When the Trump administration threatened to ban the short-video app TikTok in the U.S. in the summer of 2020 and force its divestment after a review by the Committee on Foreign Investment in the U.S. (CFIUS), the action undoubtedly troubled TikTok’s 100 million U.S. followers. But it also raised concerns among foreign investors and the small community of lawyers who represent clients before CFIUS.
Their chief concern was not the divestment order, whatever form it may ultimately take. Divestments are rare, but not without precedent. Instead, their concern went to the administration’s public speculation over TikTok’s future while the review remained pending.
First, some background: In July, Secretary of State Mike Pompeo said the administration was considering a ban on TikTok, contending that user data could be exploited by the Chinese government. Then, Treasury Secretary Steven Mnuchin disclosed that the U.S. government was reviewing the 2017 acquisition by ByteDance Ltd., a Chinese company, of musical.ly, a social video app with a large presence in the U.S., after ByteDance merged the acquisition with its TikTok app.
CFIUS, chaired by the Department of the Treasury, reviews the national security implications of covered foreign investments. Transactions deemed to threaten national security may be blocked by the president. Later that month, President Trump told reporters his administration was planning to ban TikTok from the U.S. A divestment order followed two weeks later.
Unprecedented Disclosures and Threats
Federal law, however, rigorously protects the confidentiality of CFIUS filings. Since its inception, CFIUS has protected the confidentiality of reviews, even declining to acknowledge that a review is underway unless it has been disclosed by the parties. The comments by the administration were therefore unprecedented and unsettling.
The public threats also fueled concern that CFIUS was being weaponized. Even investors from allied countries feared that investments could potentially be held hostage to political disputes.
Concern was further heightened when the president announced that the U.S. “should get a large percentage of the sale price” if TikTok is divested, and publicly debated the merits of prospective suitors. Divestment negotiations are entitled to confidential protection, and nothing in U.S. law gives the government a share in the profits when a business is divested following CFIUS review.
CFIUS, of course, is no stranger to politics. Over 30-plus years, more than one case has caught political flak. Nevertheless, these cases are notable because they are so rare.
CFIUS has distinguished itself as a largely non-political entity, focused on the national security implications of transactions under review. The committee isn’t blind to the political impact of its actions—but it has not been driven by politics.
What to Expect Now
We expect CFIUS reviews under the Biden administration to follow longstanding practice, which means investors can expect confidential treatment of filings. Further, given the president-elect’s stated goal of pursuing multilateral responses to policy disputes, we also think it unlikely that the Biden administration will seek to weaponize CFIUS.
At the same time, we do not expect a return to 2008 —or even 2016. A lot has changed in the last several years. Notably, the Foreign Investment Risk Review Modernization Act (FIRRMA), enacted in 2018, gave new authority to CFIUS, expanding reviews to include certain minority investments and, among other things, investments in real estate. The legislation reflects the consensus view that risk to national security can be found in investments outside the defense sector.
Given this new authority, we expect the Biden administration to continue investigations of significant foreign investments in U.S. critical technology, critical infrastructure, and data collection firms. We also expect investigations of real estate transactions involving properties in “close proximity” to sensitive government installations.
Covid-19 will also have an impact. Recently, Trump issued an executive order recognizing the critical role of the Public Health Industrial Base. We expect the new administration to double down on this initiative. The Covid-19 pandemic has underscored the importance of the domestic public health sector.
We expect that the Biden administration will challenge foreign investment, especially Chinese investment, whenever it is deemed a threat to national security. The majority of Chinese investments will undoubtedly clear CFIUS review—but they will get close attention. Chinese buyers must be prepared to mitigate risks associated with U.S. acquisitions, and that may require divestment of sensitive operations.
It is worth noting that CFIUS began its review of the transaction long after ByteDance acquired musical.ly. ByteDance bypassed CFIUS review when it made the acquisition.
By law, covered transactions that are not reviewed and cleared prior to closing are subject to potential review—and divestment—in perpetuity. That is true of all covered foreign investments—not just Chinese deals—and prior administrations, including the Obama administration, did not hesitate to challenge closed transactions. Biden’s administration will behave no differently.
How to Prepare
U.S. companies and their foreign investors must therefore consider the CFIUS implications of transactions early, especially any acquisition that would result in foreign control of a U.S. business that could affect U.S. national security, any acquisition (including leases) of real estate in close proximity to sensitive government installations, and any significant foreign investment, regardless of control, in U.S. companies involved in “critical technologies”—“critical infrastructure”—and sensitive personal data.
The purpose of CFIUS review is not to kill deals, but to identify and mitigate risk. Vetoes are reserved for the exceedingly rare cases where the parties either cannot or will not mitigate risk.
In all cases, the parties must be prepared to do the work necessary for a successful review. Reviews will be quieter during the Biden administration, but they will be no less real.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Chris Griner is chair of the National Security/CFIUS/Compliance practice of Stroock & Stroock & Lavan LLP in Washington, D.C. He played a key role in the development of the foreign ownership, control, or influence mitigation arrangements used by the U.S. government today and represents major foreign and domestic companies in CFIUS and other national security reviews.
Christopher Brewster is a consultant at Stroock who represents foreign and domestic clients in CFIUS reviews, including the drafting of mitigation agreements in critical technology cases and helps foreign-owned clients acquire and maintain security clearances. A former Senate counsel, he also represents clients before Congress on legislative matters.
Shannon Reaves is special counsel at Stroock who concentrates his practice in the areas of CFIUS reviews, industrial security, including FOCI mitigation matters before the Departments of Defense and Energy, and export control compliance.
Jonathan Labib is an associate in the Corporate and Private Funds practice at Stroock in New York. He advises clients on mergers and acquisitions and investment advisory, CFIUS reviews, industrial security, and FOCI mitigation matters, and on various debt and finance matters.