THE COMMITTEE ON FOREIGN INVESTMENT IN THE UNITED STATES: AN ANALYSIS OF THE FOREIGN INVESTMENT RISK REVIEW MODERNIZATION ACT OF 2018.

• Author: Thompson, Andrew

1. Introduction

   The United States is the world's largest recipient of foreign direct investment ("FDI"), with acquisition expenditures by foreign-direct investors totaling $373.4 billion dollars in 2016. (2) Foreign investment into the U.S. economy offers many benefits, from providing jobs to driving innovation. (3) The Committee on Foreign Investment in the United States ("CFIUS") is an interagency body that serves as the President's council on potential national security implications related to FDI in the U.S. economy. (4) CFIUS has the duty to balance the United States' open and rule-based policy on international investment with national security interests in reviewing FDI. (5) The committee reviews transactions resulting in foreign ownership or control of U.S. businesses and makes a determination on whether the transaction poses a national security threat. (6) Recently, key United States government officials have taken note of FDI coming into private entities, such as joint ventures, which may not trigger a CFIUS review. (7) This led to President Trump signing into law the John S. McCain National Defense Authorization Act on August 13, 2018, which expanded CFIUS' authorization to scrutinize inbound foreign investment. (8)

   Access to critical technology as a result of a transaction is one factor CFIUS looks at in determining whether a national security risk exists in a foreign transaction. (9) Based out of the United Kingdom, the SoftBank Investment Adviser-led Vision Fund ("the Fund") had its first major close in May 2017, reporting $93 billion dollars of committed capital. (10) Masayoshi Son ("Masa"), Chairman and CEO of SoftBank Group and leader of the Fund, has claimed the purpose of the Fund will be to help create a portfolio of businesses that will engage in partnerships to promote the coexistence of artificial intelligence entities and mankind in the event of "The Singularity." (11) After a December 2016 meeting with then President-elect Trump, Masa pledged to invest $50 billion in the United States with a focus on investing in disruptive high-technology, which would reportedly create 50,000 jobs. (12) One aspect of such high-technology is the dual-use feature that many of these technologies possess, which provides both civilian and military-type applications of the technology. (13) As many Vision Fund transactions have involved such critical technology, due to its ability to be used in war, it is unclear how CFIUS will view these types of investments with a United States high-technology company. Furthermore, it remains uncertain whether the CFIUS reform Senator Cornyn proposed will deter potential national security threats that foreign joint ventures pose with their investments in U.S. high-technology companies.

   Part II of this note provides an overview of the creation of CFIUS, and describes how the Committee evolved from being first established by an executive order to being codified through a statute and proceeding amendments. (14) Part III of this note outlines the transactions that have been blocked by the President, as well as the creation of Masa's Vision Fund and the potential implications of the Vision Fund's investments on CFIUS. (15) Lastly, Part IV provides an analysis of the most recently proposed FIRRMA amendment and ultimately concludes that it strengthens CFIUS to meet present day challenges CFIUS that confronts. (16) Additionally, Part IV will predict the role that the FIRRMA Amendment would have had on investments made by the Vision Fund and analyzes how the amendment politicizes the foreign investment process. (17)

2. History

   Through an Executive Order, President Ford established CFIUS in 1975. (18) CFIUS was composed of eight United States government leaders, and was granted the primary duty of monitoring the impact of foreign investment in the United States. (19) This committee was tasked primarily to (1) arrange for the preparation of analyses of trends and significant developments in foreign investments in the United States, (2) provide guidance or arrangements with foreign governments for advance consultations on prospective major foreign governmental interests in the United States, (3) review investments in the United States which, in the judgement of the Committee, might have major implications for United States national interests, and (4) consider proposals for new legislation or regulations relating to foreign investment as may appear necessary. (20)

   CFIUS was established in response to concerns about increased investments by the Organization of the Petroleum Exporting Countries in American portfolio assets. (21) For example, with a surplus of money following OPEC's U.S. oil embargo, OPEC's holdings of longer-than-one-year U.S. treasury notes and bonds reached $4 billion dollars in 1976. (22) However, the executive order created confusion among CFIUS' members as to whether the objective of CFIUS was to focus on the political or economic aspect of FDI. (23)

