United States: CFIUS Unbound: Foreign Investor Deals Continue To Draw Intense National Security Scrutiny

Last Updated: August 7 2019
Article by Joseph V. Moreno, Jodi L. Avergun, Andrew P. Alin, Joshua Apfelroth and Keith M. Gerver

Most Read Contributor in United States, July 2019

The national security implications of corporate deals involving foreign investors continues to be a headline-grabbing topic. Last summer, President Trump signed into law the Foreign Investment Risk Review Modernization Act of 2018 ("FIRRMA"), which expanded the types of transactions subject to national security review by the Committee on Foreign Investment in the United States ("CFIUS"). As we approach the first anniversary of FIRRMA, it has – unsurprisingly – made it more critical than ever to identify and address whether a cross-border deal involving non-U.S. parties is subject to CFIUS review and approval, and if so, to strategize and plan for such process early in the life cycle of a transaction.

I.    Background

Since 1975, CFIUS has consisted of a group of federal agencies responsible for addressing the national security implications of mergers, acquisitions, joint ventures, and other "covered transactions" in which foreigners acquire ownership stakes in U.S. companies.1 Historically, whether the parties to a covered transaction sought CFIUS pre-approval for the deal was entirely a voluntary decision; however, CFIUS could review any transaction within its purview at any time regardless of whether the parties made such notification. If a proposed transaction fell under CFIUS's authority, the President had the discretion to suspend, block, or approve it subject to negotiated mitigation measures. If CFIUS chose to scrutinize a transaction after the fact and identified issues that should have been mitigated, it could in certain cases impose civil monetary penalties and even unwind the transaction post-closing.

In August 2018, the enactment of FIRRMA broadened the scope of transactions subject to CFIUS scrutiny while also imposing new mandatory filing obligations on transactions involving certain industries and technologies.2 In October 2018, the Treasury Department issued interim regulations outlining FIRRMA's "Pilot Program" which detailed the declaration process for transactions requiring mandatory review.3 Collectively, these changes reflected the most significant updates to the CFIUS review process in over a decade.

II.   Pre-FIRRMA CFIUS Review Process

Prior to FIRRMA, a "covered transaction" subject to CFIUS review was limited to mergers, acquisitions, or takeovers by or with a foreign person that could result in foreign "control" of any person engaged in interstate commerce in the United States, and that could threaten the national security of the United States.

A.   What Constitutes Control?

"Control" – which does not necessarily mean majority control – is defined broadly in the CFIUS regulations to include:

"[t]he power, direct or indirect, whether or not exercised, through the ownership of a majority or a dominant minority of the total outstanding voting interest in an entity, board representation, proxy voting, a special share, contractual arrangements, formal or informal arrangements to act in concert, or other means, to determine, direct, or decide important matters affecting an entity;"4

The pre-FIRRMA CFIUS regulations did not provide a set percentage of what ownership stake constitutes "control"; however, they contained a carve-out for transactions in which a foreign person holds ten percent or less of the outstanding voting interest in a U.S. business, regardless of the dollar value of the interest, provided that the transaction is "solely for the purpose of passive investment."5 An ownership interest in a U.S. business is a passive investment "if the person holding or acquiring such interests does not plan or intend to exercise control, does not possess or develop any purpose other than passive investment, and does not take any action inconsistent with holding or acquiring such interests solely for the purpose of passive investment."6

B.   What Constitutes a Threat to National Security?

If a transaction would result in foreign control of a U.S. business, the next question to ask is whether it presents a potential threat to the national security of the United States. This analysis takes into consideration 11 factors7 which include the potential effects of the transaction on U.S. international technological leadership, the impact on U.S. critical infrastructure,8 and whether the U.S. business would fall under the control of a foreign government or state-owned entity.9 In practice, CFIUS has asserted a broad view of the types of companies and industries whose products or services may be considered relevant to U.S. national security.

C.   What Did a Traditional CFIUS Submission Entail?

The pre-FIRRMA CFIUS review process was voluntary. If the decision was made to seek CFIUS approval, typically both parties to a covered transaction would prepare and jointly submit the filing which then triggered a 30-day review period. At the end of that period, CFIUS could conclude that no further review was necessary or, alternatively, could initiate an investigation which was to be completed within 45 days. Depending on the results of the investigation, CFIUS could again choose not to take action, could negotiate with the parties to the transaction to mitigate the threats to national security posed by such foreign control, or could refer the transaction to the President for ultimate action. The President then had a 15-day period to suspend or prohibit the deal upon a finding of credible evidence that the transaction would impact the national security of the United States. In such cases, the President's determination was not subject to judicial review or other recourse.

III.  How the Process Has Changed Under FIRRMA

While leaving the existing CFIUS review criteria and processes largely in place, FIRRMA layered on a number of new parameters and requirements that make the system substantially more intricate.

A.   No Longer Limited to Foreign "Control"

FIRRMA broadened CFIUS's authority to review a wide range of foreign investments that do not result in foreign control if the U.S. business at issue is involved in critical infrastructure, critical technology, or the personal information of U.S. citizens. FIRRMA also subjected to CFIUS review certain real estate transactions where the property at issue is in close proximity to a U.S. government or military installation, transactions involving changes in foreign investor rights, and transactions involving a foreign government. This means that, even in the absence of "control," parties to an international transaction will need to identify whether their deal falls within any of these new categories.

