Washington’s normally stoic international mergers and acquisitions community is unusually animated following the culmination of an unprecedented sequence of events.
In 2012, for the first time in 22 years, the president intervened to block a foreign investment on national security grounds. In an even more unprecedented move, the company in question filed a lawsuit against the Cabinet-level Committee on Foreign Investment in the United States (CFIUS) claiming its due process had been violated. Few knowledgeable observers gave the case much chance of succeeding.
In a surprising decision handed down on July 15 by the US Court of Appeals for the District of Columbia (another first), the company in question won at least an ephemeral victory: the court found that CFIUS had denied constitutionally required due process. The decision will likely not reverse the government’s ultimate position as the court did not rule the president lacked authority to make such determinations — an important victory for the administration.
At the very least, however, the court’s decision will intensify calls to re-examine the existing CFIUS process. It also creates an opportunity to have a greater discussion of how best to provide the government the necessary tools needed to effectively adjudicate national security interests in light of increasingly complex global financial transactions.
In this particular case a US company, Ralls Corp., owned by Chinese nationals and closely affiliated with a Chinese wind turbine company, planned to construct power generation towers adjacent to and within the restricted airspace of the Naval Weapons Systems Training Facility (Boardman) in Oregon.
CFIUS, a somewhat arcane inter-governmental committee chaired by the Treasury Department with participation by 16 other Cabinet-level officials, is not well understood outside a small community of transaction lawyers and dedicated senior civil servants. The committee stands on the front line of balancing our nation’s openness to foreign direct investment — among the greatest and most efficient of any country — against the very small number of transactions which raise legitimate national security concerns.
When a publicly traded foreign company buys a US firm, the transaction is fairly easy to assess and CFIUS works well. Unfortunately, such transactions are increasingly rare. Transactions now often involve private firms whose ownership structure is more complex than an NFL playbook.
Moreover, private equity players with unknown investors and sovereign wealth funds are increasingly active, as are firms focused on acquiring everything from technology firms in bankruptcy to companies that focus on establishing “joint ventures” or small minority interests to access technology outside the purview of any review process.
With enormous amounts of global capital now on the sidelines, US technology firms are a ripe and appropriate target for any smart investor. Unfortunately, these same firms are increasingly a target for investors who may not be interested in strictly economic returns.
Just as some potential US adversaries seek to obtain IP through cyber theft, we must not be naïve about seemingly legitimate businesses targeting firms at the heart of US technological innovation. While we rightfully focus efforts on denying potential adversaries access to “crown jewels” through the back door by enhancing our cyber defenses, we must dramatically increase our efforts to stop nefarious activity at the front door where the same transfers can take place by simply investing in a firm to gain access to its technology from within.
Targeted foreign financial investment may increasingly emerge as yet another “insider threat” the nation is too slow to recognize and too disorganized to prevent.
In light of the Ralls decision small adjustments to the current process appear to be in order, such as greater transparency for the commercial parties to the transaction. But such tweaks on process alone will not likely establish the needed tools to address the emerging threat posed by the increasingly complex foreign direct investment.
The first step is to ensure that CFIUS continues to be able to protect national security while preserving open market access where possible. We also need a broader conversation on additional steps necessary to formulate new means and structures to deal with the vast majority of financial transactions not covered by the CFIUS.
Potential adversaries are increasingly knocking at the front door and the vast majority of visitors, both good and bad, continue to be welcomed with open arms. ■
Brett B. Lambert is the former DASD for Manufacturing and Industrial Base Policy and currently a Senior Associate at CSIS. John Schaus recently returned from the Pentagon to CSIS where he is a Fellow in the International Security Program. They are initiating a project on Foreign Direct Investment and U.S. National Security at CSIS.