I INTRODUCTION

Historically, US policy has favoured foreign investment and generally imposes few restrictions on, or regulatory oversight of, such investment,2 as exemplified by a statement made by former President Barack Obama while addressing the 2015 SelectUSA Investment Summit encouraging foreign investment in the United States: 'America is proudly open for business, and we want to make it as simple and attractive for you to set up shop here as is possible.'3 Recently, the Trump administration has been critical of certain foreign investment, particularly from China, and has threatened to impose greater restrictions on it.4

Foreign direct investment in the United States is found in nearly all sectors and has played a role in privatisation, development of infrastructure and natural resources, and distressed investments; for example, certain previously state-owned or municipal-owned infrastructure has been leased on a long-term basis to non-US based private equity funds.5

The United States receives most foreign investment from its traditional allies, including Canada, Germany, France, Israel and the United Kingdom.6 However, as countries such as China, Russia and the UAE seek to invest private and sovereign wealth abroad, the United States sometimes struggles to reconcile its openness to foreign investment with its economic and national security concerns.

The United States has no law prohibiting, or subjecting to review, foreign investment based on economic security concerns or, with limited exception, national origin. It does impose some sector-specific limitations and review procedures on foreign investment in a handful of regulated industries, including the airline and nuclear energy industries. Additionally, the United States has a national security review process applicable to foreign investment that might implicate US national security interests. However, only a handful of transactions each year have been abandoned, and only five have ever been prohibited, on national security grounds.7

II FOREIGN INVESTMENT REGIME

The United States has both national security and sector-specific review regimes applicable to foreign investment.8

i National security review process

The United States currently has a voluntary national security review process applicable to transactions that could result in a foreign person acquiring control of a US business.9 The US national security review process is referred to as the Exon–Florio or CFIUS10 review process after the relevant authorising statute11 and administrative body, respectively. The Exon–Florio statute and its accompanying regulations currently do not require that any particular foreign investment be subject to the voluntary national security review process, but do give CFIUS (or the President of the United States (the President), or both, as applicable) the authority to block or impose remedial measures on foreign investment that is not notified and cleared. Changes to the process following the recent enactment of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) mean that, in the future, investments by foreign government investors in certain US businesses will be subject to a mandatory notification requirement.12

The US national security review process originally focused, at least in practice, on the acquisition by foreign companies of US businesses directly or indirectly supplying the US Department of Defense (DOD); however, and especially after the 9/11 terrorist attacks, the concept of national security – and therefore the types of transactions subject to review under the regime – was broadened by statute and practice. The statute does not define 'national security', but requires CFIUS to consider the following factors in a review:

  1. domestic production needed for projected national defence requirements;
  2. the capability and capacity of domestic industries to meet national defence requirements, including the availability of human resources, products, technology, materials and other supplies and services;
  3. the control of domestic industries and commercial activity by foreign citizens as it affects the capability and capacity of the United States to meet the requirements of national security;
  4. the potential effects of the proposed or pending transaction on sales of military goods, equipment or technology to any country:
    • that is identified by the Secretary of State as a country that supports terrorism, is a country 'of concern' regarding missile proliferation or the proliferation of chemical and biological weapons, or is listed on the Nuclear Non-Proliferation Special Country List; or
    • that poses a potential regional military threat to the interests of the United States;
  5. the potential effects of the proposed or pending transaction on US international technological leadership in areas affecting national security; and
  6. the potential for national security-related effects from the acquisition of US critical technologies and infrastructure, including energy.

    ii Sector-specific requirements for foreign investment

    As discussed in Section IV, the United States imposes some restrictions on foreign investment in select regulated industries. Typically, companies in these sectors are required to obtain a licence from the government to operate in the sector, and federal law limits foreign ownership of such licensees. For example, the Communications Act of 1934, as amended by the Telecom Act of 1996, restricts foreign governments, individuals and corporations from holding more than 20 per cent of the interests of a broadcast licensee.13 Proposed foreign investment in such sectors to the extent typically permitted is subject to review and approval by sector-specific regulators. Regulations issued by the sector-specific agency outline the process and standards applicable to the review of foreign investment in the sector.

    III TYPICAL TRANSACTIONAL STRUCTURES

    Briefly set out below are typical corporate structures and transactions pursuant to which a foreign investor may enter the US market. A series of state and federal laws govern such investment. There are no laws or regulations applicable only to foreign investors regarding either the level of ownership or the mechanics for making the investment. Generally, foreign investors are subject to the same corporate legal requirements as domestic investors.

    i Choice of structure for new entities

    No federal corporate law regulates the formation, operation or dissolution of any structure. Rather, the formation of a legal entity generally is governed by the state of formation or incorporation. Accordingly, foreign investors must become familiar with the particular laws of the jurisdiction of formation. Delaware is the state in which foreign investors most commonly form entities, because the law is well established and the process straightforward. A variety of legal structures are available, distinguishable most notably by different tax consequences, which include the following:

    Corporation

    A corporation is treated as a separate and distinct legal entity from its directors, officers and shareholders. The shareholders of a corporation, as a general rule, are not personally liable for the debts and actions of the corporation. Managerial authority of a corporation is vested in its board of directors. Under Delaware law, there are no US or state residency requirements to become a board member or to be an officer of a corporation.

    Partnership

    In a general partnership, all partners manage the daily operations of the business and all are liable for the losses incurred. In a limited liability partnership (LLP), usually only one partner (the general partner) manages the daily operations of the business and is liable only to the extent of his or her investment. A partnership is not a taxable entity for state and federal purposes; rather, the income of the partnership is taxable to the partners in proportion to their share in the company's profits. Under Delaware law, a foreign investor may form a partnership with US persons, and the contractual arrangement will be honoured in the Delaware courts. In all cases, liability under Delaware law will not be affected by the fact that a foreign investor is one of the partners, whether as a general partner or a limited partner. Furthermore, there are no requirements under federal or state law that a foreign investor must form a joint venture or partnership, whether as a minority or majority holder, with a US entity.

    Limited liability company

    A limited liability company (LLC) is a cross between a corporation and a partnership. Like a corporation, members of an LLC are not personally liable for the debts and actions of the company. However, for federal income tax purposes, an LLC is treated like a partnership, with members taxed relative to their share in the company's profits. Under Delaware law, a foreign investor is allowed to hold some or all the membership interests of an LLC. There are no state residency requirements for LLC managers.

