This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (May 18, 2018).

Legislation seeks to tighten the vetting of investments involving foreign companies

By Kate O'Keeffe 

As President Donald Trump sought to forge a delicate China trade deal on Thursday, lawmakers from both sides of Congress looked set to advance a bill that would give the U.S. greater power to block deals between American and Chinese companies that could risk national security.

The legislative initiative is part of a complicated effort to confront China on both economic and security issues, while also seeking Chinese cooperation on such matters as North Korea. On Thursday, Mr. Trump hosted Chinese Vice Premier Liu He as part of an effort to negotiate concessions in the face of U.S. threats to impose tariffs on up to $150 billion in Chinese imports.

China, too, has been calibrating its responses, alternating between retaliatory threats and conciliatory gestures. China's antitrust division had delayed for months U.S. private-equity firm Bain Capital's $18 billion deal for Toshiba Corp.'s memory-chip unit, but on Thursday the Japanese firm said regulators had allowed the deal to proceed. China has yet to approve U.S. chip maker Qualcomm Inc.'s $44 billion bid for NXP Semiconductors NV.

The Trump administration on Thursday seemed determined to continue putting pressure on China, with the president using harsh terms to describe Chinese trade practices: "We have been ripped off by China," Mr. Trump said, speaking to reporters in the Oval Office. "That's not going to happen anymore."

The bill -- which has prompted debate among lawmakers and U.S. businesses active in China -- would affect both foreign firms seeking deals in the U.S. and American companies doing business abroad by tightening the processes for vetting inbound and outbound investment.

The congressional effort to strengthen U.S. defenses would expand both the remit and resources of the Committee on Foreign Investment in the U.S. CFIUS is an interagency committee that reviews proposed foreign takeovers of U.S. businesses. It can advise the president to block them on national-security grounds.

The proposed legislation spells out CFIUS's authority to vet the purchase or lease of real estate near sensitive U.S. facilities, and its right to review any deal structured to evade its jurisdiction, such as transactions that use shell companies to obfuscate the would-be buyer's ownership, for example.

The latest version of the bill seeks to settle the question of how Washington would monitor the overseas transactions of U.S. companies, a significant source of contention from the business community. In a compromise, the revised bill, according to drafts circulated as recently as Wednesday night and reviewed by The Wall Street Journal, would have the government vet domestic and overseas transactions through separate processes.

Though the new rules would apply to many transactions involving foreign companies, the bill is particularly aimed at curbing certain Chinese deals. Critics have long singled out Chinese deals as posing disproportionate risks to national security because the companies may be directed and subsidized by the government of China, which is an economic and military rival.

The CFIUS bill has bipartisan congressional support and was earlier endorsed by the president and the heads of the departments of Defense, Treasury and Justice -- which are all part of CFIUS -- among other senior officials. It was first introduced by Senate Majority Whip John Cornyn (R., Texas) and Rep. Robert Pittenger (R., N.C.) in November.

Both the Senate Banking Committee and the House Financial Services Committee, whose free-market chairmen had long resisted advancing the legislation due to opposition from the business community, now plan to mark up the bill's text as soon as next week after reaching the compromise.

The bill's initial proposal to grant CFIUS the authority to review joint-venture deals struck abroad was a step too far for some U.S. firms with interests in China such as IBM and General Electric Co. Companies criticized the bill as being overly broad and said CFIUS should stick to reviewing inbound foreign investment only.

Instead, the bill now proposes to review the overseas deals through a bolstered export controls process. It proposes the creation of a new interagency process involving the Commerce, Defense, State and Energy departments, as well as the intelligence community, to identify critical technologies and determine where they can be exported, according to the Senate and House drafts.

U.S. firms often agree to joint ventures in China because it is the only way to get access to the country's enormous market. They typically say the deals don't present national-security risks because they aren't giving Chinese firms any cutting-edge technology in return. And they have said they would prefer such joint-venture deals be governed by the export-control regime as opposed to CFIUS. The export-control process is run in a relatively transparent fashion by the Commerce Department, whereas CFIUS makes decisions on a case-by-case basis largely hidden from public view.

Just last month, Mr. Cornyn in a speech on the Senate floor appeared to shoot down prospects for a compromise on the issue. "These joint ventures are essentially acquisitions by another name, which is why CFIUS should be able to review them for national-security risks," he said, adding that those criticizing his proposal were only doing so "so they can bolster their bottom line."

In an interview Thursday, Mr. Pittenger rejected any characterization of the bill revisions as a concession to U.S. companies. "To the contrary, many believe this legislation will provide the Department of Defense and intelligence even greater oversight to protect American interests and provide coverage over outbound joint ventures."

One prominent lawyer who represents companies in CFIUS cases agreed that it might be too early for U.S. businesses to celebrate, as it is unclear how the new proposed interagency group to regulate overseas joint ventures would operate in practice.

The bill's proposal to allow for additional parties to weigh in on overseas investment injects new uncertainty into the process because it would in effect create a "mini CFIUS" to review the deals, the lawyer said.

Write to Kate O'Keeffe at kathryn.okeeffe@wsj.com

(END) Dow Jones Newswires

May 18, 2018 02:47 ET (06:47 GMT)