On September 21, 2017, the Committee on Foreign Investment in the United States (“CFIUS”) issued a public version of its most recent classified annual report to Congress on covered transactions for CY 2015. CFIUS is the multi-agency governmental committee established to evaluate and clear foreign acquisitions of U.S. businesses based on national security grounds. Each year, CFIUS reports to Congress on the number of such foreign acquisitions involving CFIUS and the resulting decision made regarding such transactions. The 2015 Report shows an increase in the number of notices of transactions, from 65 notices in 2009 to 143 in 2015. Although the total number of notices in 2015 was constant as compared to 2014, the number of notices which CFIUS determined to investigate increased from 35% of all notices in 2014, to 46% in 2015, a 30% jump in investigations. The percentage of notices in the mining and energy sector decreased over the same seven-year period, from 29% of the total to 15%, due to the larger number of total notices. The number of Chinese transactions in 2015 steadily increased from 24 in 2014 to 29 in 2015 and in 2016 is expected to jump to 75 transactions. Thus, the Report paints a fairly predictable picture in 2014-15. While CFIUS does not contemporaneously publish official reports of filed transactions, in 2016, there were 172 CFIUS notices filed. 79 of those notices, or about 46%, led to investigations and 1 of the investigations required a presidential decision as to approval.
The CFIUS Report for 2016 and 2017 may look very different, although it is premature to determine the impact from the transition this year to the presidency of Donald Trump, particularly given his well-publicized positions regarding alleged Chinese currency manipulation, trade imbalances, increasing acquisition of key U.S. intellectual property, and international policy. It appears that CFIUS reviews involving Chinese transactions have become very challenging, with increased scrutiny and much longer clearance periods and mitigation measures. At the same time, the total number of noticed transactions in 2017 is expected to increase dramatically, with estimates exceeding 250-300 transactions.
Perhaps signaling the administration’s level of CFIUS oversight, on September 13, 2017, President Trump issued an executive order blocking a $1.3 billion merger between Lattice Semiconductor Corporation and Canyon Bridge Capital Partners, a Hong Kong backed fund, based on national security concerns over the transfer of computer chip technology. The parties announced the termination of the transaction the same day. In the forty years following the establishment of the committee, it appears this executive order represents only the fourth time a U.S. President has issued an order blocking a transaction. However, this result was expected, as it had the support of over 20 U.S. senators who were against the transfer of the custom microchip manufacturing technology to China.
The effect on natural resources transactions may be less pronounced. When the Treasury Department promulgated the CFIUS regulations and guidance, they reaffirmed that covered acquisitions include acquisitions of strategic mining and energy assets, including those involved in “[t]he exploitation of natural resources, the transportation of these resources (e.g., by pipeline), the conversion of these resources to power, and the provision of power to U.S. Government and civilian customers.” However, in reviewing energy and natural resources transactions which were opposed or blocked by CFIUS, the primary factor leading to the decision often appears to be due to the company’s proximity to sensitive government or military facilities rather than the strategic nature of the company’s products:
- In 2009, CFIUS opposed an attempt by Northwest Non Ferrous International Investment of China to acquire Firstgold Corp., which operated mining property near Fallon Naval Air Station in Nevada. The Chinese buyer ultimately withdrew from the transaction.
- Similarly, in June 2012, CFIUS issued an order requiring Hybrid Kinetic of Hong Kong to divest its interest in a U.S. Gold mining Company located near a U.S. naval training facility in Nevada.
- In 2010, CFIUS issued an order blocking an acquisition by Chinese-owned Ralls Corp. of the Project Companies’ wind farms in Oregon. CFIUS based its order on grounds that the wind farm projects were located near a U.S. Navy facility. President Obama subsequently ordered Ralls to sell the wind farms and Ralls filed a lawsuit to block implementation of the President’s order, which ultimately was successful before the DC Circuit Court of Appeals and ultimately settled in 2015.
- In 2013, CFIUS imposed significant mitigation measures restricting the acquisition by Cnooc Ltd of large oil and gas assets held in the Gulf of Mexico by Canadian energy company Nexen Inc. While CFIUS approved the acquisition of the U.S. assets, Cnooc was barred from operating oilfields in the Gulf of Mexico under the accord, due to their strategic value and proximity to a U.S. Naval Air Base in Louisiana.
Thus, the long-term implications for CFIUS’s review of investment in domestic energy and mining properties in 2017 will be challenging, but perhaps not so much as in some other sectors.
CFIUS review can be a complex process that operates on a shortened timeframe. The process requires close cooperation between the buyer and seller. Further, because of the joint committee nature of CFIUS, it is important to have an understanding of other agency regulations, such as those controlled by the Departments of State and Defense. As these issues are integral to the drafting and negotiation of any deal, it is important to address these issues on the front end. As referenced above, CFIUS review will continue to be a top issue as international trade and cross-border transactions increase.