    Branch

    A foreign corporation generally may establish a branch under state law provided it is registered to conduct business in one state. Although some states restrict foreign branch operations of certain industries in their jurisdiction (such as banking and insurance), foreign corporations generally can establish a branch in the United States without any additional regulatory hurdles.

    ii Acquisition of a majority or minority stake

    Generally, there are no restrictions prohibiting a foreign investor from taking a majority or minority stake in, or acquiring 100 per cent of, a US private corporation or other legal entity, other than with respect to those entities operating in specific regulated sectors discussed in Section IV. Foreign investors need only comply with the laws that would be applicable to acquisitions by domestic investors (e.g., merger control laws).

    Some requirements administered by the Securities and Exchange Commission (SEC) and the securities exchanges apply equally to domestic and foreign investors acquiring an interest in, or the entirety of, a publicly traded company. For example, if a foreign or domestic investor makes a tender offer to acquire more than 5 per cent of a US corporation's class of securities, it must comply with standard tender offer rules. If a foreign investor acquires beneficial ownership of more than 5 per cent of a voting class of a company's publicly registered securities (either directly or by tender offer), it must file a notice with the SEC accurately disclosing the purpose of the transaction, and the source and amount of funds to be paid in consideration for the voting stock.

    iii Mergers

    For two or more corporations registered in Delaware to merge with another corporation also registered in the state, the boards of directors of each corporation must agree to the merger. A corporation that seeks to acquire 100 per cent of a Delaware corporation's stock must generally do so through a two-step merger. In the first step, the buyer consummates a tender offer to solicit the target's stockholders to sell a substantial amount of their stock. However, because it is highly improbable that all stockholders in a target company will tender all of their stock, a merger is necessary as a second step for the buyer to acquire 100 per cent of the target company. Under Delaware law, this second step requires stockholder approval if the buyer has acquired less than 90 per cent of the target's stock. To facilitate the back-end mergers, Delaware passed a law in 2013 to allow buyers, subject to certain conditions, to consummate the merger without stockholder approval, even if the buyer failed to reach the 90 per cent ownership requirement to complete a short-form merger during the tender offer process.

    iv Asset acquisition

    If a foreign investor seeks to acquire certain or all of the assets of a US target, the law governing that acquisition generally will be the law of the contract and the law of the state in which the assets reside. No unique legal requirements govern the acquisition of assets by foreign investors, and generally there are no restrictions on ownership by foreigners of US real property (except for certain restrictions on agricultural land and mineral lease rights). Because the ownership of equity in US entities is also unrestricted, there is no particular benefit in structuring a transaction as an asset or share deal for foreign investment restriction purposes.

    IV REVIEW PROCEDURE

    This section discusses in more detail the sector-based and national security-based foreign investment review regimes outlined in Section II, and the interaction of these regimes with the US merger control regime. The US merger control regime does not treat foreign investment in the United States differently from domestic investment. Thus, the fact that the buyer is a foreign investor could lead to divergent outcomes under merger control and sector-specific review processes, in which foreign investment may be treated differently. However, this is not the only factor that could lead to divergent outcomes. Because the standards applied by sector-specific regulators (e.g., a public interest standard) are different from the standard applied by US antitrust regulators (e.g., a substantial lessening of competition), there could be divergent outcomes regardless of whether a foreign investor is involved. Nonetheless, there is typically some interface between the US antitrust review and sector-specific review processes, as the public interest standard applied by sector-specific regulators encompasses competition interests. In these cases, parties must consider strategically the interaction of the review processes in terms of timing and substance.

    There is less interface between the US antitrust and national security review processes, as the antitrust regime does not take into account US national security interests, and vice versa, except to the extent that ensuring competition in the supply of goods and services to the US government acting as a consumer constitutes a national security interest.14 The national security review process itself, though, can involve concurrent reviews by several US government agencies, each tasked with administering laws governing foreign ownership of US businesses that hold certain security clearances, manufacture certain export-controlled goods, or both. In these cases, parties must coordinate their outreach to each relevant agency, as the national security-related review processes typically interface via the CFIUS review process.

    i National security review process

    The US national security review process is conducted pursuant to the Exon–Florio statute.15 The statute grants the President the authority to review any transaction that could result in a foreign person having control over a US business (i.e., a covered transaction) and to suspend or prohibit that transaction if it threatens to impair the national security of the United States. The statute has recently been amended to expand its applicability to include acquisitions of certain US real estate and non-passive minority investments of any size in US businesses involved in critical technology, critical infrastructure or sensitive US citizen personal data. This expansion will not take effect until implementing regulations issue. CFIUS is charged with conducting the national security review on behalf of the President pursuant to the statute and, as appropriate, making a recommendation regarding presidential action.

    Foreign persons include any foreign national, foreign government or foreign entity, or any entity over which control is exercised or exercisable by a foreign national, foreign government or foreign entity. Control turns on the ability to determine, direct or decide matters affecting an entity, and the regulations specifically recognise dominant minority control.16 In practice, CFIUS interprets control very broadly. Certain non-passive minority investments will be covered also, as will acquisitions of a to-be-defined 'substantial interest' by foreign government investors.

    Because the US national security regime largely is voluntary, counsel for the parties to a transaction typically consult each other with respect to the national security profile of a particular transaction to determine whether a filing is warranted. Currently, there is no legal obligation to file17 but a filing potentially offers several benefits:

    1. obtaining a no-action letter provides a safe harbour against future presidential action, provided parties comply with obligations under the statute;
    2. filing may ensure that relevant government security clearances and licences are not jeopardised, thereby negatively affecting the ability to do business; and
    3. related regulations involving clearances and licences require parallel notifications that can be coordinated.

