Study On US Security Review Mechanism For Direct Investment From China

China has gone through a fast growth over the past decades in its outward foreign investment; meanwhile its investment in the United States is also increasing. According to statistics from the Ministry of Commerce, the total amount of China’s outward foreign investment has exceeded inward foreign investment for the first time, which means that the country has transformed into a capital-exporting country from a capital importing country. But compared to China’s investment into other overseas countries and other countries’ investment into the US, the scale of Chinese companies’ direct investment into the US does not seem to achieve an expected size. The reason is that enterprises have encountered investment barriers in the process of investing in the US, among which there is the national security review of The Committee on Foreign Investment in the United States(CFIUS), which has brought great concerns to the Chinese enterprise by preventing or even revoking a lot of the large Chinese companies from their merger and acquisition with US domestic companies, such as China National Aviation Corp’s acquisition of MAMCO Corporation, which has been forced to transfer all transaction interest, CNOOC’s acquisition of Unocal, which has also failed, and Ralls’, one of Sany’s affiliates in the United States, failure to invest in a wind farm project in Oregon, which has caused the law suit against president Obama and CFIUS. despite the free invest environment in the US, national security review remains to be a stumbling block for enterprises investing in the US, resulting in a huge obstacle in the process of Chinese enterprises investing in the US and causing withdrawal or failure of many transactions. Based on the above background, this paper attempts to explore and analyze the legal issues arising from the process of Chinese companies investing in the US from the perspective of CFIUS national security review. Basically the legal issues include the mechanism of CFIUS national security review, the reason of the review obstacle and the strategy to respond to such review obstacle, and so on.For enterprises seeking solutions of the national security review barrier, the first thing is to understand the operational mechanism of CFIUS. CFIUS is an inter-agency committee of the United States Government that reviews the national security implications of foreign investments in U.S. companies or operations. Chaired by the United States Secretary of the Treasury, CFIUS includes representatives from 16 U.S. departments and agencies, including the Defense, State and Commerce departments, as well as(most recently) the Department of Homeland Security. CFIUS was established by President Gerald Ford’s Executive Order 11858 in 1975. President Reagan delegated the review process to the Committee on Foreign Investment in the United States with the Executive Order 12661 in 1988. This was in response to U.S. Congress giving authority to the President to review foreign investments, in the form of Exon-Florio Amendment. The review process of CFIUS usually consists of five stages: notification or voluntary submit; a 30-day review; a 45-day investigation; proposing to the president; and reporting to the congress. The review process, review result and its basis is not access to the public, and even the involved enterprises cannot get to know exactly why their transaction is rejected. In the thirty years of its operation, CFIUS has been trying to reach a balance between protecting national security and attracting foreign investment to proposer US economic.Safety review barriers faced by Chinese companies is produce mainly due to: first, the delicate political relations between China and the US government, among the several large countries conducting investment in the US, China is the only one out of the list of US "allies"; secondly, the relationship between the Chinese business and government is quite complicated, especially in the early stage of investment in the United States, when most larger investment transactions are carried out by the Chinese state-owned enterprises, causing a cautious attitude of the CFIUS toward foreign acquisitions by Chinese enterprises; third, compared to companies in the United States and other regions in the world, the management mode of Chinese companies is relatively backward and to some extend disordered. Such disadvantage would cause more distrust in the national security review for worry about the development of the enterprise to be merged; last but not lease, the overall investment environment in the world has become more and more strict toward foreign investment while the market is growing larger, also effecting Chinese enterprises to invest in the United States.A lot of controversial cases arise from CFIUS when it comes to the national security review toward enterprises invest in the US, including the recent lawsuit Ralls v. CFIUS and Obama. On July 15, 2014, the United States Court of Appeals for the District of Columbia remanded Ralls Corporation’s(Ralls) precedent-setting case against the Committee on Foreign Investment in the United States(CFIUS or the committee) and President Obama to district court for the enforcement of Ralls’ s right to due process. The court explained that due process requires, at the least, that an affected party be informed of the official action, be given access to the unclassified evidence on which the official actor relied and be afforded an opportunity to rebut that evidence. The ruling should reduce the opacity of the CFIUS process for foreign parties and provide some enhanced procedural protections. However, any procedural changes are unlikely to affect the outcome of any CFIUS review process. In addition, several factors are likely to limit the practical impact of the D.C. Circuit’s decision. To the extent determinations by the President or the CFIUS concerning national security rely on classified information, the decision provides no recourse. Despite the little real economic significance of the case, Chinese enterprise and enterprise from other countries seeking to invest in the US are encouraged with a new thinking to solve the review barrier of CFIUS. The conflict between Ralls and CFIUS with Obama is similar to the historic case of CNOOC’s acquisition of Unocal, demonstrating that investment in the energy industry seems to be more likely to attract CFIUS’s attention. However, there is still some difference in aspects such as nature of the two Chinese companies and the main reason that the transactions failed. The similarities and the difference show that review mechanism and attitude of the CFIUS is changing all the time, while its ultimate principle remains to be protecting US national security.Historically, Japan and Saudi Arabia have experienced a peak of investment in the US and have also confronted a certain degree of frustration in national security review of CFIUS. Faced with this situation, Japan changed their investment strategy and slowly but successfully reversed the investment barrier situation. Such practice constitutes a certain reference for Chinese enterprises. From the aspects of domestic support, China’s domestic legislation can create a more convenient environment for approval/filing of the enterprises to invest overseas and Chinese government can provide more service and support for such enterprise. From the aspects of international law, China shall be more active in creating a more convenient invest environment around the world and participate in revising and updating bilateral investment agreements. Currently the agenda of Sino-US bilateral investment agreements is undergoing and the situation and progress has brought promising future for the enterprise investing in the US. While taking use of external environment benefits, the enterprises themselves should also strengthen their internal construction and make preparations in the early stage of transaction to avoid possible national security issues. Even in cases where national security review is inevitable, there is still a way to deal with it with a take positive attitude, by negotiating with CFIUS, the congress and the local government. If their legitimate rights are being infringed during the process of review, the enterprises can seek remedies from both international laws and rules and ensure the well ongoing of the investment.