NATIONAL SECURITY CREEP IN CORPORATE TRANSACTIONS

National security review of corporate transactions has long been a relatively sleepy corner of regulatory policy. But as governments merge economic and national security, national security reviews are expanding in frequency and scope, causing numerous deals to be renegotiated or even blocked. This expansion of national security’s impact on corporate transactions—which this Essay calls “national security creep”—raises theoretical questions in both national security and contract law and has important practical implications for dealmaking and the economy.

This Essay makes several contributions. First, it provides an updated account of the national security review process for investments, which has changed substantially in recent years with the expansion of the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS), the global diffusion of CFIUS-like processes, and U.S. moves to regulate outbound investment. Second, this Essay considers the theoretical impact of national security creep. It argues that the executive branch’s increasingly broad claims about what constitutes national security may cause judges to alter long-standing deference to the executive on national security issues, with implications for deal parties, the executive, and scholars who debate whether courts should treat national security as “exceptional.” It also argues that CFIUS’s temporally tentacular review authority upends well-understood contract theory that considers regulatory review to be an ex ante contract design cost. Finally, this Essay considers practical implications of national security creep and concludes with suggestions for how the executive, courts, Congress, and scholars should approach national security creep going forward.

The full text of this Essay can be found by clicking the PDF link to the left.

* Martha Lubin Karsh and Bruce A. Karsh Bicentennial Professor of Law, University of Virginia School of Law.
** Barron F. Black Research Professor of Law, University of Virginia School of Law. For helpful comments and conversations, the authors thank Kathleen Claussen, Ashley Deeks, David Fagan, Jill E. Fisch, Larry Fullerton, Jack Goldsmith, John Harrison, Michael Knoll, Ronald Lee, Michael Livermore, Paul Mahoney, Thomas Nachbar, Richard Re, Sam Rascoff, Paul Schwartz, and David Zaring, as well as participants in workshops at Columbia Law School, the Council on Foreign Relations, Georgia Tech’s Internet Governance Project, George Washington University Law School, the Harvard–Yale–Stanford Junior Faculty Forum, N.Y.U. School of Law, Princeton University, Temple University Beasley School of Law, the University of Florida Levin College of Law, University of Georgia School of Law, University of Iowa College of Law, University of Minnesota Law School, University of Pennsylvania Carey Law School, and University of Virginia School of Law. Thanks to Sean Michael Blochberger, Lauren Burns, Joshua Goland, Hannah Keefer, Melissa Privette, Dev Ranjan, and Divya Vijay for excellent research assistance, and to the Columbia Law Review editors for their helpful suggestions and hard work in bringing the Essay to publication.

Introduction

In the last few years, the U.S. government has ordered a Chinese company to unwind its acquisition of the dating app Grindr, 1 James Griffiths, Gay Dating App Grindr Is the Latest Victim of US-China Tensions, CNN Bus. (May 14, 2019), https://www.cnn.com/2019/05/14/tech/grindr-china-us-security/index.html [https://perma.cc/GL8Y-FAXR] (last updated May 15, 2019) (reporting that Chinese company Kunlun Tech, which owned 60% of Grindr, “reached an agreement with CFIUS to sell the app by June 30, 2020”). blocked a joint venture between a U.S. robotics company and its Chinese partner, 2 Paul Marquardt, Chase D. Kaniecki & Nathanael Kurcab, CFIUS Blocks Joint Venture Outside the United States, Releases 2018–2019 Data, and Goes Electric, Cleary Gottlieb: Cleary Foreign Inv. & Int’l Trade Watch (June 3, 2020), https://www.clearytradewatch.com/
2020/06/cfius-blocks-joint-venture-outside-the-united-states-releases-2018-2019-data-and-goes-electronic/ [https://perma.cc/9XUV-U7LV] (noting that CFIUS blocked a robotics joint venture in China between a U.S. manufacturing company and two U.S. joint venture partners). and barred U.S. entities from investing in companies linked to China’s military and surveillance industry. 3 Jeanne Whalen & Ellen Nakashima, Biden Expands Trump Order by Banning U.S. Investment in Chinese Companies Linked to the Military or Surveillance Technology, Wash. Post (June 3, 2021), https://www.washingtonpost.com/technology/2021/06/03/investment-ban-chinese-surveillance-tech/ (on file with the Columbia Law Review). These actions are evidence of a phenomenon this Essay calls “national security creep”: the recent expansion of national security–related review and regulation of cross-border investments to allow government intervention in more transactions than ever before.