    The official review process typically begins with the submission of a confidential voluntary notification by the parties. Alternatively, CFIUS can initiate its own investigation.18 However, the regulations recommend that the parties notify CFIUS at least five business days before formally filing a notification, and submit a draft notification. Acceptance of a properly prepared notice triggers an initial 45-day review of the notified transaction. By the end of the 45-day period, CFIUS must decide whether to clear the transaction if it finds no national security concerns, or to initiate an additional 45-day investigation.19 CFIUS may decide during either of the 45-day periods to issue a no-action letter or to require the parties to enter into a mitigation agreement to resolve any potential national security concerns. CFIUS may impose mitigation measures only after it has identified a specific risk in relation to US national security and determined that a mitigation measure is reasonably necessary to resolve that risk.20

    Alternatively, at the end of a 45-day investigation, CFIUS may refer the matter to the President. The President then has 15 days to take action. Exon–Florio grants the President alone the authority to suspend or prohibit a covered transaction. The Committee must therefore refer a transaction to the President if it recommends that the President suspend or prohibit the transaction. To exercise this authority, the President must find both that there is credible evidence that a 'foreign interest exercising control might take action that threatens to impair the national security', and that other laws do not, in the President's judgement, 'provide adequate and appropriate authority' to protect the national security.

    Presidential action is rare, partly because mitigation measures often address national security concerns and partly because parties typically decide to abandon a transaction before CFIUS recommends that the President issue a blocking order. Determinations by the President are not subject to judicial review. This was affirmed by the US District Court for the District of Columbia.21

    The CFIUS process is confidential and third parties have no right to participate. However, other federal (e.g., members of Congress), state (e.g., governors) and local government officials (e.g., mayors) can take a public position or write to CFIUS regarding the national security implications of specific transactions. As a result, parties sometimes elect to involve public relations or government relations firms, or both, to manage press regarding the transaction and congressional and executive branch outreach.

    As a practical matter, the CFIUS process involves not only the review of a foreign investment by the Committee as a whole, but also a review of the foreign investment by each of the individual member agencies, some of whom independently administer separate reviews of foreign investment. For example, the DOD participates in the CFIUS process but also reviews proposed foreign investment in US businesses that hold security clearances.22 Thus, the review processes administered by the member agencies often interface with the CFIUS review process.

    ii Sector-specific limitations on foreign investment

    Federal limitations and restrictions on foreign investment focus on sectors that involve public interest and public services. Although not an exhaustive list, the industry sectors below illustrate some of the limitations the US federal government has imposed on foreign investment. Some states also impose limits on foreign investment in certain sectors.

    Aviation

    Foreign investment in the US airline industry is heavily restricted and is subject to control by the US Department of Transportation (DOT). Under federal regulations, an aircraft must be registered before operating legally in the United States23 and registration is limited to US citizens, permanent residents, corporations and government entities.24

    In addition, all operating air carriers must obtain a certificate of public convenience and necessity25 when applying to operate in the United States and when there has been a substantial operational, ownership or managerial change.26 Only a citizen of the United States may obtain such a certificate.27 A 'citizen of the United States' is defined as a US citizen, a partnership of US citizens, or a corporation or association organised under US law, 'of which the president and at least two-thirds of the board of directors and other managing officers are citizens of the United States, which is under the actual control of US citizens, and in which at least 75 per cent of the voting interest is owned or controlled by persons that are citizens of the United States'.28

    As a result, foreign investment in a US airline is limited to 25 per cent of the voting interests. Furthermore, when evaluating whether the corporation is under the 'actual control' of US citizens, the DOT considers factors such as the foreign entity's involvement in management and business decisions, and its influence and control over the board of directors. While the statute is silent with respect to non-voting interests, the DOT has interpreted the statute to limit a foreign non-voting interest to 49 per cent.

    Banking

    The US banking industry is heavily regulated at both federal and state level.29 Federal laws generally do not restrict foreign ownership or control of US banks, but the establishment or acquisition of a bank in the United States by a foreign entity may be subject to review by federal or state regulators.

    A foreign bank may establish a branch, agency or commercial lending subsidiary in the United States, but it must seek approval from the Federal Reserve Board (FRB) to do so.30 The FRB evaluates several factors, including whether:

    1. the foreign bank's home country consents;
    2. the foreign bank is financially sound;
    3. the foreign bank provides adequate information and assurances;
    4. the foreign bank and its affiliates comply with US laws; and
    5. the home country's financial regulations can mitigate the risk to financial stability in the United States, should the foreign bank pose such a risk.31

    Under the Bank Holding Company Act (BHCA),32 FRB approval is also needed to operate as a bank holding company (BHC) in the United States33 or to acquire more than 5 per cent of the voting securities of a US bank or BHC.34 Once the FRB accepts an application for approval as complete, the board generally issues a decision within 60 calendar days. The FRB evaluates several factors when reviewing a foreign bank's application under the BHCA, including financial stability, competition, public convenience, and whether the authorities in the foreign bank's home country exercise comprehensive consolidated supervision.35

    Communications

    The Federal Communications Commission (FCC) is tasked with reviewing and authorising all radio and television broadcasting licences. The Telecommunications Act of 1996 restricts foreign governments and government representatives from holding a broadcast, common carrier or radio station licence in the United States, and limits the interest a foreign government or company may hold in a licensed US company.

    Under the statute, foreign governments and their representatives may not obtain radio station licences.36 In addition, aliens, alien representatives and any corporation organised under the laws of a foreign government may not obtain a broadcast, common carrier, aeronautical en route or aeronautical fixed radio station licence.37

    Additionally, foreign governments, individuals and corporations are restricted from directly holding more than 20 per cent of the stock of a broadcast, common carrier or aeronautical radio station licensee.38 If the FCC determines that it would be in the public interest, it has the discretion to refuse or revoke a licence held by a corporation in which a foreign government, individual or corporation has an indirect investment of more than 25 per cent.39 The FCC typically will issue a public interest determination regarding the foreign investment in response to a petition for a declaratory ruling.40 A licensee must obtain FCC approval before direct or indirect foreign ownership exceeds 25 per cent of the licensee's US parent companies.41

    Energy

    Federal and state law heavily regulates energy resources in the United States. Under the federal Mineral Lands Leasing Act (and other laws), only US citizens and corporations organised under US law may obtain particular mineral, gas and oil leases.42 However, federal laws may allow foreign investment if the investor's home country extends similar privileges to US citizens and companies.43

