CFIUS: Account for CFIUS risks in transactions involving non-U.S. investments in businesses with a U.S. presence
Over the past year, the Committee on Foreign Investment in the United States (CFIUS), an interagency committee chaired by the Department of the Treasury, has been particularly active in reviewing and, at times, intervening, in non-U.S. investments in U.S. businesses to address national security concerns. CFIUS has the authority to impose mitigation measures on a transaction before it can proceed. It may also recommend that the President block a pending transaction or order divestiture of a U.S. business in a completed transaction. Consequently, companies that have not sufficiently accounted for CFIUS risks may face significant hurdles in successfully closing a deal. With the incoming Trump administration, there is also the potential for an expanded role for CFIUS, particularly in light of campaign statements opposing certain foreign investments.
With that in mind, below are a few key CFIUS considerations:
- Is the deal subject to CFIUS review? Definitional issues, such as what constitutes "covered transactions" or "control" of a "U.S. business" by a foreign person are critical to this analysis. Transactions between two companies headquartered and primarily operating outside the United States can even be subject to CFIUS review. For instance, President Obama recently blocked the proposed acquisition of Aixtron SE's U.S. business by Grand Chip Investments GMBH, a German company ultimately owned by Chinese investors. Even though Aixtron SE is a German company, CFIUS asserted jurisdiction in this case because the target has a U.S. business. On December 8, 2016, Grand Chip announced that it was abandoning the entire transaction, apparently because it could not be accomplished without acquiring the blocked U.S. business.
- Does the deal pose potential national security concerns? In making this determination, CFIUS analyzes the interplay between whether (i) the foreign buyer poses a threat and (ii) the U.S. business exposes a vulnerability. The threat analysis focuses on the nationality of the buyer, foreign government control over the buyer and specific concerns about the identity of the buyer (e.g., association with sanctioned parties, criminal history, etc.). In particular, Chinese buyers have been a recent focus of CFIUS scrutiny. The vulnerability analysis focuses on various attributes of a U.S. business, including whether the U.S. business involves sensitive technology, U.S. government contracts, "critical infrastructure" (e.g., certain energy assets) and/or facilities located near sensitive government facilities, among other potential concerns.
- Should the parties notify the Committee? CFIUS has the ability to intervene in a transaction and compel the parties to submit to a review. In such cases, CFIUS may begin its review with a negative impression of the transaction as well as doubt regarding the transparency of the parties, which could put the transaction at greater risk of being blocked. Parties would, consequently, be prudent to consider filing a voluntary notice of the transaction with CFIUS in situations where potential national security concerns are present. Submitting to the notification process allows the parties to obtain a "safe harbor" determination for the transaction to proceed. This determination can eliminate the uncertainty surrounding CFIUS risks and position the deal to successfully close.
- What is the timing of the CFIUS review? Parties will typically submit a voluntary notice to CFIUS after signing and in advance of closing. After preparing the required information for the notice, CFIUS encourages the parties to submit a "pre-filing" to allow the Committee time to review and comment on the draft notice in advance of filing. The Committee may extend the process for review. Most transactions are cleared (i.e., "safe harbor" is granted) during these statutory periods, although CFIUS may require a mitigation agreement to address national security concerns identified in certain transactions. However, in particularly complex and/ or difficult transactions, CFIUS may direct the parties to withdraw and refile the notice, starting the clock over with a fresh review period, to allow more time for the national security assessment and/or negotiation of mitigation terms. This development can significantly extend the transaction timeline.
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