As previously indicated, the American attitude toward foreign investment was generally a temperate one (absent energy investments or perceived war-time threats) until the aftermath of a major shift in post-WWII global wealth began to emerge in the 1970s. This impressive wealth re-allocation sprang from the geyser of middle-eastern “petro-dollars” created by the Organization of Petroleum Exporting Countries (“OPEC”) oil embargo in 1973. While the initial response to this increase of foreigners with an excess of investible dollars was somewhat alien to the American investing public, it was not immediately perceived as an outright threat. Operating under the assumption that these nouveau economic powerhouses were western-minded in their investment strategies – i.e., simply seeking a maximum return on their investment for the purpose of increased wealth – Americans paid little mind to the large, low-risk investments by these Sovereign Wealth Funds into our US Treasuries. Such treasury investments carried no real risk of foreign control and, therefore, were seen as relatively benign investments into our superior US economy.
Notwithstanding this measured response to massive foreign investment by the American public and popular media, both Congress and then President Gerald R. Ford recognized the long-term potential for concern and swiftly initiated methods for investigation and response on this new phenomenon. Congress took the first step by ordering the Foreign Investment Study Act of 1974 during the height of the first OPEC oil embargo. In 1975, President Ford established an Executive Committee to review United States investment by foreign investors. Known as the Committee on Foreign Investment in the United States (“CFIUS”), this notoriously secretive inter-agency committee has evolved its focus substantially since its 1975 inception.
The committee’s initially broad purview was to assess the risk to the United States economy as a whole, insofar as foreign investment was concerned. However, as business-specific investments and U.S. real estate holdings by the Japanese steadily increased throughout the 1980’s, the specific charge of protecting individual US businesses and their technologies became a national security concern beyond the scope of CFIUS at the time. Accordingly, Congress introduced the Exon-Florio amendment to the Defense Production Act in 1988, which empowered the President to investigate “mergers, acquisitions, and takeovers” that would result in a foreign person achieving control over a company or business where such control would impair national security.
CFIUS was consequently made responsible for implementing and enforcing the new powers of Exon-Florio under the revised Defense Production Act, as well as subsequent amendments to the Defense Production Act. Among these subsequent amendments was the Byrd Amendment which mandated committee investigation for certain foreign investment transactions where the acquirer is controlled by, or acting on behalf of, a foreign government and the acquisition “could result in control of a person engaged in interstate commerce in the U.S. that could affect the national security of the [United States].” Today, CFIUS operates under the Foreign Investment and National Security Act if 2007 (“FINSA”), which allows for more congressional oversight into the formerly secretive CFIUS review process.
America’s measured increase in concern regarding foreign investment in the United States is readily apparent from the frequent and increasingly aggressive legislative responses by Congress over the past 15 years. However, as evidenced by recent actions by the Organization for Economic Co-operation and Development (“OECD”), these growing feelings of wariness are not purely a domestic product. After citing concerns that SWFs “might not always act like private investors”, the OECD (which represents most developed nations around the globe) enlisted the assistance of the International Monetary Fund (“IMF”) to address these concerns in 2008.
In conjunction with a group of 26 Sovereign Wealth Funds, the IMF organized a working group to outline principles and practices with respect to Sovereign Wealth Fund investment activities known as the International Working Group of Sovereign Wealth Funds (“IWG on SWFs”). The group identified 24 Generally Accepted Principles and Practices (“GAPP”) to “properly reflect appropriate governance and accountability arrangements” and “allay the concerns of investee nations” regarding the investment activities of Sovereign Wealth Funds. These GAPP measures – which are also referred to as the Santiago Principles – are unfortunately more informative than reassuring for investee nations because they are purely voluntary measures, carry no binding authority over participating sovereigns and, therefore, do nothing to allay the fears of investee nations.
While the IWG on SWFs did very little to structure reform for the growing stable of Sovereign Wealth Funds (note that the operative verbiage for each formally drafted GAPP measure is should), CFIUS has taken great care to create a workable structure of analysis for US-based foreign investments while carefully avoiding bright-line tests that might be easily circumvented through creative maneuvering by these behemoth sovereign investment vehicles. The now broad definitions under which CFIUS’ duties are charged allow for a wide range of “covered transactions” which they must review and subsequently report upon to Congress.
The statute defines such covered transactions as any transaction that “could result in foreign control of any person engaged in interstate commerce in the United States by a foreign government” (emphasis added). By leaving the term “control” undefined, CFIUS maintains the ability to measure what constitutes “control” on a case-by-case basis and thus stays nimble enough to ensnare any SWF that might seek to dance around bright-line determinations of CFIUS authority.
As Michigan State law professor Bruce Bean has noted, the 2007 FINSA revision(s) to CFIUS also expanded the scope of CFIUS’ existing authority through a chain link of definitional expansions such as “specifying that the term ‘national security’ includes issues relating to ‘homeland security’, defining ‘homeland security’ to include America’s ‘critical infrastructure’ and providing that the term ‘critical infrastructure’ encompasses ‘critical technologies’, which term encompasses ‘technology, components, or items essential to national defense’.
One such transaction that will intentionally escape CFIUS review, however, is a passive investment by a Sovereign Wealth Fund that encompasses a 10% or smaller holding of voting shares in a US company. While such a transaction would understandably be allowed to sidestep scrutiny from a national security or foreign control standpoint, these minority ownership stakes are precisely the type of investments that are subject to analysis in the current hypothetical. However, the US Department of the Treasury (the department which houses the CFIUS and who’s Secretary is chairman of the committee) has been alarmingly inaccurate when measuring the size(s) and percentage(s) of foreign investments in US markets. Therefore, any comfort gained from the knowledge that only de minimus investments by Sovereign Wealth Funds are being excluded from CFIUS review is immediately replaced by the fear that any such assessment and subsequent categorization of these Sovereign Wealth Fund Investments as de minimus by the US government is grossly inaccurate and predicated on outdated information. As illustrated below, this pattern of inaccuracy is systemic and goes largely unnoticed by those who rely on the reporting figures.