B.   Mandatory Declarations for Critical Technology Industries

FIRRMA modified the historically voluntary CFIUS process with a mandatory filing requirement. Under FIRRMA's Pilot Program, parties to certain types of investments in U.S. businesses that produce, design, test, manufacture, fabricate or develop one or more "critical technologies" in one of twenty-seven identified industries must file a mandatory declaration.10 This streamlined application is shorter and contains less detail than the traditional CFIUS submission, but CFIUS can require the parties to a transaction to subsequently submit a full CFIUS filing which can effectively lead to multiple filings prior to deal closing.

C.   Revised FIRRMA Review Period

The life cycle for pre-FIRRMA CFIUS filings was intended to be no more than 90 days from submission to Presidential action. Under FIRRMA, the mandatory declaration process consists of a 45-day period for CFIUS review of the declaration, a 45-day investigation period which can be extended by CFIUS for an additional 15 days if necessary, and 15 days for review and determination by the President. As a result, parties to a transaction that may require a mandatory declaration under FIRRMA should build in even more time than was required under the traditional CFIUS process.

IV.   Post-FIRRMA Practice Tips

Since it is less than a year old, the new CFIUS regulatory regime has made it difficult to gauge exactly just how broadly it will expand and what types of deals it will capture under FIRRMA. But as we approach FIRRMA's one-year anniversary there are some practical takeaways that deal lawyers in this space should keep in mind:

  • Know if the U.S. business implicates a FIRRMA-designated category. With the concept of "control" no longer dispositive, be aware of whether the U.S. business involves one or more "critical technologies" that could cause a deal to implicate mandatory declaration obligations. This includes so-called "emerging and foundational technologies" which have yet to be defined pending Commerce Department final rules expected later this year.11
  • Negotiate potential mitigation steps in advance. If the U.S. business involved in the transaction deals in sensitive technology, significant data of U.S. persons, or other factors that are particularly likely to draw CFIUS scrutiny, tee up potential mitigation strategies before CFIUS does. There is no reason to wait until late in a transaction's life cycle to construct mitigation efforts that are acceptable to the parties and (hopefully) to the U.S. Government. Getting out in front of mitigation early could help avoid an eleventh-hour scramble.
  • Consider a hedging strategy. Some U.S. sellers have resorted to requiring foreign investors to deposit a reverse break fee in a U.S.-dollar escrow account upon deal signing. Others have sought protection with CFIUS risk insurance products, with premiums typically at ten to fifteen percent of the reverse break fee and potentially higher based on perceived regulatory risk. Depending on the stakes, the insurance expense may be worthwhile for the peace of mind of having a hedge against a delayed or failed transaction.

V.  Conclusion

Since FIRRMA and its Pilot Program regulations have gone into effect, it has become clearer than ever that a CFIUS analysis must be a part of any M&A deal involving foreign investors. The range of transactions subject to review has become broader, the application process has become more complicated, and the consequences for non-compliance have become more severe. At the same time, the Justice Department's National Security Division recently sought increased funding for FY 2020 to hire additional personnel to handle CFIUS matters.12 With higher stakes and increased regulatory scrutiny, it is essential that deal lawyers anticipate the CFIUS implications of a transaction early in its life cycle, know what to look for and what questions to ask during the due diligence process, and determine whether to apply for and obtain CFIUS approval well before a transaction closes.

Footnotes

1   See Section 721 of the Defense Production Act of 1950, as amended by the Foreign Investment and National Security Act of 2007, 50 U.S.C. App. 2170, available at https://www.treasury.gov/resource-center/international/foreign-investment/Documents/Section-721-Amend.pdf.

2   Title XVII, Pub. L. No. 115-232, available at https://home.treasury.gov/sites/default/files/2018-08/The-Foreign-Investment-Risk-Review-Modernization-Act-of-2018-FIRRMA_0.pdf.

3   31 C.F.R. Part 801, available at https://home.treasury.gov/system/files/206/FR-2018-22182_1786904.pdf.

4   31 C.F.R. Part 800, available at https://www.treasury.gov/resource-center/international/foreign-investment/Documents/CFIUS-Final-Regulations-new.pdf.

5   Id. at § 800.302(b).

6   Id. at § 800.223.

7   50 U.S.C. App. §§ 2170(f)(1)-(11).

8   "Critical infrastructure" means "systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems or assets would have a debilitating impact on national security." Id. at § 2170(a)(6).

9   Id. at § 2170(b)(1)(B).

10 Annex A to 31 C.F.R. Part 801.

11 See Industry and Security Bureau Proposed Rule, 83 FR 58201, "Review of Controls for Certain Emerging Technologies" (November 19, 2018), https://www.federalregister.gov/documents/2018/11/19/2018-25221/review-of-controls-for-certain-emerging-technologies.

12 U.S. Department of Justice FY 2020 Budget Request, National Security and Cyber, https://www.justice.gov/jmd/page/file/1142631/download.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions