States of flux

Restrictive foreign investment measures and rising protectionism are creating a more complex environment for cross-border M&A. Drawing on his experience of shaping and implementing US national security and investment policy, Washington-based partner Aimen Mir shares his thoughts on geopolitical shifting sands – and how deal scrutiny is on the increase.

We live in complex times. The US and China have close economic ties that benefit both countries, but because they are not strategically aligned those relationships are ripe for challenge. This complex dynamic is visible in the dispute over trade – on one level this is separate from the national security issues on which the Committee on Foreign Investment in the United States (CFIUS) adjudicates, but on another there’s significant overlap.

The trade war is in part motivated by Washington’s perception that the Chinese government has created an environment in which US companies are disadvantaged. Inside the US government there are many people who believe that economic imbalance has to have an impact on security. CFIUS is focused purely on the security dimension, but outside the committee the two are much more closely entwined.

The concept of ‘national security’ has changed as technology has become more pervasive. For CFIUS this is not just about foreign investments in technologies that have direct military applications, transactions involving defence companies or acquisitions in the critical infrastructure space. Over the past 10 years we have seen the emergence of technologies that offer massive commercial opportunities but also have potentially significant military uses. AI, biotech, robotics, fintech – all of these have been identified by the military intelligence community as potentially pivotal to strategic supremacy.

Many of these emerging technologies are not currently the subject of export controls. Bringing these regulations up to date is difficult when the potential of new tech often takes time to be understood. The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), which extends the reach of CFIUS, and the Export Control Reform Act of 2018 were designed to do just that. However, the challenge never ends, and we might therefore need to rethink the way we safeguard security. Do we protect it via regulation – by building walls – or through some other mechanism?

As more and more things are connected and technology becomes more powerful, it gets easier to gather massive amounts of data and manipulate it. This creates increasing national security vulnerabilities. If a foreign investor is interested in a business that holds the names and credit card numbers of large numbers of US citizens, that may be unlikely to present a concern that prompts CFIUS action, given the broad availability of such information. But what if it holds very sensitive personal information, like genetic data, about a more limited group of individuals? That’s increasingly seen as a real risk.

It’s in the interest of CFIUS to have greater engagement with allied countries, particularly where those countries have leading-edge technological capabilities or are investors in the US. Whether or not the technology originates in the US, it can prompt national security concerns in Washington – so there is a governmental interest in ensuring a common approach to these issues across jurisdictions. The FIRRMA legislation that was passed last summer creates a legal authority for that engagement, and in the EU, new foreign direct investment screening similarly confirms the ability of member states to engage with non-member state governments.

As an adviser, the type of things you have to walk through with a client are their objectives and how much risk they are willing to take. Then it’s about understanding the CFIUS view. How is the committee likely to view the implications of the deal? Is there a way it can be structured to mitigate concerns? Does the committee’s view change the buyer’s investment objectives or exit strategy?

Whether you’re a financial or a strategic investor, you need to think through how CFIUS will consider the deal, even if there’s no Chinese money involved. And now, with increased co-ordination among governments, companies will have to think about how CFIUS review intersects with increasingly active foreign investment screening regimes in other countries.