foreign acquirors or investors merit some level of CFIUS risk analysis to determine whether a deal triggers a mandatory filing or presents a risk of CFIUS attention. Concerns about Chinese acquirors are not limited to acquirors based in China. CFIUS may review the Chinese involvement of foreign acquirers merely with operations in China but a headquarters elsewhere. Looking ahead, China-related deals, especially those involving the health sector, advanced technology or information about US persons, will remain particularly fraught for the foreseeable future—whether closing occurs before or after January 20, 2021.
CFIUS Has Expansive Authority to Review Foreign Investment
With overwhelming bipartisan support (a vote of 85-10 in the Senate and 400-2 in the House),8 Congress passed the Foreign Investment Risk Review Modernization Act (FIRRMA) in 2018 and substantially expanded the jurisdiction of CFIUS.9 CFIUS effectively has three separate jurisdictional regimes: a voluntary regime, a mandatory regime and a new real estate regime.
For the voluntary CFIUS regime, the Committee has the power to review:
- Any control transaction to determine the effect of a foreign person having control of a US business on the national security of the United States; or
- Any covered investment, which is any direct or indirect investment by a foreign person in a technology, infrastructure or data US business that does not result in control of the US business but affords the foreign person with:
- Access to material nonpublic technical information, personal data or critical infrastructure information;
- Membership or observer rights on the board of the US business; or
- Any other involvement in the operation of the US business, other than with respect to voting shares.
Although CFIUS notice is not mandatory in these circumstances, CFIUS has broad authority to initiate an investigation of any covered transaction over which it has jurisdiction that has not been notified to CFIUS and that may raise national security issues.
The mandatory regime is different. Pursuant to an October 15, 2020 revision of CFIUS regulations, transaction parties must formally notify CFIUS before the closing of two types of transactions. First, a mandatory notice to CFIUS is required for a control or covered investment by a foreign person into a US company that develops, designs, tests, fabricates or produces export-controlled technology if the technology at issue would require a “US regulatory authorization” to share with the country of the foreign investor. The term “US regulatory authorization” means:
- A license or other approval issued by the US Department of State under the International Traffic in Arms Regulations (ITAR);
- A license from the Department of Commerce under the Department of Commerce’s Export Administration Regulations (EAR);
- A specific or general authorization from the Department of Energy relating to regulations governing assistance to foreign atomic energy activities; or
- A specific license from the Nuclear Regulatory Commission under the regulations governing the export or import of nuclear weapon material.10
Second, CFIUS regulations currently require the filing of a declaration for certain covered control transactions or covered investments where a foreign government has a “substantial interest” in a foreign person that will, in turn, acquire a substantial interest in US businesses (called Technology, Infrastructure or Data (TID) US Businesses) associated with critical technologies, critical infrastructure in the United States or large data sets of US person information.
The real estate regime gives CFIUS special authority to review the foreign acquisition of lease or ownership interests in property in proximity to over 100 specially identified federal installations.
Together, these CFIUS rules give the federal government substantial power to scrutinize foreign investment in the United States. There’s no reason to think the rules will be changed in any material way in the Biden Administration and, more likely, the new administration will remain focused on using all the tools available to protect US technological leadership in strategically significant technologies. For example, on 5G cell technology and artificial intelligence in particular, Biden lamented during the campaign that “other nations are devoting national resources to dominating their development and determining how they are used.”11 In response, Washington “needs to do more to ensure that these technologies are used to promote greater democracy and shared prosperity, not to curb freedom and opportunity at home and abroad,” he wrote, calling for the United States and its democratic allies to develop private-sector-led 5G networks.12
CFIUS Is Devoting More Resources to Foreign Investment Reviews
In July 2020, the House Appropriations Subcommittee on Financial Services and General Government submitted a report (H. Rept. 116-456) accompanying the Financial Services and General Government Appropriations Act, 2021 (H.R. 7668), which is pending before Congress. The bill would provide roughly $24 billion in new discretionary budget authority for fiscal year 2021 to fund the Department of the Treasury, the judiciary and various independent agencies.
Of note, the Committee recommended that Congress approve a $44 million budget for operations related to FIRRMA, matching the request proffered earlier this year by the Department of the Treasury. The budget would include $20 million for the “CFIUS Fund,” which solely supports CFIUS’s activities, and $24.1 million for “Departmental Offices—Salaries and Expenses.” The $24.1 million will enable CFIUS to hire an “additional” 39 full-time employees by the end of fiscal year 2021. These new personnel will “support the anticipated growth in the CFIUS caseload.”13
The Committee report adds that “[t]he Committee supports the Department’s efforts to hire and fully staff operations for CFIUS activities, including its critical role in reviewing transactions that may pose a national security threat. The Committee notes the importance of closely monitoring anticompetitive consolidations that hurt small business and often result in artificial price inflation.”14
Regulatory scrutiny of foreign investment in the United States has been increasing for several years, and that trend is likely to continue in a Biden Administration, which has already called for a reshoring of supply chains and voiced suspicion of Chinese technological theft. CFIUS’s expanded jurisdiction, proposed congressional funding for increased operations and staffing, and new regulations portend increasing regulatory scrutiny of such transactions for national security threats well into the next administration.