On January 20, 2021, U.S. presidential power transferred—peacefully—to Joseph R. Biden.

Presidential transitions historically have brought near-term uncertainty for parties undertaking mergers and acquisitions in the United States, particularly transactions subject to review by the Committee on Foreign Investment in the United States (CFIUS). It typically takes time for the new Administration to gain its footing with respect to CFIUS and for the career staff in each CFIUS member agency to adapt to new political leadership. This time, however, the opposite is true. Since the inauguration, there has been a palpable sense of return to traditional norms in government, and a renewed clarity and confidence in Executive Branch processes, including CFIUS, that comes from an incoming Administration perceived to have a stronger commitment to the rule of law and a more mature interagency policymaking process coordinated by the White House. There likely will be occasional timing delays in the CFIUS process for certain matters, which is a natural result of the transition; these hiccups no doubt will be magnified somewhat by the greater bureaucracy created around the CFIUS process through the reforms of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). Additionally, investments from countries such as China that are viewed by the U.S. government as strategic competitors will continue to face close scrutiny and skepticism. Overall, however, investors and transaction parties can have confidence in the substance and the process of CFIUS under the new Administration.

The following reflects our present assessment of the key questions and issues relating to the Biden Administration’s approach to foreign direct investment and CFIUS.

Yes. Every Administration since that of President Carter—including the previous Administration—explicitly affirmed the United States’ openness to foreign direct investment. We expect the same will occur in the Biden Administration and that this commitment will be even stronger in practice, for three distinct reasons.

First, President Biden is inheriting an economy facing serious pandemic-driven challenges. As a consequence, we expect that the Administration will likely be oriented toward policies that are focused on attracting capital and maintaining and bolstering investor confidence.

Second, President Biden has made it clear that his Administration will focus on restoring U.S. relationships with traditional allies. Restoring those relationships very likely will include reaffirming allies’ roles as trade and investment partners, particularly to balance the continued rise of China’s economic power. This view of alliances is also informed by a fundamental belief that the United States should lead by example and compete based on its openness, rather than adopt policies motivated by protectionist fears. While CFIUS is not necessarily central to these policy perspectives, the reality is that such commitments to alliances and openness frequently carry over to the CFIUS process, which ultimately reports to the White House and, in turn, is informed by the policy perspectives of the President. An Administration that is internationalist in its outlook will inherently instill a discipline of openness and undoubtedly will be more favorably disposed to solutions that balance security and economic interests in ways that have been largely missing for the last four years.

Third, the rhetoric of the last Administration furnished—in subtle and not-so-subtle ways—protective cover for bureaucratic decision-makers to be more cautious and risk-averse in reviewing foreign investments. Thus, while the United States has generally remained open to foreign investment over the last four years, there unquestionably were circumstances in which the hyperbole of the Administration had a chilling effect on certain determinations of risk arising from foreign investment and, in turn, on the willingness of Administration officials to consider solutions to mitigate identified risks. This unfortunately resulted in some transactions being prohibited outright where the risks otherwise might have been mitigated. We expect this dynamic to recede, at least to some degree, in the Biden Administration.

Taken together, these factors mean that the United States, under the Biden Administration, will be strongly committed to foreign direct investment. At the same time, however, certain transactions—particularly those involving industries that have been the focus of China-related concerns—will continue to receive deeper political and regulatory scrutiny.

We expect that the CFIUS process will change in two material ways, which may not be completely transparent to investors.

First, we believe that there will be a greater balance between the CFIUS member agencies with traditional national security responsibilities (for example, the Departments of Defense, Justice, and Homeland Security) and those with broader economic and trade responsibilities (namely, the Departments of State and Commerce and the Office of the U.S. Trade Representative). Reflecting the policies and personalities of the Trump Administration, over the last several years the economic agencies were uncharacteristically aggressive on national security issues within CFIUS—at times in ways that seemed at odds with their agency missions. This disrupted the long-standing and intentional balance of a Committee established by Congress with the goal of protecting U.S. national security within the broader context of an open investment environment. The prior Administration’s broad support for the views of national security hawks arguably prompted the Committee to identify more facts as presenting national security concerns, and in turn made resolving those concerns more challenging. We expect the normative balance of the Committee to be restored under the Biden Administration.

Second, and equally important, the Biden Administration will have a strong commitment to interagency processes managed and informed by a strong National Security Council process at the top. This was largely absent in the last four years. Instead, as has been well documented, the Trump Administration often was characterized by a “tribalist” approach of competing views at senior levels, and a notable absence of process, with decision-making at times turning on the personal whims of the President and the advisor with whom he had most recently spoken. This dynamic made it very challenging for sub-cabinet level officials and staff to work through complicated issues and resolve differences. That behind-the-scenes discussion and compromise is critical to the effective functioning of the CFIUS process, especially given that there are nine different voting agencies that require consensus to act on every important matter before the Committee. We believe that this internal dialogue will improve considerably in the Biden Administration, and that ultimately, as sub-cabinet level officials assume their posts, there will emerge a stronger process than we saw under the previous Administration—a CFIUS process predicated on greater trust and comity among and between the agencies, their staff, and their leadership. As a result, we expect to see more efficient, coherent, and effective resolution of different views and perspectives among the agencies in the CFIUS process that more closely adhere to the governing statute, regulations, and policy.

