By Max Raileanu
The U.S. Department of the Treasury describes the Committee on Foreign Investment in the United States (“CFIUS”) as being an “interagency committee authorized to review certain transactions involving foreign investment in the United States (“covered transactions”), in order to determine the effect of such transactions on the national security of the United States.” Upon completion of an investigation, the committee is able to recommend that the President block the acquisition or merger for national security purposes. Aside from 2018, CFIUS had not been reformed since 2007, leaving it unequipped to deal with the ever-changing foreign investment landscape.
CFIUS Reform
In August 2018, the Foreign Investment Risk Review Modernization Act of 2018 was incorporated into the John S. McCain National Defense Authorization Act for Fiscal Year 2019 to reform and modernize CFIUS. This law expands CFIUS’ jurisdiction to include investment structures that differ from mergers & acquisitions, such as non-controlling investments and acquisitions of real estate with no U.S. business. This reform was driven in part by growing concerns that certain countries like China have been using or attempting to use investment structures and agreements with U.S. companies to obtain technology that is vital to national security.
When CFIUS conducts an investigation, the committee is required to analyze the twelve factors that were created by Congress to determine whether a particular investment has national security implications. If the committee members agree that it does not, the review is terminated. The twelve factors cover the effects of transactions on the sale of military goods, equipment, and technology, the effects of the transactions on U.S. technological leadership in areas affecting U.S. national security, and the effects of the transaction on infrastructure (to name a few). But before these factors are considered, CFIUS needs to determine whether they have jurisdiction to conduct a review and later an investigation. The new law allows the term “investment” to cover:
“a national, government, or foreign entity of a ‘country of special concern,’ or a foreign entity controlled by, organized under, or with ‘substantial interest’ held by a ‘country of special concern,’ and that would result in obtaining: (1) sensitive personal data of U.S. citizens that ‘may be exploited in a manner that threatens national security;’ (2) involvement in ‘substantive decision-making,’ including the use of personal data or critical technologies; or (3) ‘material nonpublic technical information’ in possession of the U.S. company.”
At the moment, an application for CFIUS review is pending for a planned joint venture between GNC Holdings and the Chinese company Harbin Pharmaceutical Group Holdings Co., Ltd. Under the proposed joint venture, Harbin would become GNC’s single largest shareholder which would control 65% of the company. The joint venture would allow the manufacturing, marketing, and sale and distribution of GNC products in China. A key provision within the contract requires Harbin to provide a detailed list of all individuals and entities that “hold, own, or control equity or voting interests” in the company and to describe whether they are affiliated with any foreign government.
Determining Whether CFIUS has Jurisdiction to Review Harbin, and Whether It Poses a National Security Threat
China has been a country of special concern and President Trump has sought to limit Chinese investment in U.S. companies. Therefore, one piece of the first requirement mentioned above is satisfied, but the control aspect might not be. The first requirement explains that the foreign entity must be controlled by or organized under a foreign government, or that the foreign government must have a substantial interest in the entity. It remains to be seen whether the Chinese government satisfies this requirement because the CFIUS application is still pending.
If the Chinese government satisfies this requirement, the joint venture could be subject to extensive CFIUS review because the joint venture most likely satisfies the second and third criteria for review. The second criterion requires that the country could obtain sensitive personal data of U.S. citizens that “may be exploited in a manner that threatens national security.” Since Harbin would have a controlling share of the company, it is more than likely that they could obtain information about GNC customers. In particular, GNC has a number of stores next to U.S. military installations, which means that Harbin could obtain information about U.S. military personnel who use GNC.
The third criterion requires that the country could be involved in “substantive decision-making,” including the use of personal data or critical technologies. It can be reasonably inferred that Harbin, and potentially China (if found to have control or an interest in the company) would be involved in substantive decision making because Harbin has the right to appoint five directors to the board.
Conclusion
CFIUS’ increased jurisdiction will be a useful tool in countering national security concerns posed by foreign acquisitions of U.S. companies. If CFIUS determines that Harbin’s application for review is within its jurisdiction, there could be major national security concerns if the Chinese government has access, whether directly or indirectly, to GNC’s customer’s information.
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