    Nuclear facility licences also are heavily restricted. Under the Atomic Energy Act, a nuclear facility licence may not be acquired by an alien or corporation owned, controlled or dominated by an alien, foreign government or foreign corporation.44 As a result, such entities are not eligible to apply.45 The Nuclear Regulatory Commission has issued guidelines for determining whether an alien, foreign government or foreign corporation owns, controls or dominates a licence applicant.46 According to these guidelines, an applicant that is partially owned by a foreign entity may be eligible for a licence if it imposes certain conditions on the foreign investor, such as limiting nuclear material handling to US citizens.47

    Shipping

    Shipping between ports in the United States is limited to US-built, owned and registered vessels, with few exceptions.48 Only statutorily eligible entities can obtain a registration from the US Coast Guard to engage in this activity49 and a registration generally is limited to US citizens or entities in which US citizens hold at least 75 per cent of the interests.50

    V FOREIGN INVESTOR PROTECTION

    Foreign nationals and entities that invest in the United States enjoy protection before an independent international arbitration tribunal against certain actions by the United States that breach substantive protections established in bilateral investment treaties (BITs) and the investment protection provisions in free trade agreements (FTAs) to which the United States is a party. BITs offer reciprocal protection for investments made by investors of one signatory country within the territory of the other signatory country. FTAs are broader treaties that address an array of trade-related issues and typically include foreign investment protection guarantees that mirror those in BITs.

    This section provides an overview of the basic investment protections that apply to foreign investments in the United States under BITs and FTAs, the investors that may invoke these protections, and the negotiations that are under way to extend these protections to additional investors through new international agreements.

    i Current framework

    Protections applying to inbound investments in the United States

    BITs and FTAs provide the bulk of the protections that apply to foreign investments in the United States. Although every BIT and FTA is unique, almost all the treaties that the United States has signed guarantee the following basic protections to foreign investors.

    Fair and equitable treatment

    Foreign investments generally must receive 'fair and equitable treatment'51 from the United States. The scope of this protection depends on whether the treaty in question links the standard to customary international law (as does the 2012 US Model BIT and most US FTAs) or establishes it as an autonomous protection. When the autonomous standard applies, the actions of the United States must be consistent, non-discriminatory and non-arbitrary. This standard protects the investor's legitimate expectations at the time it made the investment. These expectations may be based on specific offers or assurances that the United States made to the investor. The customary international law standard has traditionally been understood to be less protective to the investor. To demonstrate a breach of this standard, an investor must show that the United States failed to meet the minimum standard of treatment under customary international law, which has been interpreted by certain tribunals as requiring 'a gross denial of justice, manifest arbitrariness, blatant unfairness, a complete lack of due process, evident discrimination, or a manifest lack of reasons'.52

    Full protection and security

    Almost all BITs and FTAs obligate the United States to afford covered foreign investments 'full protection and security',53 which requires the United States to take reasonable steps to safeguard investments made by foreign nationals protected by the relevant BIT or FTA. The full protection and security standard requires vigilance and, in some cases, protective state action. Traditionally, this standard has been understood to apply only in the context of physical threats to investments (owing to labour unrest, civil conflict, etc.); however, some cases have held that this obligation also extends to legal security.

    Expropriation

    Foreign investments typically enjoy protection against expropriation.54 The United States may only expropriate a covered investment if the expropriation:

    1. is for a public purpose;
    2. is carried out in a non-discriminatory manner;
    3. is performed in accordance with due process of law; and
    4. prompt, adequate and effective compensation is provided to the investor.
    National treatment and most-favoured nation treatment

    Foreign investments generally must not receive less favourable treatment than domestic US investments or investments made by investors from any third country.55

    In addition to the aforementioned core protections, US BITs and FTAs also typically guarantee the free transfer of funds56 and protect investors against performance requirements, such as export quotas or sales restrictions.57

    When the United States violates the standards described above (or when an action attributable to the government violates these standards), a covered investor typically may pursue investor-state arbitration before a neutral international arbitral tribunal.58 The relevant treaty will establish a menu of possible institutions and the investor will select the institution that best suits its objectives. The key institution is the International Centre for Settlement of Investment Disputes (ICSID), part of the World Bank Group, although this requires both parties to the BIT or FTA to be a party to the ICSID Convention.59 Another frequent alternative is arbitration under the rules of the United Nations Commission on International Trade Law (UNCITRAL), but this has the disadvantage of being an ad hoc arbitration with no institutional support.

    Who can invoke these investor protections?

    Two of the basic requirements that an investor must fulfil to invoke the treaty protections described above are that it made an 'investment' as defined in the applicable instrument, and that it is a national of a country covered by a BIT or FTA to which the United States is a party. BITs and FTAs typically include expansive definitions of the term 'investment'. For instance, the US Model BIT defines 'investment' as 'every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk'.60 US FTAs also define 'investment' in broad terms.61 An investment does not usually include a simple contract for the sale of goods or monies invested in the hope of making an investment (such as expenses incurred to participate in a public bid).

    In addition, the investor must be a national of a country that has a ratified treaty with the United States that includes investment protections. As at the date of publication, the United States is a signatory to 47 BITs, 40 of which are in force.62 Investors from these countries can pursue investor–state arbitration if the United States violates the guarantees and standards in the relevant BIT. Frequently, arbitration case law has permitted investors to structure their investments through protected states in the event that the state of origin does not benefit from such protection. However, this will depend heavily on the language of the treaty under which protection is sought.

    In addition to the BIT-protected countries, the North America Free Trade Agreement (NAFTA) protects Mexican and Canadian investments in the United States. Nationals of Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua receive investment protection in the United States based on the Dominican Republic–Central America Free Trade Agreement. The United States has also signed and ratified bilateral FTAs with Australia, Bahrain, Chile, Colombia, Israel, Jordan, Morocco, Oman, Panama, Peru, Singapore and South Korea. Most of these bilateral FTAs contain investment protection provisions very similar to those described earlier, but a few exceptions do exist.

    ii The future of investment protection in the United States

    The United States has been negotiating new FTAs and BITs that would extend inbound investment protection to investors from additional countries. However, uncertainty surrounds the status of some of these agreements because of the 'Trump effect'.