One driver of national security creep is the Committee on Foreign Investment in the United States (CFIUS)—an interagency committee in the executive branch that reviews foreign investment into the United States for national security concerns. 4 The Committee on Foreign Investment in the United States (CFIUS), U.S. Dep’t of the Treasury, https://home.treasury.gov/policy-issues/international/the-committee-on-foreign-investment-in-the-united-states-cfius [https://perma.cc/6ZKF-NR4B] [hereinafter U.S. Dep’t of the Treasury, CFIUS] (last visited Oct. 5, 2022). Historically, CFIUS reviewed a small number of deals a year, ordering mitigation measures in deals with obvious national security implications, such as foreign government–controlled investments in U.S. defense contractors. 5 David Zaring, CFIUS as a Congressional Notification Service, 83 S. Cal. L. Rev. 81, 87 (2009) (noting that, at the time of writing, “the Committee itself almost never actually prevent[ed] foreign acquisitions from going forward” and that “CFIUS ha[d] launched in-depth reviews of acquisitions in thirty-seven of the 1800-plus filings made since 1998”). In recent years, however, it has reviewed hundreds of transactions a year, blocked several, and, via presidential order, ordered deals to be unwound after they have closed. 6 See, e.g., Farhad Jalinous, Karalyn Mildorf, Keith Schomig, Ryan Brady & Timothy Sensenig, CFIUS 2021 Annual Report Reveals Record Filings and Continued Encouraging Trends, White & Case LLP (Aug. 5, 2022), https://www.whitecase.com/insight-alert/cfius-2021-annual-report-reveals-record-filings-and-continued-encouraging-trends [https://perma.cc/
N9QZ-C8LB] (reporting on recent CFIUS filing trends and CFIUS actions on filings); see also infra notes 69–70 and accompanying text (detailing blocked transactions). And CFIUS’s purview is only increasing, pushed along by a major congressional expansion of its jurisdiction in 2018. 7 See infra notes 83–102 and accompanying text.

While practitioners have tracked the increase in CFIUS activity, 8 See, e.g., CFIUS in the Biden Administration, Covington & Burling LLP (Jan. 29, 2021), https://www.cov.com/en/news-and-insights/insights/2021/01/cfius-in-the-biden-administration [https://perma.cc/UQ7E-3C84] (predicting how the Biden Administration will use the CFIUS review process); Farhad Jalinous, Karalyn Mildorf, Keith Schomig & Timothy Sensenig, CFIUS Outreach on Non-Notified Transactions: What It Means, What to Expect, and How to Successfully Navigate the Process, White & Case LLP (June 1, 2021), https://www.whitecase.com/publications/alert/cfius-outreach-non-notified-transactions-what-it-means-what-expect-and-how [https://perma.cc/V6SJ-JVMX] [hereinafter CFIUS Outreach on Non-Notified Transactions] (noting that the passage of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) resulted in a “significant increase in resources allocated [to CFIUS] for monitoring and enforcement and the establishment of a formal process to identify non-notified transactions” and providing information on how CFIUS reviews non-notified transactions). CFIUS has received little attention from legal scholars. 9 Over the last dozen years, there appear to be three main articles that discuss national security review in the deal context in the legal academic literature. See Jon D. Michaels, The (Willingly) Fettered Executive: Presidential Spinoffs in National Security Domains and Beyond, 97 Va. L. Rev. 801 (2011) [hereinafter Michaels, Presidential Spinoffs]; Andrew Verstein, The Corporate Governance of National Security, 95 Wash. U. L. Rev. 775 (2018); Zaring, supra note 5. All of them predate, and thus do not account for, the recent “national security creep” that this Essay addresses. See infra note 51. This Essay takes into account recent developments to chronicle how the reach of national security reviews is creeping outward both within and outside of the United States, leading to important consequences for both national security and corporate transactions.

