Movies, Popcorn, and National Security: The CFIUS Committee May Expand its Scope to ‘Soft Assets’

Last month, 16 members of Congress wrote to the Government Accountability Office (GAO) to express concern over recent changes in the U.S. movie industry. Their concerns had nothing to do with the quality of the latest super-hero film or the price of popcorn, but instead with the significant influx of Chinese investment in companies such as Legendary Entertainment and AMC Theaters, both of which were recently purchased by Dalian Wanda Group, a Chinese conglomerate.

In their letter, the congressmen cited “growing concerns about China’s efforts to censor and exert propaganda controls on American media.” The congressman asked the GAO to take a closer look at the influx of Chinese investment in U.S. companies and the mechanism used by the federal government to review the national security impacts of these transactions—the Committee on Foreign Investment in the United States (CFIUS).

The vast majority of Americans, and American companies, have little reason to be familiar with CFIUS. The committee, established in its current form in 2007, consists of representatives of major government agencies and departments and is empowered to review the acquisition of U.S. companies made by foreign entities when such a transaction could have national security impacts. The committee was established to help ensure that key national security and critical infrastructure assets, such as defense industrial base manufacturers and nuclear power plant operators, remain under the control of American citizens rather than potential adversaries.

While the committee’s interpretation of national security is relatively broad, the reality is that it reviews only about 10 percent of the hundreds of foreign acquisitions of U.S. companies made every year. However, Congress’s renewed interest in CFIUS, spurred by recent Chinese investments, may soon lead to more frequent review of such transactions, including transactions involving media companies and other “soft power” assets — a possibility that the GAO has agreed to look into.

Such an expansion would be significant. The CFIUS review process can be intimidating and confusing to both American and foreign companies. The review process can add an entirely new level of complexity to already complicated international transactions, forcing buyers and sellers to consider every aspect of their business and how it may pertain to U.S. national security.

The CFIUS review process should not be underestimated. While review can be completed in as quickly as 90 days, the reality is that many companies voluntarily engage in discussions and negotiations with CFIUS over a much longer period of time. During this time, companies focus on identifying key assets of potential concern and developing mitigation plans that either shield national security assets from foreign control or divest them to another U.S. company. Companies that choose to forgo a voluntary review can suffer a much worse fate—a CFIUS order that completely unravels an acquisition.

It is also a process that can become highly political, as the 2006 Dubai Ports World deal demonstrated. In that case, the United Arab Emirates (UAE)-based company acquired the rights to operate six major U.S. ports. While the deal initially secured CFIUS approval, it immediately encountered significant public and congressional opposition. Congress and commentators expressed concern over Emirati citizens having direct access to major U.S. port facilities and some influencers posited possible connections between the Emirati company and terrorism. As a result of this political and public pressure, Dubai Ports World ended up selling the operating rights to a U.S. company, a dramatic departure from their original plans.

Cases such as this are likely to become more common as the number of transactions reviewed by CFIUS continues to grow, particularly if the government ultimately decides to expand the scope of CFIUS reviews to cover so-called “soft power” assets. Companies and individuals involved in the sale and purchase of U.S. assets must get better acquainted with the CFIUS process and its intricacies, including the communications and government relations strategies that can be implemented before a transaction is announced to increase the chances of passing a CFIUS review. Without this knowledge, an increasing number of companies may find themselves in an unenviable position of significant public scrutiny, or worse yet, a broken deal.

Alan Wehler is a Senior Associate at The Chertoff Group, a security and risk management advisory firm.

Lex Suvanto is Global Managing Director, Financial Communications & Capital Markets at Edelman, a global communications and marking firm.

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