To Protect Your Freedom to Invest, Look Beyond the Black Box
March 31, 2020
To Protect Your Freedom to Invest, Look Beyond the Black Box
Amid growing scrutiny of foreign investments in the United States, the role of strategic advocacy has become ever more important for preserving your deal. Here’s how to succeed.
The notion that the Committee on Foreign Investment in the United States (“CFIUS”) is a complex black box has too often led companies to overlook the importance of strategic advocacy to help condition an environment for success.
As the spotlight on transactions intensifies under a strengthened CFIUS, it’s more important than ever for companies to understand the role of public discourse in influencing the timing and outcome of cross-border M&A deals, as well as the importance of a comprehensive strategy to protect their freedom to invest.
On February 13 of this year, the U.S. Department of Treasury finalized a set of regulations designed to keep certain foreign investors under close watch. The regulations derive from the Foreign Investment Risk Review Modernization Act (FIRRMA), a law signed by President Trump in August 2018. FIRRMA significantly expanded the authority of CFIUS to review and restrict foreign investments on national security grounds.
CFIUS has become a popular tool to promote special interests that are arguably outside the scope of national security.
CFIUS now has the power to review and potentially block a far broader group of “covered” transactions, including certain minority foreign investments in critical technology and infrastructure. The program requires the parties to declare these controlling investments — and certain non-controlling investments — to CFIUS (which is chaired by the U.S. Treasury Department).
The passage of FIRRMA follows heightened geopolitical tensions between the United States and China that have intensified under Trump. The administration is closely examining transactions involving the high-tech sector, where China has long been accused of intellectual property theft and requiring the transfer of trade secrets in exchange for market access.
On January 15, the two countries signed phase 1 of a trade agreement that focuses on easing trade tensions involving agricultural and manufactured goods. As the administration seeks to implement this phase, they’re more likely to use a strengthened CFIUS to challenge China in the areas of critical technology, personal data and intellectual property.
This climate of uncertainty around foreign transactions is not limited to deals involving China, however. Other source countries are also under the microscope.
According to a CFIUS report, in the first two years following Trump’s taking office, more overseas companies abandoned deals after being investigated by U.S. authorities than in the two years prior. From 2016 to 2018, CFIUS conducted 331 investigations, doubling the agency’s total of 145 from 2014 to 2016.
Adding to this trend is a broad array of stakeholders who are looking to increase their roles in foreign investment screening. Whether it’s a mayor in California working to protect local jobs, a federal lawmaker looking to demonstrate his tough stance on China, or a U.S. business fending off a hostile takeover, CFIUS has become a popular tool to promote special interests that are arguably outside the scope of national security.
Case in point: In 2016, Chinese gaming company Beijing Kunlun Tech acquired a majority stake in the popular dating app Grindr for US$93 million. Kunlun completed the buyout two years later. In April 2018, Senators Edward Markey (D-Mass.) and Richard Blumenthal (D-Conn.) sent a letter to the CEO of Grindr inquiring about its policies for protecting sensitive information. This triggered a barrage of news headlines and, less than a year later, the U.S. government revealed that it was demanding Kunlun Tech to give up control of Grindr.
European Union Gets Tough
Skepticism about foreign investments extends beyond those proposed within the United States, however. In April 2019, for example, the European Union (“EU”) adopted a new framework through which to safeguard Europe’s security and public order in relation to foreign direct investments into the Union. Moreover, in the two years prior to the EU’s decision, the German government twice adopted new policies (one in 2017, the other 2018) to tighten investment screening.
Thus, foreign companies must closely examine and prepare for regulatory hurdles associated with cross-border M&A when seeking to invest in Europe. In particular, U.S. companies must be sensitive to local customs, cultures, employment law and takeover bid frameworks. Without this insight, an acquiring company can easily become caught up in regulatory issues under local and national jurisdictions rather than those controlled by the EU governing body in Brussels.
Furthermore, with Brexit now a certainty, U.S. acquirers of European companies will need to consider EU competition clearance. The UK’s Competition and Market Authority (CMA) is taking a muscular and much more interventionist approach to inbound M&A. That has added additional uncertainty to buyers of UK and EU businesses since the CMA may claim a right to overview and/or intervene in a proposed transaction.
Managing the Buzz
Transacting within this environment has become something of a minefield. Since outside noise can penetrate the halls of the U.S. Treasury and impact the outcome of your deal, it’s crucial to understand the likelihood of public scrutiny, as well as how to drive the narrative. While legal counsel is critical, it has also become increasingly important to have strategic advocacy expertise available to help navigate the political pressures and complexities. An experienced team of professionals can help manage the buzz around your deal by creating an advocacy campaign that neutralizes unwanted attention while elevating the desired kind.
This course of action is predicated on two primary elements related to your deal: 1) knowing the political risks, and 2) driving the narrative. Here’s how to proceed.
6 Questions to Determine the Likelihood of Public Scrutiny
- What is the public profile of my company?
- Which countries or investors are involved in my deal?
- What impact does my deal have on local jobs?
- Does my transaction involve critical technologies/infrastructure/personal data?
- Who might want to stop my deal and why?
- Does the company for investment have U.S. or other national government contracts?
How to Drive the Narrative
Depending on the likelihood of public scrutiny around your deal, it may be wise to develop a strategic advocacy plan to drive the narrative. These guiding principles can help:
- Know your audience (e.g., lawmakers, regulators, media, corporates, investors, employees) and how well they understand the story.
- Ensure your narrative is clear and consistent, and addresses concerns (makes sense when heard for the first time).
- Make sure your message is easily accessible to lawmakers, reporters and other interested parties (consider creating an online content hub).
- Strengthen relationships with influential stakeholders (shareholders, sell-side analysts, local officials, policy makers, journalists, academics/think tanks).
In this environment of intense scrutiny, a combination of deep financial communications expertise and public affairs experience is key to developing and executing a communication strategy that will lead your processes, whether it’s within CFIUS or another national government’s jurisdiction, to a positive outcome.
© Copyright 2020. The views expressed herein are those of the authors and do not necessarily represent the views of FTI Consulting, Inc. or its other professionals.
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