While corporate transactions are subject to a variety of regulatory reviews, national security has always been special. For instance, the CFIUS review process is cloaked in secrecy. 10 Because CFIUS reviews deals for national security risk, it must necessarily keep the details of many of those risks under wraps. Filings with CFIUS are confidential, and the Committee does not divulge whether particular transactions are under review, the nature of risks identified with respect to particular transactions or investors, or the contents of mitigation agreements entered into to address national security risks. See U.S. Dep’t of the Treasury, CFIUS, supra note 4 (noting that “Section 721 of the Defense Production Act of 1950 . . . mandates confidentiality protections with respect to information filed with the Committee” and that “[c]onsistent with section 721, the Committee does not publicly confirm or deny that a transaction has been notified to CFIUS” (emphasis omitted)). Bloomberg recently wished “[g]ood luck” to those seeking to understand CFIUS’s work, noting that CFIUS “investigations are effectively a black box.” 11 Saleha Mohsin & Daniel Flatley, All About CFIUS, the Watchdog Biden May Use to Review Musk’s Ventures, Bloomberg (Oct. 21, 2022), https://www.bloomberg.com/news/
articles/2022-10-21/all-about-cfius-us-watchdog-on-foreign-dealmaking-quicktake-l9ivzn5i (on file with the Columbia Law Review); see also John Schmidt, Ronald D. Lee & Ludovica Pizzetti, UK National Security Reviews: Insight Into Emerging Trends After First Deal Gets Blocked, Arnold & Porter Kaye Scholer LLP (Aug. 15, 2022), https://www.arnoldporter.com/
en/perspectives/advisories/2022/08/uk-national-security-reviews [https://perma.cc/7L3Q-9D8L] (characterizing the U.K. investment screening process as a “black box”). As a result of CFIUS’s secrecy, it can be hard for deal parties to gauge the risk that CFIUS will review or disrupt their transaction. The co-head of JPMorgan Chase’s mergers and acquisitions team, for instance, memorably called CFIUS “the ultimate regulatory bazooka.” 12 Kevin Granville, CFIUS, Powerful and Unseen, Is a Gatekeeper on Major Deals, N.Y. Times (Mar. 5, 2018), https://www.nytimes.com/2018/03/05/business/what-is-cfius.html (on file with the Columbia Law Review).

But while CFIUS’s secrecy is not new, the recent expansion of its jurisdictional scope is. CFIUS has traditionally scrutinized deals that seemed clearly related to U.S. national security interests. For example, the first deal it reviewed, in 1987, was the proposed sale of an early Silicon Valley semiconductor company to Japan’s Fujitsu at a time when the Reagan Administration considered Japan’s growing semiconductor industry a threat to U.S. development of computers, robotics, and related technologies. 13 Fairchild Semiconductor called off the transaction in 1987, “reportedly ‘bowing to intense pressure from Reagan Administration officials.’” Grace Maral Burnett, Analysis: Semiconductors Made CFIUS, Bloomberg L. (June 12, 2020), https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-semiconductors-made-cfius [https://perma.cc/GN6Z-HZJX] (quoting David E. Sanger, Japanese Purchase of Chipmaker Canceled After Objections in U.S., N.Y. Times (Mar. 17, 1987), https://www.nytimes.com/1987/03/17/business/japanese-purchase-of-chip-maker-canceled-after-objections-in-us.html (on file with the Columbia Law Review)) (describing the semiconductor industry as one that has always particularly interested national security regulators); see also Chris Miller, A Semiconducted Trade War, Foreign Pol’y (July 1, 2019), https://foreignpolicy.com/2019/07/01/a-semiconducted-trade-war/ [https://perma.cc/
6KB6-9DF2] (describing the U.S.–Japan trade war over semiconductors in the 1980s). Now, however, the government’s interests—and CFIUS’s congressionally mandated jurisdiction—have expanded to include foreign real estate investments located near sites of national security concern, 14 Gordon F. Peery, Commercial Leases and Other Real Estate Transactions Are Subject to National Security Review, Law.com (July 8, 2021), https://www.law.com/2021/07/
08/commercial-leases-and-other-real-estate-transactions-are-subject-to-national-security-review/ (on file with the Columbia Law Review) (noting that, in some cases, leasing or purchasing property that is close to national security interests may trigger CFIUS review). and foreign investment in businesses that control or produce critical technologies, infrastructure, and data. 15 James K. Jackson, Cong. Rsch. Serv., RL33388, The Committee on Foreign Investment in the United States (CFIUS) 2 (2020), https://sgp.fas.org/crs/natsec/
RL33388.pdf [https://perma.cc/G576-QZZ4] (noting that FIRRMA allows CFIUS “to review any noncontrolling investment in U.S. businesses involved in critical technology, critical infrastructure, or collecting sensitive data on U.S. citizens”). In many of these cases, foreign investment is indirect or noncontrolling—but CFIUS’s tentacles still find their way in. 16 See infra notes 86–89 and accompanying text. CFIUS review now captures a wide variety of deal parties, structures, activities, and policies in its attempt to protect national security, and this creeping review has significantly magnified uncertainty for corporate deal parties. 17 See infra section II.B.

