When evaluating government regulation, business usually abides by the principle that less is more.
A proposal by Sen. John Cornyn, a Texas Republican, to provide a clearer framework for which foreign investments will be subject to review by the Committee on Foreign Investment in the United States, or CFIUS, is one of the exceptions.
The inter-agency panel, which is chaired by the Treasury Secretary and includes members of the state, commerce and defense departments, weighs national security risks from the takeover of U.S. companies by overseas firms. While its profile has grown amid concerns that Chinese firms are improperly appropriating U.S. technology, the definition of “national security” is vague under current law and has been clouded further by the Trump administration’s willingness to apply the label in unorthodox ways.
Cornyn’s bill, unpopular at first because of language covering outbound investments that was later removed, remedies some of that lack of clarity, making it easier for overseas investors to determine when a deal is likely to run afoul of U.S. regulators.
A dozen trade associations and organizations representing hundreds of companies expressed their support for the plan, which would modernize the review process to cover new and disruptive technologies in management and information systems, in a letter in late May.
“It is critically important for foreign investment that the CFIUS process is well respected on Capitol Hill,” said Nancy McLernon, president of the Organization for International Investment, which was one of the letter’s signers and represents foreign companies with U.S. subsidiaries. “Without passing, it leaves the U.S. less competitive to foreign direct investment.”
In cross-border mergers and acquisitions, time is money, and the undefined nature of national security concerns has caused lengthy delays in past reviews, McLernon said. Even though the bill would add layers of scrutiny, it may also supply more funding and staff to the committee while limiting its oversight to inbound investment, all of which could speed up the process.
That might heighten the allure that the U.S. already possesses as the world’s largest economy, one that was burnished last year by Republican tax cuts that slashed the top corporate rate to 21 percent from 35 percent.
“There isn’t really a perception that this will hamper opportunity for U.S. businesses,” added Eva Hampl, the senior director of investment, trade and financial services at the U.S. Council for International Business.
Cornyn’s proposal was prompted largely by China’s massive “Made in China 2025” initiative, which outlines 10 significant industries from aerospace to robotics in which the country wants to be globally competitive in by 2025.
Almost all of the sectors in China’s plan could pique the interest of the committee during a national security review. When Cornyn first introduced the bill in 2017, he specifically called out China’s acquisition of technology pertinent to the U.S. military.
“By exploiting gaps in the existing CFIUS review process, potential adversaries, such as China, have been effectively degrading our country’s military technological edge by acquiring, and otherwise investing in, U.S. companies,” he noted.
The panel has no formal authority to prevent transactions, a power that resides with the president. However, in most cases, whatever conclusion the committee comes to on a transaction will determine the outcome, according to a person familiar with the process.
The Trump administration’s blocking of Broadcom’s $117 billion hostile bid for the U.S. based chip-maker Qualcomm earlier this year, for instance, followed the group’s assessment that the deal might give China an edge in developing fifth-generation, or 5G, wireless networks that provide greater speed and capacity and will be used in U.S. defense.
There are some industries, however, that still aren’t fully on board with the CFIUS proposal. Jeff Farrah, general counsel at the National Venture Capital Association, an organization that advocates on behalf of venture capitalists, said the current modifications don’t go far enough.
When the bill was introduced, his industry was concerned about its treatment of passive minority investors. The proposal’s original language extended the committee’s jurisdiction over foreign limited partners investing in venture capital funds, which might make the U.S. less attractive to overseas capital.
“Our country should not be sending a message that we aren’t open to foreign investment,” he said. “It’s a very competitive landscape.”
While changes have been made to clarify how the committee will treat passive minority investors, Farrah remains concerned about how regulators will write and interpret the rules.
Still, discussion and business support have already helped narrow the proposal’s scope, said Kevin Wolf, an attorney who previously served as a senior representative for the Commerce Department on the committee and testified during a House Energy and Commerce committee hearing on the bill.
“They did a lot of legwork running this by industry,” he said. “This whole debate for me is actually a beautiful example of the system working.”