    The first executive action President Donald J Trump took was to permanently withdraw the United States from the Trans-Pacific Partnership (TPP).63 Following the conclusion of negotiations in October 2015, the TPP was signed on 4 February 201664 by ministers from all 12 Member States: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam.65 The TPP provided for investor protections and investor-state arbitration.66 Once the United States withdrew, the remaining 11 TPP signatories went forward with a new version of the treaty called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which was signed by the 11 Member States on 8 March 2018.67 In April 2018, President Trump announced that the United States was considering rejoining the TPP.68

    The discussions regarding the Trans-Atlantic Trade and Investment Partnership (T-TIP) between the United States and the European Union began in July 2013. Fifteen rounds of negotiations have taken place since then, and the most recent update on the status of negotiations was released in January 2017.69 If negotiated successfully, the T-TIP would protect inbound investment into the United States from the European Union and vice versa; another important expansion of the US foreign investment protection regime. The T-TIP is almost certain to include reciprocal investment protection provisions,70 although the inclusion of investor–state dispute settlement provisions has been the subject of considerable debate.71 The European Union has proposed a multilateral investment court, rejecting traditional investor–state dispute system practices.

    T-TIP negotiations have been more extensive than expected, in part because the implications of the United Kingdom's referendum vote to leave the European Union have cast doubt on the future progress of the T-TIP.72 In addition, while the Trump administration has not signalled any intention to formally withdraw, the T-TIP negotiations have been frozen since President Trump took office. Even if a T-TIP agreement could be negotiated, securing ratification of any such agreement is far from certain.

    President Trump has expressed an intention for his administration to renegotiate parts of NAFTA. On 18 May 2017, US Trade Representative Robert Lighthizer informed Congress that the President intended to formally commence negotiations with Canada and Mexico with respect to NAFTA.73 Negotiations with Canada and Mexico began in August 2017 and are still continuing.74 The investor–state dispute settlement provisions in NAFTA are among the terms of the treaty under negotiation.75

    On 29 April 2017, President Trump ordered a comprehensive review of all US trade and investment agreements.76 This process was supposed to be completed within 180 days but, more than a year later, no result of the review has been made public.77 The Trump administration thus continues to keep the world guessing what the future holds for investment protection in the United States.

    VI OTHER STRATEGIC CONSIDERATIONS

    i Compliance considerations

    US companies can be subject to private lawsuits brought by customers, competitors, employees or shareholders alleging that the company has violated the law, their rights or both. This is in addition to any potential governmental action. Many US laws reward whistle-blowers (i.e., persons who publicly report violations by companies). Therefore, it is important to have resources within the US organisation, including both personnel and processes, to support and ensure compliance with the myriad applicable state and federal regulations. In particular, publicly traded companies in the United States are subject to significant public disclosure and accounting requirements, and these companies must have effective compliance programmes to avoid costly government and private shareholder litigation. Many US companies have compliance divisions charged with ensuring that the company complies with, inter alia, export control, securities, antitrust, anti-bribery and employment laws.

    Additionally, once a company has operations in the United States, its foreign operations may be subject to spillover effects of US regulations. For example, US sanctions and bribery laws prohibit US persons and companies from engaging in business with countries subject to US sanctions, and bribery (broadly defined) of foreign government officials. Under these laws, US employees and operations of a foreign corporation cannot be involved even tangentially with such activities; doing so could subject foreign operations also involved with such conduct to the jurisdiction of US prosecutors.

    ii Getting target stakeholders on board

    How stakeholders, such as shareholders and employees of a US target, will respond to foreign investment is a critical strategic consideration for foreign investors. Key issues to consider from the outset are how stakeholders will view the transaction and how rival bidders might exploit this when the target board is assessing the transaction. Apart from any concerns linked to national security, the receptiveness of the target and its stakeholders (especially board members) will be particularly key if the foreign investor is from a jurisdiction that is currently experiencing difficulties in its relationship with the United States or that has a reputation for failing to comply with US regulations, including anti-bribery laws. As referenced above, parties may choose to employ a public relations or government relations firm, or both, to promote the benefits of the transaction, identify potential stakeholder concerns, and develop messaging targeted at alleviating those concerns. Certain efforts may fall within the statutory definition of 'lobbying' and are governed by various statutes. The Lobbying Disclosure Act is the primary lobbying statute, which requires registration and reports. Under the statute, registration and reports are made public.78

    A particularly key stakeholder group is the target's employees. Unlike in many jurisdictions, employment of workers in the United States is usually 'at will', meaning that there are no contractually stipulated notice requirements when terminating employment and no law prevents the dismissal of employees upon the sale of a business (other than in relation to certain mass lay-offs or plant closures, for which special rules and notice requirements apply to any buyer).79 However, as a relationship and reputational issue, any investor (and particularly a foreign investor who may be more likely to give rise to concerns about the future relocation of the target's operations) may want to communicate with employees to minimise disruption to the target's business. There are no statutory requirements to inform employees of a pending sale or to obtain their consent. However, any buyer should be aware that if any of the employees are unionised, the seller could be obliged to inform the union of the intended transaction and negotiate the treatment of employees by the buyer going forward, and may require the buyer to assume any collective bargaining agreement.

    iii Rival bids

    Foreign investors may be perceived as offering less deal certainty or increased complexity, cost or time to completion, which could be exploited by rival bidders. If the investor is from a jurisdiction from which it is difficult to extract cash or other assets or that is experiencing financial instability, or if the investing entity has a corporate form or management structure with which the seller or other interested parties are less familiar, the investor will be required to provide extra comfort as to its solvency and ability to pay any consideration in a timely manner. This may result in a foreign investor having to commit to paying a certain percentage of the consideration up front as a 'goodwill deposit' or place a certain amount in escrow. Similarly, more diligence will be required in respect of any financial institutions without a significant presence in the United States providing third-party financing. The need for additional consents (e.g., in the home country with respect to outbound investment) and for external advisers to fill any knowledge gaps regarding the US market will represent additional cost to any foreign investor, and require more forward planning and commitment of internal resources.

    iv Investor protection clauses

    Parties to any contract in the United States enjoy the ultimate freedom of contract. Therefore, whether the foreign investor wants to acquire a US entity or to partner with other investors in a US joint venture, it can seek contractual protections, in particular if the investor is less familiar with the regulatory and economic environment in the United States. For example, in a sale and purchase agreement, an investor can seek the right to abandon the purchase and walk away if there is a 'material adverse change' in the financial condition or operations of the target (although this right is notoriously hard to invoke regardless of the domicile of the party seeking to enforce it). An investor may also agree a 'drop-dead date' so that all obligations of both the buyer and seller fall away if the regulatory approvals and other conditions to which completion of the transaction are subject, are not achieved within a certain time period. Similarly, investors can gain comfort in terms of their maximum liability for abandoning a transaction by agreeing a 'break fee', allowing the buyer to walk away from the purchase, subject to certain conditions, for an agreed sum, although the caps on such fees tend to be lower in the United States than in other jurisdictions.