But CFIUS review of investments into the United States is not the sole component of national security creep. Countries around the world—some encouraged by the United States—are establishing their own CFIUS-like processes to screen inbound foreign investment for national security concerns. 18 See infra section I.B.2. And creep is not even limited to regulating inbound investment. Both the executive branch and Congress are becoming increasingly interested in regulating outbound investment on national security grounds. In 2021, the Biden Administration doubled down on regulations issued at the end of the Trump Administration to prohibit U.S. persons from investing in companies linked to China’s military. 19 See infra notes 149–164 and accompanying text. National Security Advisor Jake Sullivan warned that the Biden Administration is “looking at the impact of outbound U.S. investment flows that could . . . enhance the technological capacity of our competitors in ways that harm our national security,” 20 Press Release, The White House, Remarks by National Security Advisor Jake Sullivan at the National Security Commission on Artificial Intelligence Global Emerging Technology Summit (July 13, 2021), https://www.whitehouse.gov/nsc/briefing-room/2021/
07/13/remarks-by-national-security-advisor-jake-sullivan-at-the-national-security-commission-on-artificial-intelligence-global-emerging-technology-summit/ [https://perma.cc/UNY8-APRA]. and Congress is actively considering establishing a CFIUS-like committee to review outbound investments in countries of concern. 21 See infra notes 165–174 and accompanying text.

In addition to identifying and describing the phenomenon of national security creep, this Essay makes several theoretical contributions to literatures in national security law, corporate law, and contract law.

The expanding ambit of national security reviews ties into existing debates about judicial deference to the executive branch on foreign relations and national security. 22 Judicial deference to the executive branch in national security and foreign affairs–related cases has sparked numerous law review articles describing and critiquing the amount of, and rationales for, such deference. See, e.g., Curtis A. Bradley, Chevron Deference and Foreign Affairs, 86 Va. L. Rev. 549 (2000) [hereinafter Bradley, Chevron Deference and Foreign Affairs]; Robert M. Chesney, National Security Fact Deference, 95 Va. L. Rev. 1361 (2009); Ashley S. Deeks, The Observer Effect: National Security Litigation, Executive Policy Changes, and Judicial Deference, 82 Fordham L. Rev. 827 (2013); Kristen E. Eichensehr, Courts, Congress, and the Conduct of Foreign Relations, 85 U. Chi. L. Rev. 609 (2018); Kristen E. Eichensehr, Foreign Sovereigns as Friends of the Court, 102 Va. L. Rev. 289 (2016) [hereinafter Eichensehr, Foreign Sovereigns as Friends of the Court]; Derek Jinks & Neal Kumar Katyal, Disregarding Foreign Relations Law, 116 Yale L.J. 1230 (2007); Deborah N. Pearlstein, After Deference: Formalizing the Judicial Power for Foreign Relations Law, 159 U. Pa. L. Rev. 783 (2011); Eric A. Posner & Cass R. Sunstein, Chevronizing Foreign Relations Law, 116 Yale L.J. 1170 (2007). As the political branches engage in ever-broader actions in the name of national security, the role of the courts as a potential overseer or check is an obvious consideration. Judges tend to defer to the executive on national security issues, but national security creep is already leading to more and somewhat different cases, challenging the traditional deference paradigm. 23 See infra section II.A.1. Judges could continue to defer to the executive, expanding the scope of their deference to match the scope of the national security claims. But there is some early evidence that judges might be shifting their approach either to constrict deference across the board or to bifurcate deference based on whether the executive is addressing a “traditional” national security concern or an economically focused one like those on which this Essay focuses. 24 See infra section II.A.1. Such adjustments to judicial deference will affect the executive and regulated parties and have the potential to complicate scholarly debates about whether national security and foreign relations are subject to exceptional rules or are instead being “normalized” toward a domestic law baseline. 25 See infra section II.A.2.

