Once again showing a flare for the dramatic, this week Tesla founder Elon Musk dropped a bombshell regarding the electric car manufacturer. He revealed a tentative plan to leave the public marketplace and take the company private at a per-share price of price of $420.
It is estimated that the deal could be worth as much as $72 billion.
Where would the money come from? Following Musk’s announcement, Saudi Arabia's sovereign wealth fund acquired, through secondary markets, a stake in the company that could total as much as $3 billion.
Here is where things may get a bit tricky for Tesla, if, hypothetically, a foreign sovereign wealth fund went all in and fronted the billions of dollars needed to take Tesla private, that deal might very well attract unwanted scrutiny under newly expanded government trade rules. Such a review could ultimately prove to be a deal-killer.
Expanding and modernizing
In recent months, there has been an increased focus on foreign financial deals by U.S. companies and the role of the Committee on Foreign Investment in the United States.
CFIUS—chaired by the Treasury Secretary and comprised of Defense Department, Justice Department, State Department, and Homeland Security officials—reviews foreign investments in U.S. companies, including mergers and acquisitions, with a mission to detect and respond to national security risks.
Increasingly, given the multinational business climate, growing national security threats, and widespread intellectual property theft perpetrated upon companies doing business abroad, CFIUS is invoked far more than in past years. That helped spark legislative efforts to expand and codify its jurisdiction.
As a backdrop, earlier this year CFIUS squashed a proposed $117 billion Broadcom-Qualcomm merger. It also forced MoneyGram and Ant Financial Services Group, an affiliate of China-based Alibaba, to terminate their planned merger.
On Aug. 1, Congress, following a compromise between the House and Senate, passed the National Defense Authorization Act for 2019. It is expected to be signed into law by President Trump in the coming days. Within the pages of the NDAA is the Foreign Investment Risk Review Modernization Act, legislation intended to “modernize and strengthen” CFIUS.
Export controls have also been modernized with the inclusion of the Export Control Reform Act of 2018 in the NDAA. It includes language that creates a process for reviewing and controlling “emerging and foundational technologies” that are “essential” to U.S. national security and otherwise not subjected to export controls.
“I think it is historic,” says Mario Mancuso, who leads the law firm Kirkland & Ellis’ international trade and national security practice and is author of the recent book, A Dealmaker’s Guide to CFIUS. During his tenure as Under Secretary of Commerce for Industry and Security, Mancuso served as a CFIUS decision-maker.
“This is the most important update to CFIUS in its existence. The reason why is that this reform legislation would dramatically enhance and enlarge the scope of CFIUS’ legal jurisdiction over transactions,” he explains. “Transactions that were reviewable under the current regime will continue to be reviewable and, in addition, new transactions that had not been reviewable will become subject to CFIUS’ jurisdiction, including investments in certain non-passive, non-control investments in critical infrastructure, critical technologies and businesses involving sensitive personal data of U.S. residents,” he says.
“The key thing that makes it historic is the jurisdictional perimeter of CFIUS will get a lot larger,” Mancuso said. “In the weeks and months after it passes, I expect that for U.S. businesses and boards it will start to sink in how significant this legislation is.”
CFIUS is currently authorized to review mergers, acquisitions, and takeovers that may result in control of a U.S. business by a foreign person. That authority expands in its latest legislative iteration.
Rep. Robert Pittenger (R-N.C.) was among the architects of the new legislation. Chinese investment in the United States increased more than 900 percent between 2010 and 2016, he says.
“Much of this investment was part of a strategic, coordinated Chinese government effort to target critical American infrastructure and defense applicable technologies,” Pittenger said, stressing that the new FIRRMA strengthens how the CFIUS reviews the national security risks of potential foreign investments.
Changes and expansions of power contained in the new legislation include:
Expanding CFIUS’ authority to review non-controlling investments by foreign actors;
Placing a new emphasis on investments that could release U.S. citizens’ personal data or reveal sensitive information on critical technologies or critical infrastructure to potential adversaries;
Allowing CFIUS to review the purchase or lease of real estate near U.S. military installations and government properties that may be targeted for national security reasons;
Closing gaps in U.S. export controls that could permit emerging and “critical” technologies to be shared with targeted countries via joint ventures or other investment arrangements, threatening a U.S. advantage in the global marketplace; and
Allowing CFIUS decisions to be contested in the Court of Appeals for the D.C. Circuit.
Congress also authorized CFIUS to review all partnership agreements a U.S. company has signed with foreign investors. The legislation did not, however, agree to create safe harbors or “white lists” of investors and countries that would not face additional reviews.
There will also be new filing fees for CFIUS reviews, as authorized by the legislation. The fees are “not to exceed” 1 percent of the value of a transaction or $300,000, whichever is less.
A client advisory from the law firm Stroock clarifies that investments in critical technology or infrastructure companies should now expect CFIUS review.
“For the first time, this will include investments that fall short of control, but that allow the foreign investor access to material non-public information, membership or observer rights on the board (or the right to nominate directors), or any substantive involvement (other than voting shares) in (among other things) the use, development, or release of critical technology, or the management of critical infrastructure,” the firm wrote.
CFIUS review, it added, “may now be triggered by any change in a foreign investor’s rights in a U.S. business that could either result in foreign control of the U.S. business—or in an investment in critical technology, critical infrastructure, or in a firm maintaining or collecting sensitive personal data.
Mancuso detailed one aspect of the legislative reform that may be of particular importance from a compliance perspective.
“A lot of what is animating CFIUS reform is about the transfer of sensitive technologies from the U.S. to foreign persons,” he says. “Once the breadth of CFIUS reform kicks in, the role of trade compliance officers inside of U.S. companies will see their work become more visible. Because the CFIUS analysis will, in part, depend upon whether a business has sensitive technology, whether it is export controlled or emerging, the yeoman’s work that trade compliance people do on a daily basis will be much more visible inside of the C-suite. That is a good thing.”
Jason Waite, leader of Alston & Bird’s international trade & regulatory group, noted his particular interest in the changes raised by the Export Controls Act.
“In the CFIUS reform debate, there was a lot of discussion about somehow using it to regulate investments entering into joint ventures, certain types of technology licensing agreements, and investments in foreign companies where there was going to be technology transfer,” he says.
“Witness after witness went before Congress in hearings and explained that those are the kinds of things that should really be addressed by export controls. CFIUS is about whether a foreign person is going to come in and invest in or acquire a U.S. business, but you don’t want to move technology licensing arrangements and those sorts of things into it. That is better suited for our substantial export controls regime.
“A lot of the large technology companies were beating on that drum too, because they were concerned about having to deal with CFIUS every time they entered into some type of foreign licensing arrangement, joint venture, or anything like that. They prevailed and those matters are not part of the new CFIUS authority. Congress passed the Export Controls Act of 2018 and they became part of it.”
Waite, however, thinks that language in the statute may cause confusion and consternation for companies.
To keep pace with fast-evolving advancements in technology, the export controls legislation “created this new idea of having an interagency process to identify ‘emerging and foundational’ technologies,” he says. “That is somewhat of an unknown for companies. One of the things about export controls is that you want to know what they are and what is controlled as you are launching initiatives, launching R&D, or making business decisions. This concept that something could be found to be an ‘emerging and foundational’ technology and then subject to controls is a potential moving target.”
“How this is administered, who is defining what is an emerging and foundational technology, and how it is projected onto the private sector is a big deal. We don’t know how that is going to look like yet,” he adds, noting that the legislation even stops short of even defining what “foundational” means for its purposes.