    VII CURRENT DEVELOPMENTS

    According to the Foreign Direct Investment Confidence Index calculated by AT Kearney, the United States was ranked at number one in 2018 for the sixth consecutive year.80 Most investment in the United States still comes from Canada and from allies in Europe.81 However, CFIUS reviewed more investments from China than from any other jurisdiction during 2013 to 2015,82 and certain Chinese companies, such as Lenovo, have now established themselves with multiple acquisitions in the US market. Nonetheless, legislation passed the US Congress to expand significantly the scope of the US national security review process.

    For foreign investors seeking to invest in the United States, especially those from China and other jurisdictions who are not as familiar to US politicians, regulators, employees and consumers, there are a few key points to consider. First, the breadth of national security concerns is growing, as is the aggressive application of the US national security review process. Thus, foreign investors need to consider as broadly as possible the potential national security implications of their US acquisitions or investments. For example, several deals have been effectively blocked or required a remedy because the US target business had substantial databases of personally identifiable information about US citizens. Second, CFIUS is taking action based on more attenuated risks, such as those arising from the ordinary course commercial relationships with non-trusted partners. Third, the number of transactions subject to in-depth review under the US national security process is growing exponentially. Combined with the expected explosion of cases that will result from passage of FIRRMA, CFIUS' staffing challenges will lead to even greater delays. Finally, the United States is increasing the aggressiveness of enforcement of its sanctions and anti-bribery laws. Compliance with those laws is essential for doing business in the United States.

    Therefore, foreign investors acquiring interests in US businesses that might trigger such a review need to plan for a longer review period and a strategic response that includes potential outreach to political and regulatory constituencies. Advance planning and thorough diligence can be critical to effective deal management and reducing the risk of an adverse investment review.


    Footnotes

    1 Shawn Cooley and Christine Laciak are special counsel at Freshfields Bruckhaus Deringer US LLP.

    2 According to the World Bank, the United States has the highest absolute net foreign direct investment of all monitored countries, and this investment accounts for approximately 1 per cent to 2 per cent of the gross domestic product of the United States. See World Bank International Financial Statistics and Balance of Payments databases, available at https://data.worldbank.org/indicator/.

    3 Address to 2015 SelectUSA Investment Summit, available at https://no.usembassy.gov/obama-selectusa-investment-summit/.

    5 For example, in 2005, the City of Chicago sold the rights to operate the Chicago Skyway toll road to Skyway Concession LLC, a company owned by Spanish and Australian companies Cintra Concessiones de Infraestructuras de Transporte SA, Macquarie Infrastructure Partners and Macquarie Atlas Roads. In November 2015, a consortium including Canada pension plans bought the concession company for $2.8 billion. See www.chicagoskyway.org/the-skyway/#about-the-skyway. In 2014, Emirati company Gulftainer was awarded the 35-year concession to operate and develop Port Canaveral's container and multipurpose cargo terminal. See Gulftainer press release, 'Gulftainer Expands Into USA' (26 June 2014), available at www.gulftainer.com/press-release/gulftainer-expands-into-usa/.

    6 See US Department of Commerce (DOC), 'Foreign Direct Investment in the United States: Update to 2013 Report', available at http://esa.gov/sites/default/files/foreign-direct-investment-in-the-united-states-update-2016.pdf.

    7 Four of the five prohibited transactions involved acquisitions by Chinese companies: (1) China National Aero-Technology and Export Corp's acquisition of Mamco Manufacturing Inc (a US aerospace parts manufacturer) in 1990; (2) Ralls Corp's acquisition of a US wind farm operator in 2012; (3) Fujian Grand Chip Investment Fund LP's attempted acquisition of the US business of German semiconductor manufacturer Aixtron SE in 2016; and (4) China Venture Capital Fund Corporation Limited's US affiliate Canyon Bridge Capital Investment Limited's proposed acquisition of US semiconductor manufacturer Lattice Semiconductor Corporation in 2017. Additionally, Broadcom's proposed 2018 acquisition of US 5G provider Qualcomm was prohibited before Broadcom could re-domicile from Singapore to the United States.

    8 Additionally, the DOC reinstated a post-closing notification requirement for all foreign direct investment in November 2014 (having discontinued it in January 2009), pursuant to which a notice must be submitted to the DOC within 45 days of closing, providing basic details regarding the level of investment to assist the DOC with statistical reporting on the US economy. See www.bea.gov/surveys/respondent_be13.htm.

    9 When implemented by regulation, the newly enacted Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) will expand the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS or the Committee) to include not just acquisitions of control but also non-passive minority investments of nearly any size in US businesses involved in critical technology, critical infrastructure or sensitive US citizen personal data.

    10 CFIUS is an inter-agency committee consisting of, as chair, the Secretary of the Treasury, and as members, the Secretaries of Commerce, State, Defense, Homeland Security and Energy, as well as the Attorney General, the United States Trade Representative and the Director of the Office of Science and Technology Policy. The Secretary of Labor and the Director of National Intelligence serve as ex officio members. Other executive branch representatives appointed pursuant to executive order observe and, as appropriate, participate in the Committee's activities, including the chair of the Council of Economic Advisers, the Director of the Office of Management and Budget, the Assistant to the President for National Security Affairs, the Assistant to the President for Economic Policy, and the Assistant to the President for Homeland Security and Counterterrorism.

    11 The Exon–Florio Amendment to the Defense Production Act of 1950, as amended by the Foreign Investment and National Security Act of 2007, 50 USC Section 4565, and by FIRRMA.