National security creep also muddies the conventional understanding of how to manage contracting costs in corporate transactions. Contract theorists have long made a distinction between the ex ante costs of contracting, such as the costs associated with negotiating and drafting the contract, and the ex post costs, which include litigation costs and the uncertainty of the deal outcome. 26 See, e.g., Richard A. Posner, The Law and Economics of Contract Interpretation, 83 Tex. L. Rev. 1581, 1583 (2005) (defining the cost of a contract as the ex ante negotiating and drafting costs, plus the probability of litigation multiplied by the sum of the parties’ litigation costs, the judiciary’s litigation costs, and judicial error costs). More investment ex ante should reduce litigation probability and complexity, thereby decreasing ex post costs. 27 See, e.g., Albert Choi & George Triantis, Strategic Vagueness in Contract Design: The Case of Corporate Acquisitions, 119 Yale L.J. 848, 852 (2010) (arguing that parties can use vague contract provisions efficiently—for example, material adverse change clauses in acquisition agreements may remain vague because they are rarely litigated); Cathy Hwang, Unbundled Bargains: Multi-Agreement Dealmaking in Complex Mergers and Acquisitions, 164 U. Pa. L. Rev. 1403, 1419 (2016) [hereinafter Hwang, Unbundled Bargains] (discussing how modularizing a contract ex ante can reduce litigation costs ex post); Robert E. Scott & George G. Triantis, Anticipating Litigation in Contract Design, 115 Yale L.J. 814, 818 (2006) (examining the efficiency of investment in the design and enforcement phase of the contracting process and arguing that parties can lower overall contracting costs by using vague contract terms ex ante and shifting investment to the ex post enforcement phase); Robert E. Scott & George G. Triantis, Incomplete Contracts and the Theory of Contract Design, 56 Case W. Rsrv. L. Rev. 187, 189 (2005) (considering the role of litigation in motivating contract design). The nature of national security review weakens the link between the two: As many deal parties have learned, for instance, it is hard to manage ex post costs through ex ante investment when CFIUS intervention is so uncertain.

Beyond these theoretical points, this Essay’s descriptive account of national security creep also raises a number of practical implications that warrant further exploration.

From the national security side, an important question is whether global diffusion of CFIUS-like processes might stoke nationalism and blowback in investment reviews. Will the CFIUS-like processes the U.S. government has encouraged allies to establish be turned against U.S. investors going forward? From the corporate side, national security review increases uncertainty in dealmaking. Will deal parties’ attempts to dodge regulatory scrutiny also decrease the amount of information available to investors? And will national security creep reduce overall deal volume?

The remainder of this Essay proceeds as follows. Part I offers a descriptive account of national security creep in corporate deals, situating U.S. government moves to merge economic and national security in a broader context and focusing on three recent developments: the expansion of CFIUS’s jurisdiction, the diffusion of CFIUS-like processes around the world, and stepped-up U.S. regulation of outbound investment. Part II discusses theoretical implications of national security creep for national security law and for contract law, and Part III identifies additional practical implications for further research. While the Essay sounds some notes of caution about national security creep, the Conclusion explains why we do not here take a stronger normative position on the desirability (or not) of expanded national security review of investments, and it closes by discussing how we think executive branch officials, judges, legislators, deal parties, and scholars should approach national security creep going forward.