Foreign Investment Vetting Changes Would ‘Paralyze’ Tech Firms

Stay current on the latest developments from agencies including the CFPB, Federal Reserve, FDIC, and OCC to advise clients on real-life regulatory situations.

By Alexei Alexis and Llewellyn Hinkes-Jones

Leading U.S. technology firms are urging Congress to narrow legislation that would put new restrictions on foreign transactions in the name of national security.

The bill (S. 2098) as currently written would require government scrutiny of virtually any kind of technology transfer that a company undertakes, according to the Washington-based Information Technology Industry Council, which represents Apple Inc., Google Inc., IBM Corp., and other tech giants.

Christopher Padilla, vice president for government and regulatory affairs at IBM, testified before the Senate Banking Committee Jan. 18 about the legislation. He said IBM supports the underlying goal of the bill, but his company is looking for some changes. He cited as a “serious flaw” a provision that would allow “review [of] out-bound international transactions, including thousands of non-sensitive sales and IP technology transfer deals, even with friendly nations.”

Before the hearing, ITIC senior vice president Josh Kallmer told Bloomberg Law that some of the bill’s language needs to be tightened and clarified to avoid confusion. “The language about tech transfers is very broad and, as we read it, would capture all kinds of routine business activities in a way that would literally paralyze businesses,” he said.

Legislation Moving

The Committee on Foreign Investment in the United States (CFIUS), a multi-agency panel headed by the Treasury Department, is responsible for vetting foreign transactions where national security concerns are raised. Lawmakers in both the House and Senate have proposed updating the rules governing the process. The issue is gaining increased attention as lawmakers and administration officials question Chinese companies’ efforts to acquire U.S. firms and their technology.

“The context for this legislation is about China,” said Sen. John Cornyn (R-Texas), who sponsors the bill with Sen. Dianne Feinstein (D-Calif.). “I’m an ardent supporter of free trade, and I strongly support foreign investment in the United States, consistent with the protection our national security. China, however, has significantly altered the threat landscape for the United States.”

Cornyn told the committee that he is committed to providing CFIUS with the necessary resources to allow expanded review of international transactions to keep U.S. intellectual property intact. “CFIUS is not a normal regulator by any means. It’s part of our national security apparatus,” he said.

The bill has support from key members of President Donald Trump’s administration, including Defense Secretary Jim Mattis, Treasury Secretary Steven Mnuchin, and Attorney General Jeff Sessions.

CFIUS currently looks at transactions that result in foreign “control” of the U.S. business. Cornyn and Feinstein’s bill would broaden the purview of CFIUS by covering additional types of transactions, including “any other transaction, transfer, agreement, or arrangement the structure of which is designed or intended to evade or circumvent the application” of the bill.

Staff is working to move the bill toward a vote, Feinstein aide Tom Mentzer told Bloomberg Law. Feinstein and Cornyn aren’t members of the Banking Committee, but Chairman Mike Crapo (R-Idaho) told Bloomberg Law that the committee will move as fast as possible on the measure.

The House Financial Services Committee is expected to take up a companion bill (H.R. 4311), introduced by Rep. Robert Pittenger (R-N.C.).

Kallmer told Bloomberg Law that his group is talking with congressional staff in both the House and Senate about changes to address industry concerns.

“Companies in all sectors engage in tech transfers in some form or another countless times a day,” he said. “We don’t believe that the authors of the bill and its supporters intend for this expansion to be as broad as it appears to be.”

CFIUS’s Increased Oversight

CFIUS activity has grown considerably in the last decade. The committee had only one investigation in 2005, but it has been increasingly more active since. The number of investigations tripled in 2016 from 2008, from 23 to 79, according to annual reports analyzed by Bloomberg Law. CFIUS data isn’t publicly available for 2017, but anecdotal reports of the committee’s reviews suggest that the activity has continued to increase over the last year.

The number of notices CFIUS received for potential investigations also jumped from 322 in the period between 2011-2013 to 462 in 2014 through 2016.

Nate Bolin, partner with Drinker Biddle who advises on corporate transactions and regulatory affairs, told Bloomberg Law that more companies are realizing that their deals risk being rolled back by CFIUS because they have seen other transactions publicly scuttled. “It’s now more important to get the blessing of CFIUS as part of an investment plan,” he said.

CFIUS also is looking at more of the deals on which it receives notification. The number of notices that led to investigations hovered around 40 percent in 2016. It was 4 percent in 2007.

Rod Hunter, partner with Baker McKenzie and previously senior director for international economics at the National Security Council (NSC) that oversees CFIUS, told Bloomberg Law that the workload of the committee is recently driven by investments from China.

“Sheer volume of transactions combined with strategic competition from China and the role of technology transfer has led to a doubling of CFIUS’s caseload,” he said.

CFIUS moved into the public eye as a result of the ill-fated 2006 Dubai Ports World merger. CFIUS approved the deal, finding no security risk in the purchase, but public outcry and pressure from Congress killed it.

To contact the reporter on this story: Alexei Alexis in Washington at aalexis@bloomberglaw.com, Llewellyn Hinkes-Jones at ljones@bloomberglaw.com

To contact the editor responsible for this story: Fawn Johnson at fjohnson@bloomberglaw.com

Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.

Request Antitrust on Bloomberg Law