Deals are generally approved, but reviews are often taking longer and transactions are being scrutinized rigorously
The Committee on Foreign Investment in the United States (CFIUS), which is led by the US Department of the Treasury and made up of various agencies and offices of the Executive Branch of the US Government, including Defense, State, Justice, Commerce, Energy and Homeland Security, reviews acquisitions of, and investments in, US businesses by foreign persons or businesses.
The parties to the transaction file a joint voluntary notice that addresses specific information about the investor and its owners, the US business and the transaction, and includes attachments such as annual reports, the deal document and information about the target's activities that have a nexus to US national security. A CFIUS review is ostensibly a voluntary process, but in some cases it is effectively mandatory, e.g., acquisitions of cleared defense contractors or assets likely to qualify as critical infrastructure.
CFIUS actively looks for transactions of interest that were not notified and will "invite" parties to submit a filing regarding transactions it would like to review. In recent years CFIUS has reviewed transactions in a wide array of industries.
Types of deals reviewed
CFIUS has jurisdiction to review any transaction that could result in control of a US business by a foreign person. "Control" is defined—and interpreted by CFIUS—broadly and can include many minority investments. The types of transactions that CFIUS can review are quite varied, including deals structured as stock or asset purchases, debt-to-equity conversions, foreign-foreign transactions where the target has a US business, private equity investments (in some cases even from US-based companies) and joint ventures where the foreign partner is investing in an acquired or contributed US business.
The CFIUS statute does not specify what types of industries are relevant to national security. This has given CFIUS substantial leeway to review transactions covering a wide variety of areas, including semiconductors and other technology areas, identity authentication, biometrics, information technology, energy, telecommunications, food safety, financial services, real estate, cybersecurity and healthcare, as well as industries with a more direct link to national security such as aerospace and defense. External issues unrelated to the structure of the transaction, such as the US business's location in close proximity to sensitive US government assets, can also pose substantial national security concerns.
Accordingly, it is important to consider CFIUS issues in connection with any transaction involving foreign investment (direct or indirect) in a US business with a potential link to national security.
Scope of the review
The CFIUS review process is designed to assess the risk profile of the deal from a US national security perspective. It analyzes the threat posed by the foreign buyer, the vulnerability exposed by the target, and the consequences resulting from the combination of the threat and vulnerability. Based on that risk profile, CFIUS decides if the deal can proceed (with or without mitigation) or whether it needs to be stopped. Often the analysis is done based on the filing as well as follow-up Q&A. In some cases, the parties will also meet with CFIUS either per the parties' or CFIUS's request.
- Most deals are approved
- Where CFIUS has national security concerns, it can impose mitigation conditions that can have significant implications on the foreign investor's involvement with the US business
- A relatively small but nevertheless notable number of deals are abandoned while going through the process
- Only the US President can formally stop a deal, which has happened four times in the history of CFIUS—twice in the past year alone. More typically in cases where CFIUS determines there are unresolvable national security concerns, CFIUS will suggest that parties abandon a deal or it will recommend a presidential block, at which point parties usually agree to withdraw from the transaction
Trends in the review process
In recent years, there has been a significant broadening of the foreign investor base represented in CFIUS reviews, with greater activity from emerging markets, such as China, Japan and the Middle East. As a result, the risk factors CFIUS considers in its national security analysis have changed to reflect a broader pool of investors.
Most notably, there has been rising sensitivity to Chinese-based transactions, which have continued to increase under President Trump's administration. In general, the CFIUS process for Chinese deals has become more complex and is taking longer. Despite the focus on China, even sensitive transactions involving investments from traditional allies can raise national security concerns and take longer than anticipated.
How foreign investors can protect themselves
It is critical for foreign investors to consider CFIUS issues in planning and negotiating transactions, including with respect to allocation of CFIUS-related risk. The range of mitigation requirements that can be imposed is quite wide (based on the risk profile of the deal), and it is important for buyers in particular to have as clear an understanding as possible with respect to what mitigation requirements would be acceptable to them. As a buyer, you do not want to buy an asset and have CFIUS-imposed mitigation prevent you from achieving your objectives for the deal. It is also advisable for investors in potentially sensitive transactions to try to avoid owing reverse breakup fees should the transaction fail due to CFIUS objections.
Review process timeline
Typically, the process takes at least two to three months from the time the parties submit the joint voluntary notice and its attachments to CFIUS in draft (called a pre-filing) to completion. Concurrent with a recent surge in CFIUS reviews—2017 is on pace to well exceed the previous modern-era record for CFIUS filings in a year—the CFIUS process is often taking longer, sometimes significantly so. CFIUS typically takes about two to three weeks to review and comment on the prefiling, though in some cases this process can take a month or longer. Once the parties incorporate CFIUS's comments and formally file, CFIUS typically takes a few days to a week to accept the filing and start a 30 calendar-day review process. At the end of the 30 calendar days, the review is either completed or is taken to the investigation phase (which happens in nearly half of all filed cases annually). Investigation can take up to 45 calendar days. Thereafter, most reviews are completed. On rare occasions, contentious deals are taken to the President, who has 15 days to make a decision. Sometimes, most often when CFIUS needs more time to assess a sensitive transaction or parties are still negotiating mitigation terms with CFIUS, CFIUS may encourage the parties to withdraw and resubmit the notice to restart the 30-day clock. In the past year, more transactions have been withdrawn and resubmitted for a second review cycle.
2017 update highlights
- The number of CFIUS reviews continues to rise. It is important to incorporate extra time for CFIUS review into deal-planning timelines.
- Chinese deals, particularly those involving sensitive or state-of-the-art technologies, continue to come under significant scrutiny. Not only Chinese deals are sensitive, however—German-based Infineon abandoned its proposed acquisition of Cree's Wolfspeed business following CFIUS objections. Thus, it is critical to consider potential CFIUS concerns in all cases.
- Senator John Cornyn (R-TX), the second-ranking Republican in the Senate, and Rep. Robert Pittenger (R-NC) have introduced similar, bipartisan bills to strengthen the CFIUS process. According to Senator Cornyn, these bills seek to modernize the CFIUS process to better handle emerging threats (e.g., from adversarial countries and those involving particularly sensitive technologies).
- In October 2017, US Senators Chuck Grassley and Sherrod Brown introduced a bill that would allow the US Department of Commerce to review and potentially block certain transactions based on the transaction's economic impact on the United States.
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