Skip to main content

  • AddRemove
  • Build a Report 
Legal Update

The United States Rejects Chinese Investment on National Security Grounds

22 December 2009
Mayer Brown Legal Update

The United States government has effectively rejected a foreign acquisition in the United States on the grounds that it would threaten to impair the national security. Recent public announcements indicate that the Committee on Foreign Investment in the United States (CFIUS) was preparing to recommend that President Obama disapprove a Chinese company’s attempt to invest in a US mining company, because the mining facilities are located near certain US military installations. The Chinese company apparently withdrew its application to CFIUS on December 21, 2009, thus forestalling a referral to the president.

If the president had ultimately rejected the transaction, it would have marked only the second time since the creation of the CFIUS review process more than 20 years ago that a president had taken such action. (The first presidential rejection occurred in 1990 by President George H.W. Bush and also involved a Chinese investment.) While the substance of the CFIUS decision probably does not mark any dramatic change of US policy toward foreign investment, the US rejection at a time of tension in the US–China economic relationship could have considerable impact.

On December 17, 2009, Firstgold Corp. (Firstgold), a Nevada mining company, announced that CFIUS had advised Firstgold that on December 21 CFIUS would recommend to President Obama that he reject the proposed investment in Firstgold by a China-based company, Northwest Non Ferrous International Investment Company (Northwest). Firstgold stated that US officials had specifically noted the proximity of Firstgold’s properties to a Naval Air Station and related facilities. Firstgold also stated that CFIUS had advised that it had considered several mitigation possibilities and concluded that none would resolve the national security concerns. Remarkably, a memorandum detailing the communications between Treasury staff and counsel to the parties was leaked to the New York Times.

CFIUS’s counterpart in Australia, the Foreign Investment Review Board, has also in the past year objected to a number of Chinese investments based on proximity to defense installations. Thus, these Australian, and now American, rejections could reflect a new trend in the national security assessment of Chinese investments abroad.

Although, as noted, the formal rejection of a foreign investment by the president is almost unprecedented, many foreign investments are blocked for national security reasons when CFIUS informally advises the parties that the transaction will not be approved or proposes mitigation measures unacceptable to the parties. In such circumstances, the parties typically withdraw their applications to CFIUS and the process terminates. The vast majority of proposed foreign acquisitions that are submitted to CFIUS, however, are cleared without submission to the president. 

In 2007, the US Congress overhauled the CFIUS process through enactment of the Foreign Investment and National Security Act. In January 2008, President Bush issued an executive order (E.O. 13456) implementing the law, and the Treasury Department’s final regulations governing the revised CFIUS procedures became effective at the end of 2008. The Obama Administration, therefore, is the first Administration to apply the new rules formally on a case-by-case basis. 

In meetings with Chinese officials, the Obama Administration has professed a policy of openness to foreign investment. By making the CFIUS treatment of the Northwest investment a matter of public record, Firstgold may create the appearance of a change in US policy toward foreign investment. It is more likely, however, that this rejection is simply a confluence of unusual factors. Coming on the heels of Congress’s enactment of enhanced “Buy American” provisions in the economic stimulus law, the president’s decision to impose tariffs on Chinese tires, and tough negotiations at the UN climate change conference in Copenhagen, the symbolism of a rejection of the Firstgold-Northwest transaction may increase US-China tensions, and thus have a larger impact than its substance warrants.   

Foreign investors and their US counterparts should pay close attention to any repercussions of the collapse of the Firstgold-Northwest transaction, and take into account the CFIUS review process when considering potential transactions. Many foreign investments in the United States are subject to review to determine whether they threaten to impair the national security. Commercial competitors of the parties to a transaction sometimes attempt to influence this process to stop potential investments. Acquisitions in a wide range of US industries will likely require CFIUS approval — and the associated political risk management — before investors can complete them. Thus, informed legal and political advice is critical for both parties to a foreign investment in the United States.

For more information on this alert, please contact the authors, and .

Learn more about our Global Trade practice.

The Build a Report feature requires the use of cookies to function properly.  Cookies are small text files that are placed on your computer by websites that you visit. They are widely used in order to make websites work, or work more efficiently.  If you do not accept cookies, this function will not work.  For more information please see our Privacy Policy

You have no pages selected. Please select pages to email then resubmit.