In this regard, it is particularly important that inter-agency relationships between certain key CFIUS member agencies—which have deteriorated substantially over the last several years—improve. We expect that such improvement likely will be an area of focus for the sub-cabinet level political appointees who have CFIUS responsibilities at each agency.

At the same time, it is not certain that improved dynamics within the process necessarily will contribute to shorter timelines. On the one hand, the administrative functioning of the CFIUS process has seen substantial improvement since 2018, driven in significant part by a strong commitment from the Treasury Department, as chair, to process cases quickly. That commitment, together with the lengthening by FIRRMA of the initial CFIUS review period from 30 days to 45 days, and the establishment of greater CFIUS-directed resources among the agencies—generally has reduced timelines in the past 18 to 24 months. This has been particularly true for cases that have not raised national security concerns. On the other hand, the resumption of a stronger interagency process actually could—ironically—lengthen timelines somewhat. In the Obama Administration, the interagency process generally was quite methodical and thorough; this translated into fairer outcomes but often also resulted in longer timelines. Given the number of Obama-era officials who are populating the Biden Administration, it will be important to watch whether deliberation and consultation turns into delay and pressure on deal timetables. If so, and given a vastly expanded process—the last year of the Obama Administration had 172 CFIUS cases; by comparison, there were more than 300 notices and declarations in 2020—it is conceivable that some types of transactions that were cleared in the initial 45-day review phase in the Trump Administration could face a second-stage review in the Biden Administration.

In all events, given the absence of Senate-confirmed, sub-cabinet officials for the next several months, in the near-term we would expect there to be a slight drag on the timelines for CFIUS cases, but overall we expect the process to be smoother and more predictable in the Biden Administration.

We expect that CFIUS will continue to approach Chinese transactions with caution and skepticism, and apply close scrutiny to such transactions. We also believe, however, that the Biden Administration will approach such transactions with less rhetoric and a greater commitment to a consensus-driven process that carefully and objectively evaluates risk and seeks to use mitigation as a tool, where appropriate. That is, we do not expect a sea change in the U.S. government’s approach to potential perceived risks posed by Chinese investment, but we do think that there will be somewhat more equilibrium in and coherence to the process.

As a foundational point, it is important to note that the door was not closed to all Chinese investment over the last four years—CFIUS did approve a number of transactions involving Chinese acquirers. However, there was deep skepticism of Chinese investors and a presumption of “no” for most cases involving technologies in areas of competition between the two countries, large volumes of data, and/or proximity to sensitive U.S. government facilities. It equally should be underscored that the concerns about China that animated the CFIUS process over the last several years were not strictly political; they emanated to a considerable degree from a consensus analysis by the professional corps of the U.S. national security community, including the U.S. Intelligence Community, which predated the Trump Administration, regarding the near-term and long-term threats and challenges posed to the United States by China. Because these perspectives were not solely political, they are not likely to change drastically with the new Administration, and they will continue to inform the CFIUS approach to China-related transactions.

Candidate Biden also campaigned on the basis of being tough on China and, for many years, one of the few areas of consensus between Democrats and Republicans has been on strong policy and legislative action directed at addressing geopolitical and economic competition with China. Indeed, when announcing his foreign policy team earlier this month, then President-elect Biden made clear that his Administration will continue a strong focus on competing with China across a range of areas, including technology. Thus, the policy perspectives of the new Administration are unlikely to result in a dramatic change in the CFIUS approach to Chinese investment. Equally, however, the Biden approach to China has been more pragmatic and careful in how the rivalry is characterized—emphasizing strategic competition rather than ideological confrontation—and we expect the Biden Administration to pursue a more multi-lateral, deliberate approach to addressing competition with China, rather than the unilateral and very aggressive approach to containing and combating Chinese power that informed the Trump Administration. Contrary to the Trump Administration, there is no significant constituency for broad economic decoupling from China among incoming senior Biden Administration officials, who favor a more targeted approach to reducing dependencies and limiting interactions with China. In addition to national security, human rights concerns will likely receive more attention as a consideration in deciding when decoupling, such as restricting technology flows, is warranted.

In this context, we expect that the Biden Administration will view CFIUS as a tool to address risks with respect to U.S. competition with China, but only as one of many, and not necessarily a primary one. And, while we think the Biden Administration will not hesitate to prohibit Chinese investment where it deems there to be unresolvable national security concerns, we expect the orientation of the Administration, as noted, to focus on the process; generally to prefer that CFIUS, rather than the White House, be the body to resolve matters—and to do so quietly, consistent with the confidentiality protections of the statute; and to foster a balance of views among the different CFIUS member agencies to inform consensus-based decision-making with respect to both national security risks and potential mitigation.

