Buyer Beware: CFIUS's Expanding Reach
11 April 2018
Although the Committee on Foreign Investment in the United States (CFIUS) has been evaluating foreign investment for implications to U.S. national security interests since 1975, its authority has expanded only incrementally over the years, with the last significant legislative changes more than a decade ago, through the Foreign Investment and National Security Act (FINSA) in 2007. Recent and potentially imminent developments suggest that the scope and import of CFIUS will continue to expand. CFIUS’s recent blocking of Broadcom’s acquisition of Qualcomm clearly demonstrates – if there was ever any doubt - that CFIUS increasingly considers indirect threats to national security when assessing potential transactions. In addition, pending reform legislation in Congress, if passed, will expand the types of transactions within CFIUS’s jurisdiction and enhance CFIUS’s review process. Each of these developments is considered below.
Blocking of Qualcomm / Broadcom Transaction
On March 12, 2018, President Donald Trump issued an order blocking Broadcom’s $117 billion bid for Qualcomm due to national security concerns. This followed an investigation by CFIUS, which had concluded that Broadcom’s acquisition would threaten American advancement of 5G technology, and potentially position Huawei, a Chinese competitor, to emerge as a leader in 5G technology. CFIUS and President Trump took this measure notwithstanding that Broadcom was in the midst of efforts to redomicile its headquarters in the United States from Singapore, a move that had been previously praised by the President, and had pledged to prioritize Qualcomm’s development of 5G technology.
Citing “credible evidence” that the transaction could “threaten to impair the national security of the U.S.,” President Trump blocked the transaction after CFIUS raised concerns that Broadcom’s takeover would precipitate reduced investment in 5G research and development by Qualcomm, a leader in the field, which would in turn position Chinese companies to take the lead on developing this new technology. The blocking – a still rarely-employed measure – is of particular note as a signal of CFIUS’s disfavor of structuring efforts to evade the Committee’s review jurisdiction, given that Broadcom was in the process of relocating to the United States, a move that may have eliminated CFIUS jurisdiction to review the transaction. Also notable is that the potential threat to national security identified by CFIUS, namely competition in 5G technology by Chinese firms, was not manifested directly by the potential acquirer Broadcom, but by the perceived knock-on effect the transaction could have in the industry more broadly.
Foreign Investment Risk Review Modernization Act – FIRRMA
The number of CFIUS filings has risen consistently, and although the scope of CFIUS review is widely perceived to have broadened in recent years, CFIUS has not been subject to a significant legislative overhaul since 2007. In tandem with an increase in concerns about potential national security threats associated with cross-border transactions and a rise in economic protectionism, various proposals have been made to update and modernize CFIUS. Certain of these proposals have crystallized into the proposed Foreign Investment Risk Review Modernization Act (FIRRMA), which the U.S. Congress is currently considering. FIRRMA enjoys broad bipartisan support, has been endorsed by President Trump, and is widely expected to become law in 2018. Some of its key changes are highlighted below:
Although filing in certain circumstances is generally advisable, there are currently no circumstances in which filing with CFIUS is compulsory. In a marked change from current practice, FIRRMA would require brief declarations to be made in certain circumstances, including transactions involving companies with 25% or more foreign government ownership acquiring 25% or more of a U.S. business, or certain other transactions to be delineated in future regulations by CFIUS. Following such a declaration, CFIUS may either provide for an expedited approval or request that a full filing be made.