   1. Exon-Florio Amendment

      In 1988, over growing concerns of Japanese and British acquisitions of U.S. firms, Congress created a formal review system for CFIUS through the Exon-Florio Amendment to (the "Amendment") the 1950 Defense Production Act. (24) The Amendment granted the President the power to suspend or prohibit foreign "mergers, acquisitions, or takeovers" that might threaten U.S. national security. (25) A protocol was put in place where if it was determined that an investigation should be taken, it would start no later than thirty days after the President received a report of the acquisition, merger, or takeover, and that said investigation should be completed within forty-five days. (26)

      Congress designated factors that the President may take into consideration when determining if a national security threat existed within a transaction. (27) Leading up to the adoption of the amendment and continuing to the present day, a hotly debated topic in Congress was how to define "national security" in the amendment. (28) Through the Exon-Florio Amendment, the President's role in CFIUS was strengthened, while it attempted to emphasize that the decisions made by the President regarding foreign investment policy remained free of political considerations. (29)

   2. Byrd Amendment

      Through the Byrd Amendment of 1992, Congress expanded the reach of the Exon-Florio Amendment. (30) The Byrd Amendment's two main additions to Exon-Florio were the instituted mandatory investigation of transactions involving foreign governments and increased Congressional report requirements of the President. (31) CFIUS members and Congress had different interpretations of the Byrd Amendment's meaning with regards to conducting a full forty-five day investigations into a covered transaction. (32) The differences in interpretation truly came to light during Dubai Ports World attempt to acquire six commercial U.S. ports in 2006. (33) The intense public and congressional debate from the Dubai Ports World acquisition changed the way the Bush administration viewed CFIUS investigations into foreign acquisitions, specifically when CFIUS approved of the French-based Alcatel SA acquisition of Lucent Technologies with a Special Security Agreement (S.S.A). (34)

   3. Foreign Investment And National Security Act of 2007

      A myriad of domestic and international factors played a role in the passage of the Foreign Investment And National Security Act of 2007 (FINSA). (35) From the start, FINSA placed a strong emphasis on national security and was designed to balance foreign investment and U.S. national security interests. (36) FINSA was the first statutory codification of CFIUS, which was previously empowered by Executive Order 11858. (37) FINSA formalized the process by which CFIUS conducted its national security investigations into a three part process. (38) Through President Bush's Executive Order 13456, the Committee's membership makeup was changed to nine members. (39) FINSA clarified that "national security" included issues related to homeland security as it applies to critical infrastructure. (40) Five new factors were added for the Committee to consider while undertaking an investigation into a covered transaction. (41) Much like the Committee did with Alcatel SA when it acquired Lucent Technologies, (42) FINSA authorized the Committee to require a foreign entity to enter into a mitigation agreement to deter the potential national security threat of a transaction. (43) Congressional oversight of the Committee was also increased with the passage of FINSA, which included providing Congress an annual report with a list of all concluded reviews and investigations. (44)

   4. The Foreign Investment Risk Review Modernization Act

      On November 8, 2017, Senators John Cornyn, Dianne Feinstein, and Richard Burr introduced the Foreign Investment Risk Review Modernization Act (FIRRMA). (45) The new FIRRMA bill broadens CFIUS' jurisdiction to investigate non-passive, minority-position investments in critical technology or infrastructure and associated support of a foreign arrangement such as a joint venture and real estate investments close to national security facilities. (46) Although FIRRMA does not specifically reference any specific country, the bill states that CFIUS should review covered transactions that are likely to reduce the technological leadership of the U.S. compared to a country of "special concern." (47) Additionally, the legislation calls for a report to Congress on Chinese foreign investment in the United States. (48)

      FIRRMA further expands CFIUS' jurisdiction by amending the definition of a "covered transaction" and identifying six factors the Committee would take into consideration when evaluating the national security aspects of such transaction. (49) The factors include considerations if a "country of special concern" is a party to the transaction, if the transaction is likely to create cybersecurity vulnerabilities, whether the transaction will...