The US remains a leading destination for foreign direct investment (FDI) in many forms, including providing additional capital to existing US operations, purchasing the entirety of a US company, forming a joint venture or any such combination.
Japan and other nations such as the UK, Canada, Germany and China continue to invest in American companies due to the large customer base, largely predictable legal system, and highly developed business environment that exist in the US.
Target industries range from manufacturing to financial and insurance, to trade and maintenance, with the technology and energy sectors rapidly attracting the most activity in general. The US is well positioned to remain as one of the leading destinations for FDI in the world.
This article summarises two key investment considerations for Japanese management and legal counsel to consider when investing in US businesses: (1) economic considerations; and (2) regulatory considerations.
Investment in the US can be an important part of global investment strategy. Overseas investors often choose the US for its diverse consumer markets, skilled labour force and transparent investment regime. The US is often considered a haven for foreign businesses seeking stronger intellectual property regulations and relatively inexpensive exporting procedures.
The US has a world-leading research and development pipeline and university systems, which have historically attracted STEM (science, technology, engineering and math) businesspersons to the US investment landscape. Further, the government’s regulatory environment and tax regime are more liberal than many European and Asian countries. Finally, the US dollar is the central currency to the world economic ecosystem.
The US offers a number of additional investment benefits within certain key industries. For example, the information technology sector has been a high-performing instance of success for many foreign investors.
The covid-19 pandemic has pushed consumers toward greater reliance on information technology, and US businesses have been cognisant of this trend. Sub-sectors such as software, telecommunications and e-commerce, especially, have experienced tremendous growth. As a result, there has been a significant number of public and private investments made into companies in these sectors in the US during 2020.
Many investors from Asia and Europe select US tech companies for inclusion in their investment portfolios due to the relatively recession-resistant nature of the current tech operations. In other words, because nearly every individual and business consumer relies on technology to some degree every day, investors feel greater comfort in funding tech companies in an otherwise unfamiliar jurisdiction due to the consistent market demand the sector experiences.
The healthcare industry has experienced greater attention from foreign investors as well. While only a small fraction of FDI in the US, the healthcare sector has nonetheless grown noticeably. Biopharmaceutical services and healthcare information technology, in particular, are attractive to foreign investors due to their roles in relation to the covid-19 pandemic. There is currently a global recognition of the importance of supporting the medical industry, and many non-US investors hope to capitalise on this by investing in American healthcare companies at the forefront of pandemic-preventative innovation.
However, the American economy is not attractive to all types of prospective investors. Competition for attractive target companies is intense, and entering into new markets in the US often requires significant up-front investment. Additionally, governmental pre-clearance requirements, as discussed below, for transactions in certain industries can attenuate the transaction process and introduce unwanted execution risk. Finally, a number of industries prevalent in the US took a downturn this past fiscal year, including the once-dominant transportation industry, as well as traditional media industries like print, television and film.
A Japanese company that is interested in acquiring or investing in US businesses should evaluate its unique economic goals and business strategies to determine whether its participation in the American market is the right fit.
Once a non-US investor settles on a US business to invest in or acquire, there are a number of regulatory matters to consider. The most common is whether to make a voluntary filing with the Committee on Foreign Investment in the United States (CFIUS) as a condition to closing the investment or acquisition.
As one of the largest recipients of FDI in the world, US governmental authorities acknowledge both the opportunities and risks associated with foreign capital. The US as a whole generally has a self-proclaimed open investment policy that affords non-US investors the same treatment as a US party regardless of origin. In other words, a majority holding interest of a US company by an offshore investor is legal and there are no technical restrictions on the transfer of shares to a foreign stakeholder. However, there are a number of situations in which the US government may deny or restrict such investments.
The CFIUS was established to monitor and regulate FDI in the US. While the chief goal of the CFIUS is to combat national security concerns associated with foreign takeovers, the agency also generally provides guidance over any “covered transaction” that takes place within an American company. Any joint venture, merger, acquisition or investment that could result in non-US control of a US company is considered a covered transaction.
The general guideline is that acquiring a stake greater than 10% invites the assumption that the non-US investor may have intentions to direct business decisions of the US target, or control the target. Many who are party to a deal that fits this broad description choose to submit a voluntary filing to the CFIUS to inform the government of the investment transaction and its terms. If the CFIUS does not return any comments or queries, the transaction can likely proceed without issue.
Prior to 2020, the CFIUS notice filings were free of charge for parties to make. Currently, however, notice filings are subject to a filing fee of up to US$300,000, calculated based on the size of the transaction at issue. Foreign investors should take into account that this financial hurdle may deter some cost-sensitive US businesses from even negotiating with a non-US investor.
Although the CFIUS engages frequently in conducting reviews and soliciting information on both private and public foreign investment transactions, the agency has only blocked five foreign investment transactions to date. That being said, according to the CFIUS Annual Report to Congress, investors from Japan, China and Canada are the most frequent users of the CFIUS voluntary filing mechanism to clear their transactions. Japanese investors should carefully consider the benefits and drawbacks of prospectively interacting with the CFIUS when making an investment in a US business.
FDI in the US provides Japanese and other investors with the opportunity and challenge to participate in the largest economy in the world. The business needs of an investor and its US target counterpart will vary with each transaction. However, every prospective deal team should consider how the economic and regulatory components affect their transaction goals, risks and potential strategies.
This lens is especially critical as the US navigates the first term of a new presidential administration, and its effects on the general deal climate. Japanese management and legal counsel should endeavour to consistently monitor the latest developments in the US investment environment to ensure the greatest business success.
I Bobby Majumder
Tel: +1 469 680 4217
Lynwood E Reinhardt
Tel: +1 469 680 4220
Brooke C Dorris
Tel: +1 469 680 4255
2850 N. Harwood Street
Suite 1500 Dallas
Texas 75201, USA
Tel: +1 469 680 4200