In the last few years, the U.S. government has ordered a Chinese company to unwind its acquisition of the dating app Grindr,
blocked a joint venture between a U.S. robotics company and its Chinese partner,
and barred U.S. entities from investing in companies linked to China’s military and surveillance industry.
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.
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.
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.
And CFIUS’s purview is only increasing, pushed along by a major congressional expansion of its jurisdiction in 2018.
While practitioners have tracked the increase in CFIUS activity,
CFIUS has received little attention from legal scholars.
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.
Bloomberg recently wished “[g]ood luck” to those seeking to understand CFIUS’s work, noting that CFIUS “investigations are effectively 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.”
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.
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,
and foreign investment in businesses that control or produce critical technologies, infrastructure, and data.
In many of these cases, foreign investment is indirect or noncontrolling—but CFIUS’s tentacles still find their way in.
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.
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.
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.
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,”
and Congress is actively considering establishing a CFIUS-like committee to review outbound investments in countries of concern.
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.
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.
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.
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.
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.
More investment ex ante should reduce litigation probability and complexity, thereby decreasing ex post costs.
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.