On August 13, 2018, President Trump signed into law the Foreign Investment Risk Review Modernization Act (“FIRRMA”), which had received overwhelming bipartisan support in both houses of Congress. FIRRMA expanded the authority of the Committee on Foreign Investment in the United States, or CFIUS, to review (and potentially block) foreign investments in U.S. companies that are deemed to pose a threat to national security—a standard that remains vaguely defined. Even before FIRRMA, CFIUS had broad powers; its reviews constituted a substantial hurdle for transnational deals in a wide range of industries, such as telecommunications, integrated circuits, and payment systems. Perhaps most notably, on March 12, 2018 President Trump—acting on a recommendation by the CFIUS—prohibited Singapore-based Broadcom’s proposed acquisition of U.S.-based Qualcomm on national security grounds. With FIRRMA expanding CFIUS’s authority even more, and with the President seeming to take a broader view of what could pose a threat to national security, U.S. companies seeking international investments face an increased risk that potential transactions will be blocked—with limited legal options to challenge those decisions.
The History and Background of the CFIUS. The CFIUS is an interagency committee authorized to review certain transactions involving foreign investment in the United States, in order to determine the effect of such transactions on U.S. national security. This authority is provided under section 721 to the Defense Production Act of 1950, as amended in the Exon-Florio amendment in 1988. Congress passed the Exon-Florio amendment in response to a rise in foreign—in particular, Japanese— acquisitions of U.S. technology companies.
The composition of the CFIUS has changed over time, but it is currently made up of the heads of the Departments of Treasury, Justice, Homeland Security, Commerce, Defense, State, and Energy, along with representatives from the Office of U.S. Trade and the Office of Science & Technology Policy. Other executive branch offices observe and participate in the CFIUS, including the Office of Management & Budget, the Council of Economic Advisors, the National Security Council, the National Economic Council, and the Homeland Security Council.
The Exon-Florio amendment granted the President the authority to block foreign acquisitions of companies engaged “in interstate commerce in the United States” that pose a risk to national security. To block a foreign acquisition, the President must conclude that other U.S. laws are inadequate to protect national security, and determine that there is “credible evidence” that the foreign acquirer might take action that threatens to impair U.S. national security. Significantly, the statute also states that the President’s decision to suspend or prohibit a transaction is “not subject to judicial review.”
Despite the Exon-Florio amendment’s grant of virtually unchecked power to block foreign acquisitions of U.S. companies, presidents have rarely exercised that power. Until 2011, President George H.W. Bush was the only president to block a deal. However, starting with President Obama, who vetoed two deals involving Chinese acquirers, the CFIUS has not shied away from investigating transactions involving foreign companies and investors—in particular, from China. And in his first two-and-a-half years in office, President Trump has already blocked three deals, two of which involved Chinese firms. With FIRRMA’s enactment last year, CFIUS’s and the President’s power to block investments from foreign investors has expanded even more.
One of the reasons that historically presidents have only rarely used their powers to formally block transactions is that the CFIUS typically enters into mitigation agreements with transacting parties to alleviate potential national security concerns. For instance, the parties may agree to allow foreign persons only limited or no access to sensitive documents or information bearing on national security, or agree to allow the U.S. government the right to review and approve certain business decisions. Thus, historically, even if the CFIUS determined that an acquisition threatened to impair national security, the CFIUS and the parties could usually find a way to mitigate that threat and still close the transaction. But another reason presidents have rarely used their powers is that transacting parties often preemptively withdraw from scrutinized transactions based on feedback they receive from the CFIUS, thus mooting the need for presidential action.
Challenging CFIUS Determinations. The Exon-Florio amendment provides that Presidential decisions to suspend or prohibit deals are “not subject to judicial review.” Accordingly, the options to appeal any adverse rulings emerging from a CFIUS review are severely limited. FIRRMA further restricts the ability to challenge CFIUS orders by mandating that any legal challenges be filed in the United States Court of Appeals for the District of Columbia Circuit. To date, no such suits have been initiated under FIRRMA. In fact, since passage of the Exon-Florio amendment, only one company has ever gone to court to challenge a CFIUS review. See Ralls Corp. v. Comm. on Foreign Inv. in U.S., 758 F.3d 296 (D.C. Cir.2014).
Ralls involved a Chinese-owned company, Ralls Corporation (“Ralls”), that in 2012 sought to acquire a wind-farm project in north-central Oregon. The transaction caught the attention of the CFIUS because the wind-farm was located near a U.S. Navy weapons systems training facility. Id. at 304-05. The CFIUS issued orders mandating interim mitigation measures (preventing Ralls from building the wind farms during the pendency of CFIUS review, and ordering the removal of all items from the project sites, including concrete foundations), and President Obama followed up with an executive order formally blocking the deal. Id. at 305-06.
Ralls brought suit challenging both the CFIUS order and the Presidential veto. The District Court for the Districtof Columbia dismissed the case on jurisdictional grounds, but on appeal the D.C. Circuit reversed and remanded. The Court of Appeals confirmed that Ralls could not challenge the merits of the President’s determination that the transaction at issue posed a national security threat. Id. at 311. However, the Court did hold that the presidential veto deprived Ralls of constitutionally protected property interests without procedural due process, because the government did not provide Ralls with advance notice, access to the unclassified evidence supporting the decision, and an opportunity to rebut that evidence. Id. at 319-21. The Court of Appeals also remanded the matter to the District Court to assess on the merits the lawfulness of the CFIUS’s orders mandating interim mitigation measures. Id. at 325. The parties settled before the District Court ruled on whether the CFIUS exceeded its authority and violated Ralls’ due process by “effectively prohibiting” the transaction (which only the President has authority to do).
Ralls illustrates that even before FIRRMA, parties to potential international investment transactions faced severe hurdles in challenging an interim CFIUS order, much less a presidential blocking order. Even if a court rules that the CFIUS exceeded its authority in ordering interim mitigation measures (or in recommending that the transaction be prohibited), once the CFIUS refers the matter to the President, he or she can issue an order blocking the deal that is non-appealable.
Recent Enforcement Trends. Under the Trump Administration, the CFIUS has stepped up its efforts to scrutinize acquisitions made by Asian companies, and especially Chinese companies, on national security grounds. In 2017, for instance, President Trump blocked the Chinese investment firm Canyon Bridge Capital Partners from acquiring U.S. chipmaker Lattice Semiconductor Corp., finding that the transaction “pose[d] a risk to the national security of the United States that cannot be resolved through mitigation.” A year later, the President blocked Singapore-based Broadcom’s acquisition of Qualcomm over concerns that Broadcom’s influence over Qualcomm’s development of 5G technology posed a risk to U.S. national security. And earlier this year, President Trump ordered Beijing Kunlun Co. to divest itself of Grindr LLC, an online dating app, over national security concerns based on foreign access to personally identifiable information.
Although transactions in the technology arena are clearly being targeted by the CFIUS, recent statements coming out of the White House in connection with the ongoing trade war with China show that the CFIUS may begin scrutinizing transactions in sectors that are not often associated with national security, such as imported automotive passenger vehicles and auto parts. President Trump’s announcement (in May 2019) that “automobiles and certain automobile parts are being imported into the United States in such quantities and under such circumstances as to threaten to impair the national security of the United States,” generated concern from major automobile importers such as Toyota. Whether the President’s statement will lead to future CFIUS scrutiny and potential prohibition of transactions in the automotive sector—especially in connection with companies involved in the development and manufacture of electric and autonomous vehicles—or beyond, only time will tell.