    12 This obligation will not take effect until implementing regulations are introduced.

    13 See 47 USC Section 310(a) and (b) for complete restrictions.

    14 The US antitrust agencies have refrained from challenging certain transactions determined to be anticompetitive because the US Department of Defense (DOD) supports the transaction for national security reasons (see, e.g., Federal Trade Commission press release, 'FTC Closes Its Investigation into GenCorp's Proposed Purchase of Pratt & Whitney Rocketdyne' (10 June 2013)), while committing to considering concerns by the DOD about consolidation in the defence industry (see 'Joint Statement of the Department of Justice and the Federal Trade Commission on Preserving Competition in the Defense Industry' (12 April 2016), available at www.ftc.gov/system/files/documents/public_statements/944493/160412doj-ftc-defense-statement.pdf).

    15 50 USC Section 4565.

    16 31 CFR Section 800.204.

    17 Even following implemention of FIRRMA, the mandatory obligation will be narrowly tailored so that filings will largely remain voluntary.

    18 See, e.g., Reuters, 'U.S. watchdog expands scrutiny to more Chinese deals' (11 October 2016), available at www.reuters.com/article/us-usa-china-m-a-insight-idUSKCN12B0C4, reporting that in December 2015, a month after closing, CFIUS approached Fosun International Ltd to express concerns regarding its acquisition of Ironshore Inc. Fosun ultimately divested its interest in Ironshore.

    19 If a transaction involves either a foreign government-controlled entity or US critical infrastructure, a 45-day investigation must be undertaken (unless waived by the relevant CFIUS member agencies). Under FIRRMA, the investigation period can be extended for an additional 15 calendar days in extraordinary cases.

    20 CFIUS has broad authority to develop mitigation measures, although it uses that authority in only a handful of cases each year. Between 2013 and 2015, only 40 cases resulted in the use of legally binding mitigation measures. See 'CFIUS Annual Report to Congress' for CY 2015, available at https://www.treasury.gov/resource-center/international/foreign-investment/Documents/Unclassified%20CFIUS%20Annual%20Report%20-%20(report%20period%20CY%202015).pdf. Note that 2015 is the most recent calendar year for which statistics are available.

    21 See Ralls Corp. v. Comm. on Foreign Inv. in the United States, 926 F.Supp.2d 71 (D.D.C. 2013), revised and remanded, 758 F.3d 296 (D.C. Cir. 2014).

    22 Federal laws prohibit foreign individuals, foreign companies and US subsidiaries under foreign control from obtaining security clearances and accessing classified information, and any entity that has security clearances is required to notify the DOD of any potential foreign ownership. See National Industrial Security Program Operating Manual, Reg. 5220.22-M (February 2006, as amended), available at www.fas.org/sgp/library/nispom/nispom2006.pdf. The DOD determines whether a contractor is under foreign control, ownership or influence (FOCI) on a case-by-case basis. Should the DOD find FOCI, the contractor may undertake measures approved by the DOD to mitigate the FOCI.

    23 49 USC Section 44101.

    24 49 USC Section 44102(a).

    25 49 USC Section 41101(a).

    26 14 CFR Section 204.5.

    27 49 USC Section 41102(a).

    28 49 USC Section 40102(a)(15).

    29 Some states impose citizenship and residency requirements on state-chartered banks. In addition, the directors of national banks chartered at the federal level must be US citizens. 12 USC Section 72.

    30 12 USC Section 3105(d).

    31 Id.

    32 12 USC Sections 1841 to 1852.

    33 A bank holding company (BHC) is one that controls one or more banks but does not itself engage in banking. BHCs exist in the United States because the United States limits the activities in which US banks can be involved; a BHC permits a US bank to be owned by a company that engages in activities in which the US bank is not permitted to engage. Foreign companies that acquire an interest in a BHC or US bank under certain circumstances are exempt from such limitations (e.g., with respect to operations outside the United States. See 12 USC Section 1841(h)(2) and (3); 12 USC Section 1843(c)(9)).

    34 Other regulations are applicable to the merger of certain banking institutions not regulated under the BHCA.

    35 12 USC Section 1842(c).

    36 47 USC Section 310(a).

    37 47 USC Section 310(b)(1) and (2).

    38 47 USC Section 310(b)(3). Note that, with respect to common carrier licences, the FCC has determined to forbear from applying the foreign ownership limitations in 47 USC Section 310(b)(3) to the class of common carrier licensees in which the foreign investment is held in the licensee through US-organised entities that do not control the licensee, to the extent that it determines the foreign ownership is consistent with the public interest under the policies and procedures the FCC has adopted for the public-interest review of foreign ownership subject to 47 USC Section 310(b)(4). See 'First Report and Order' in IB Docket No. 11-133, FCC 12-93 (released 17 August 2012), 77 Fed. Reg. 50,628 (22 August 2012), available at http://apps.fcc.gov/edocs_public/attachmatch/FCC-12-93A1.pdf, Paragraph 1.

    39 47 USC Section 310(b)(4). The FCC has clarified that it will approach each application involving foreign investment in the controlling US parents of broadcast licensees on a case-by-case basis. See Commission Policies and Procedures Under Section 310(b)(4) of the Communications Act, Foreign Investment in Broadcast Licensees, MB Docket No. 13-50, 'Declaratory Ruling', 28 FCC Rcd 16244 (2013), available at www.fcc.gov/document/fcc-clarifies-policy-foreign-investment-broadcast-licensees-0, Paragraph 11.

    40 See 47 CFR Section 1.2.

    41 Review of Foreign Ownership Policies for Broadcast, Common Carrier and Aeronautical Radio Licensees under Section 310(b)(4) of the Communications Act, as amended, GN Docket 15-236 'Report and Order', FCC 16-128, 81 Fed. Reg. 86,586 (1 December 2016). In 2015, the FCC approved the request of a broadcast radio licensee to exceed the 25 per cent indirect foreign ownership benchmark. See In the Matter of Pandora Radio LLC, MB Docket 14-109, 'Declaratory Ruling', available at www.fcc.gov/document/fcc-grants-petition-declaratory-ruling-pandora-radio-llc.

    42 30 USC Section 181.

    43 Id.

    44 42 USC Section 2133(d).

    45 10 CFR Section 50.38.

    46 Final Standard Review Plan on Foreign Control Ownership, Control or Domination, 64 Fed Reg 52,355 (28 September 1999).

