Elon Musk may soon be tweeting at President Donald Trump, again.
Trump signed the National Defense Authorization Act for Fiscal Year 2019 on Monday, hours after Musk said he has been in talks with the Saudi Arabia sovereign wealth fund to take Tesla private. Musk has complained about China’s auto tariffs in a tweet at Trump. And now, his plan to take the automaker private could be threatened by a giant defense bill Trump signed on Monday.
The $716 billion defense law includes the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), which strengthens the authority of the Committee on Foreign Investment in the United States, or CFIUS, the interagency committee tasked with assessing foreign-funded deals to ensure they do not compromise national security.
The measure has expanded the types of deals that are reviewed by the CFIUS. It’s common for sovereign wealth funds to make passive investments (or non-controlling investments). Passive investments, deals in which an investor takes a less than 10% stake in a company, are usually a Safe Harbor for CFIUS jurisdiction. Now under the new measure, fewer deals in critical technology or infrastructure companies are likely to be deemed “passive”.
“Any investment from the Saudi fund, even it’s not controlling, will be subject to CFIUS review,” Jeffrey Gordon, a professor at Columbia Law School, said in an email. A CFIUS review looks into the national security concerns of a deal. After a lengthy and opaque process, the agency decides whether to approve or block a transaction. In rare circumstances, CFIUS may also refer a transaction to the president for a final decision. President Barack Obama, for example, blocked a Chinese company’s bid to buy a German semiconductor company, Aixtron, in December 2016.
Gordon thinks Tesla will likely be subject to review because of its cutting-edge technology. “Of particular interest is whether Tesla ‘owns or operates critical infrastructure, develops critical technologies, or maintains or collects U.S. citizens’ personal data that may be exploited in a manner that threatens national security,” wrote Gordon.
“The U.S. government has been concerned with artificial intelligence. With everything Tesla is doing with AI, the deal is definitely on top of regulators’ mind,” said Lawrence Ward, a partner at Dorsey & Whitney which specializes in international business and U.S. national security law.
But a lot of terms in FIRRMA, including “passive investment” and “critical technology”, still need to be defined. Theodore H. Moran, nonresident senior fellow at the Peterson Institute for International Economics, believes that the Saudi investment will not have to go through CFIUS review because “the Saudis will not ‘take over control’ of Tesla technology,” Moran wrote in an email to Yahoo Finance.
Will Tesla investors stick around for the ride?
The risk of a CFIUS review hinges on its shareholders. In his post to investors, Musk said he estimated two-thirds of Tesla’s current shareholders would remain invested in Tesla after it goes private. But Musk also admits he needs some time to understand shareholders’ thoughts.
If most of Tesla’s public shareholders remain for the ride, the Saudi investment would be relatively small meaning the fund would have a minority stake in Tesla. Since Saudi Arabia’s Public Investment Fund already has amassed a 5% stake in Tesla, it’s likely a buyout would grant it more than 10% of Tesla shares.
If the Saudi sovereign wealth fund needs to buy out a significant amount of Tesla’s public shareholders, it may raise serious concerns about control rights and technology sharing. The uncertainty may also give the board a pause when it votes for Musk’s plan to go private.
Even if CFIUS give the Saudi investment a pass, Congress may have something to say. There have long been concerns about the conservative Muslim country’s ties to radical organizations and its potential financial support of terrorists. “Certain members of Congress believe Saudi funds are related to activities that they consider nefarious,” said Ward. “The U.S. has been careful not to sanction the country on the whole, but target at certain parties.”
Krystal Hu covers technology and economy for Yahoo Finance. Follow her on Twitter.