INSUBCONTINENT EXCLUSIVE:
After months of back-and-forth negotiations, Washington moved rapidly this past week to fend off the increasing transcendence of China tech
industry, with Congress passing expanded national security controls over MA transactions and the Trump administration heaping more pressure
on China with threats of increased tariffs.
We&ve been following the reforms to CFIUS — the Committee on Foreign Investment in the United
States — since the proposal was first floated late last year
The committee is charged with protecting America economic interests by preventing takeovers of companies by foreign entities where the
transaction could have deleterious national security consequences
The committee and its antecedents have slowly gained powers over the past few decades since the Korean War, but this week, it suddenly
gained a whole lot more.
Through the Foreign Investment Risk Review Modernization Act of 2018, which was rolled into the must-pass National
Defense Authorization Act and passed by Congress this week, CFIUS is gaining a number of new powers, more resources and staff, more
oversight, and a charge to massively expand its influence in any MA process involving foreign entities.
Lawfare has a great summary of the
final text of the bill and its ramifications, but I want to highlight a few of the changes that I think are going to have an outsized effect
on Silicon Valley and the tech industry more widely.
One of the top priorities of this legislation was to make it more difficult for Chinese
venture capital firms to invest in American startups and pilfer intellectual property or acquire confidential user data.
Congress fulfilled
First, the definition of a &covered transaction& has been massively expanded, with a focus on &critical technology& industries
In the past, there was an expectation that a foreign entity had to essentially buy out a company in order to trigger a CFIUS review
That jurisdiction has now been expanded to include such actions as adding a member to a company board of directors, even in cases where an
investment is essentially passive.
That means that the typical VC round could now trigger a review in Washington — and in the fast
timelines of startup fundraising, that might be enough friction to keep Chinese venture capital out of the American ecosystem
Given that Chinese venture capital (at least by some measures) has outpaced United States venture capital in the first half of this year,
this provision will have huge ramifications for startups and their valuations.
The second element Congress added was requiring that CFIUS
receive all partnership agreements that a company has signed with a foreign investor
Often in a transaction, there is a main agreement spelling out the overall structure of a deal, and then side agreements with individual
investors with special terms not shared with the wider syndicate, such as the right to access internal company data or intellectual property
By requiring further disclosure, CFIUS will have a more holistic picture of a deal and any risks it might add for national security.
It
important to note that Congress was keen on balancing the need for investment with the need of national security
Through oversight provisions, including allowing CFIUS decisions to be contested in the DC Court of Appeals, Congress has designed the
reform to be fairer, even as it takes a harder line on certain transactions.
It will take many months for the provisions to come in full
force, so some of the effects of this bill won''t be felt until the end of next year
Nonetheless, Congress has sent a clear message of its intent.
Congress& national security concerns in financial transactions are also
British Prime Minister Theresa May and her government are spearheading new controls over foreign investment transactions, and the EU has
also launched more screenings to ensure that transactions are in the best interests of the continent
All of these legislative moves are a response to Chinese foreign direct investment, which has skyrocketed in Europe while almost
disappearing in North America.
President Trump signed tariffs on China earlier this year
Now, the administration wants to more than double them.
That disappearance is a function of the on-going trade dispute between the United
States and China, which crescendoed this past week
The Trump administration said it is considering increasing tariffs from 10% to 25% on $200 billion worth of Chinese goods, significantly
heightening the tariffs it had put in place earlier this year.
That threat got a swift response from China overnight, with the Chinese
Commerce Ministry saying that it would put tariffs on $60 billion worth of American goods in retaliation if the United States followed
through with its threat.
So far, the tech industry appears to have been more insulated from the back-and-forth than expected, although the
increasing scope and intensity of tariffs could change that calculus
Apple updated its quarterly filing this week to include a new risk around trade disputes, saying that &Tariffs could also make the Company
products more expensive for customers, which could make the Company products less competitive and reduce consumer demand.& Legal boilerplate
for sure, but it is the first time the company has included such a provision in its filing.
The tariffs drama is going to continue in the
But this week in particularly was a watershed for United States and China technology relations, and a busy week for tech lobbyists and
policy officials.
For startups, most of this news basically boils down to the following: the United States is one market, and China is
Cross-investing and cross-distribution just aren''t going to be easy as they were even a few months ago
Pick a market — one market — and focus your energies there
Clearly, it going to be tough times for anyone caught in the middle between the two.