    47 Id. at 52,358.

    48 46 USC App 883.

    49 46 USC Section 12103(a).

    50 46 USC Section 50501.

    51 See, e.g., 2012 U.S. Model Bilateral Investment Treaty, April 2012, Article 5, available at
    www.state.gov/documents/organization/188371.pdf. The government negotiates BITs based on this model text; thus, most BITs to which the United States is a party adhere closely to this document. See also North American Free Trade Agreement, January 1994, Article 1105, available at www.nafta-sec-alena.org/Home/Texts-of-the-Agreement/North-American-Free-Trade-Agreement?mvid=2.

    52 United Nations Conference on Trade and Development, 'Fair and Equitable Treatment: A Sequel', 2012, p. 57, available at http://unctad.org/en/Docs/unctaddiaeia2011d5_en.pdf.

    53 See, e.g., Model BIT Article 5; NAFTA Article 1105.

    54 See, e.g., Model BIT Article 6; NAFTA Article 1110.

    55 See, e.g., Model BIT Articles 3 and 4; NAFTA Articles 1102 and 1103.

    56 See, e.g., Model BIT Article 7; NAFTA Article 1109.

    57 See, e.g., Model BIT Article 8; NAFTA Article 1106.

    58 See, e.g., Model BIT Article 24(3); NAFTA Article 1120(1).

    59 The United States is a party, with 153 other countries (as at June 2018).

    60 Model BIT Article 1.

    61 See, e.g., Free Trade Agreement Between the United States of America and Panama, Article 10.29, available at www.ustr.gov/sites/default/files/uploads/agreements/fta/panama/asset_upload_file684_10351.pdf; Free Trade Agreement Between the United States of America and the Republic of Korea, Article 11.28, available at www.ustr.gov/trade-agreements/free-trade-agreements/korus-fta/final-text.

    62 US Department of State, 'United States Bilateral Investment Treaties', available at https://www.state.gov/e/eb/ifd/bit/117402.htm.

    63 'Presidential Memorandum Regarding Withdrawal of the United States from the Trans-Pacific Partnership Negotiations and Agreement' (23 January 2017), available at https://www.whitehouse.gov/presidential- actions/presidential-memorandum-regarding-withdrawal-united-states-trans-pacific-partnership- negotiations-agreement/.

    64 Office of the United States Trade Representative, 'Trans-Pacific Partnership Ministers' Statement' (4 February 2016), available at https://ustr.gov/about-us/policy-offices/press-office/press-releases/2016/February/TPP-Ministers-Statement.

    65 The United States has signed and ratified FTAs with six of the TPP countries: Australia, Canada, Chile, Mexico, Peru and Singapore.

    66 TPP FTS, Chapter 9. Office of the United States Trade Representative, available at https://ustr.gov/sites/default/files/TPP-Final-Text-Investment.pdf.

    67 Government of Canada, 'Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)', available at https://international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/cptpp-ptpgp/index.aspx?lang=eng.

    68 The New York Times, 'Trump Proposes Rejoining Trans-Pacific Partnership' (12 April 2018), available at https://www.nytimes.com/2018/04/12/us/politics/trump-trans-pacific-partnership.html.

    69 Office of the United States Trade Representative, 'U.S.-EU Joint Report on T-TIP Progress to Date' (17 January 2017), available at https://ustr.gov/about-us/policy-offices/press-office/press-releases/2017/january/us-eu-joint-report-t-tip-progress-0.

    70 See Office of the United States Trade Representative, 'T-TIP Issue by Issue Information Center', available at https://ustr.gov/trade-agreements/free-trade-agreements/transatlantic-trade-and-investment-partnership-t-tip/t-tip-5. See also 'Commission draft text TTIP – Investment', available at http://trade.ec.europa.eu/doclib/docs/2015/september/tradoc_153807.pdf.

    71 See, e.g., 'TTIP and the arbitration clause' (last updated 26 April 2016), available at www.euractiv.com/section/trade-society/special_report/ttip-and-the-arbitration-clause/.

    72 Office of the United States Trade Representative, 'Statement by Ambassador Froman on the UK Referendum' (24 June 2016), available at https://ustr.gov/about-us/policy-offices/press-office/press-releases/2016/june/Statement-Ambassador-Froman-UK-Referendum.

    73 Office of the United States Trade Representative, 'North American Free Trade Agreement (NAFTA)', available at https://ustr.gov/trade-agreements/free-trade-agreements/north-american-free-trade-agreement-nafta.

    74 Office of the United States Trade Representative, 'USTR Robert Lightizer Issues Statement on Status of NAFTA Renegotiation' (May 2018), available at https://ustr.gov/about-us/policy-offices/press-office/press-releases/2018/may/ustr-robert-lighthizer-issues-statement.

    75 Investment Arbitration Reporter, 'Trump Administration's Top Trade Official Goes on Record About ISDS Skepticism – Confirms That US is Looking to Opt Out of NAFTA Chapter 11 Arbitration and Blames ISDS Mechanism for Chilling Regulation' (21 March 2018), available at https://www.iareporter.com/articles/trump-administrations-top-trade-official-goes-on-record-about-isds-skepticism-confirms-that-us-is-looking-to-opt-out-of-nafta-chapter11-arbitration-and-blames-isds-mechanism-for-chilling-regulatio/; see also CBC News, 'Canada, Mexico tell U.S.: Decide whether you want a NAFTA dispute settlement process' (28 January 2018), available at https://www.cbc.ca/news/politics/nafta-montreal-talks-january-28-1.4507990.

    76 Executive Orders, 'Presidential Executive Order Addressing Trade Agreement Violations and Abuses' (29 April 2017), available at https://www.whitehouse.gov/presidential-actions/presidential-executive-order- addressing-trade-agreement-violations-abuses.

    77 Office of the United States Trade Representative, 'The Trump Administration Invites Public Comment for Review of Existing Trade Agreements' (29 June 2017), available at https://ustr.gov/about-us/policy-offices/press-office/press-releases/2017/june/trump-administration-invites-public.

    78 Lobbying Disclosure Act, 2 USC Section 1605.

    79 See, e.g., Worker Adjustment and Retraining Notification Act, 29 USC Section 2101 et seq.

    81 See footnote 6.

    82 See footnote 20.