In practice, we expect that this will result in a more considered calibration of whether mitigation is an adequate and appropriate tool to address concerns in the context of Chinese investment, and a more bottom-up driven analytical and deliberative process. To be sure, we do not expect a return to the openness to Chinese investment that characterized the early period of the Obama Administration, but we do think that investors should expect a “fairer shake” from the process, and a general press from the Administration to allow CFIUS itself to address concerns and not to have CFIUS cases animate the bilateral relationship with China.

While the Biden Administration may have a different orientation on certain aspects of the CFIUS process, it will be inheriting a process that was greatly expanded by FIRRMA, with enhanced resources. The combination of the new expanded jurisdiction and the enhanced resources has resulted in a more probing CFIUS process, even for cases that receive clearance during the review period or through the short-form declarations. In these circumstances, we offer the following suggestions to transaction parties:

• Ensure that CFIUS considerations are at the forefront when first evaluating a potential investment target. A few hours of focusing on potential national security considerations and getting an experienced view on such issues at the outset of a due diligence assessment can avoid weeks, or even months, of wasted effort evaluating a business and negotiating terms with respect to a U.S. business that ultimately will not be a realistic investment target. Thus, the optimal time to evaluate CFIUS issues is when parties are at the outset of the transaction process, such as when producing or receiving a confidential information memorandum or management presentation, if not sooner.
• Think globally about potential national security considerations. One aspect of the CFIUS process almost certain to remain constant in the Biden Administration is the agencies’ broader approach to identifying and considering national security risks. No longer is it the case that the CFIUS member agencies solely consider the four corners of the transaction and evaluate how it bears on U.S. national security at a particular moment in time. Rather, the risk-based analysis also considers how the transaction fits within broader trends and pressure points with adversary countries, particularly China, and evaluates those pressure points both now and how they could exist in the future. This is particularly the case for transactions in advanced technologies or areas that support advanced technology industries, investment in critical infrastructure, or businesses with high volumes of confidential enterprise or personal information. These also are areas in which the U.S. is closely collaborating with allies on strengthening their own foreign investment national security review processes and sharing information. Thus, even for transactions that do not involve parties from adversary countries, the parties should understand and plan to address how the transaction fits within the U.S. view of competition with, and risks from, those countries.
• Do not underestimate the value of the legal safe harbor or the likelihood that a transaction will implicate U.S. national security interests now or in the future. The history of the last several years—including both blocked investments and transactions that closed years ago and recently came under review—underscores that national security considerations can shift and evolve, and are particularly hard for commercial parties to predict. It is imperative that transaction parties and their counsel think broadly and holistically about potential national security considerations, both immediate and future, and recognize the value in securing a safe harbor against prospective CFIUS action.
• Think strategically about the declaration process. As noted, the short-form declaration process can be a valuable tool for investors to manage and minimize risk of later CFIUS action: declarations that result in approvals can provide legal safe harbor, and those that result in a “no action” determination, while not providing formal safe harbor, nonetheless provide the parties valuable information about the government’s perspective on the contemplated transaction and risks associated with closing the transaction. At the same time, certain transactions are much more likely to require full reviews; filing those transactions as declarations simply adds to the cost and timing of the review. Thus, declarations can be a valuable fast-track path for appropriate benign transactions and/or for repeat, highly-trusted acquirers, but may result in more time and cost overall for more complex transactions or ones with investors that have not been recently reviewed by CFIUS or from more sensitive countries. Thus, careful evaluation of the competing considerations of declarations versus notices is crucial to ensuring the CFIUS review of a transaction moves forward as efficiently as possible.
• Anticipate the potential need to address national security interests both in the transaction agreement and in the operation of the acquired business. While the vast majority of CFIUS cases are approved without conditions, it also is not unusual for CFIUS to seek mitigation measures from parties to address the government’s national security considerations. These can range from spinning off certain assets or business operations prior to closing (or post-closing), to conditions on ownership and governance, to supply assurance requirements, to various security-related undertakings and monitoring requirements—or all of the above. Incorporating such considerations into the ultimate valuation of the U.S. business, as well as when negotiating the transaction agreement, can avoid disappointing commercial expectations among the parties and help maintain realistic goals for the timing of closing and integration of the U.S. business.
• Be committed to transparency; approach CFIUS as an important long-term constituent. Repeat investors often can be well-served by meeting and briefing the agencies in advance of transactions, and ensuring that the agencies are aware of and understand the investors’ near and long-term strategies for the U.S. market. This commitment to transparency and to making the effort to arm the agencies with a clear understanding of the investors’ intentions and rationales for transactions—rather than assuming that they will or should have such an understanding—can be important tradecraft to establishing success in the CFIUS process.

If you have any questions concerning the material discussed in this client alert, please contact the following members of our CFIUS practice.