When a non-US company is buying a US pump company, the proposed acquisition may need to be reviewed by the US Committee on Foreign Investment in the United States (CFIUS). Eric McClafferty and Wyatt Mince walk us through the process.
Many European and other global pump and fluid handling equipment companies are thinking about acquisitions of US companies, even with the strong US dollar (or maybe because of it). As over 20 non-US companies have found in the last few years when buying US pump and fluid handling equipment companies, sometimes it makes sense to enter or expand in the lucrative US market through an acquisition rather than by building a manufacturing/sales operation up from nothing, or by trying to expand direct sales from a distance or indirect sales through distributers. US pump and fluid handling equipment companies thinking about selling are also increasingly targeting international buyers. But there are significant regulatory hurdles to overcome when a non-US company tries to buy a US pump company, including understanding whether the proposed acquisition must (or should) go through a review by the US Committee on Foreign Investment in the United States (CFIUS)
Navigating the process
In 2018 and 2019, new rules were put in place that required reviews of non-US acquisitions of US pump, valve, and other companies that make critical technology products that are controlled for export as military, nuclear, or dual-use items. National security reviews are now mandatory before a non-US company is allowed to buy a pump company that possesses information required to produce a primary heat transport pump for a nuclear power plant, nuclear submarine, or pumps in other submarine service. That makes sense given the very sensitive nature of those items. But the scope of the CFIUS mandatory reviews of critical technology transactions is much broader than that in the pump industry, and they also include investments that touch on certain critical infrastructure. More recently, in September 2022, the White House issued an Executive Order (EO) formally emphasizing the risks CFIUS should consider when reviewing foreign company purchases of US businesses. The EO is intended as a message to US acquisition targets and to non-US companies thinking about acquisitions that scrutiny of proposed acquisitions of US companies will be intensified.
Mandatory CFIUS reviews
n fact, under the newer rules, mandatory CFIUS review will be increasingly common for pump and many other fluid handling acquisitions in the US because the scope of US critical technology dualuse export controls is broader than many assume. CFIUS doesn't just cover acquisitions of companies that produce pumps that go into nuclear and military applications. Critically, the controls apply to many types of pumps and the know-how that is required to build export-controlled pumps that are used for chemical and other corrosive or dangerous fluids processing. Under the US Export Administration Regulations (EAR), chemical processing pumps that are classified in export control classification number (ECCN) category 2B350 trigger a required CFIUS filing in almost every case.
ECCN 2B350 covers pumps that fall into the following triggering category: "Multiple mechanical seal and seal-less pumps (eg air operated diaphragm, magnetic drive, canned motor) with flow rates greater than 0.6 mf/hour (600 litres/hour), and certain vacuum pumps where the wetted surfaces of such pumps are made from a long list of chemically inert or anticorrosive materials, such as fluoropolymers, high nickel content alloys, titanium and other specialty metals (and multiple other materials)." Moreover, if the target company makes key parts, including pump bodies, preformed casing liners, impellers, and certain other parts in the listed materials, the acquisition is also likely to be subject to mandatory review.
Mandatory CFIUS review does not apply only to pump companies. Companies that make multiple other types of chemical processing equipment are also subject to mandatory CFIUS review if they make export-controlled items or possess the know-how to make certain export-controlled items, such as certain valves and valve parts; reaction vessels, reactors and prefabricated repair assemblies; agitators; storage tanks, containers and receivers; heat exchangers or condensers (potentially including heat exchangers that are used to cool mechanical seals); remotely operated filling equipment; and multi-walled piping incorporating a leak detection port.
Each of the categories of equipment listed above also includes a list of materials that trigger the application of export controls, if the items qualify (and thus mandatory CFIUS review), if process chemicals come into contact with all the wetted surfaces made of listed controlled materials. (Note that there is some variation in the materials list among subcategories).
Under US export control rules, the information required to develop, produce, and sometimes even use an export-controlled item is also controlled for export. So, buying a US company that has such information triggers a mandatory CFIUS review. The bolded terms are important, as they provide the guiding principles for the control criteria listed above. The definitions of the terms development, production and use are broad and they cover most aspects of the design, production and, as indicated, sometimes even the use of export-controlled pumps.
Chemical processing equipment and the associated technology covered by the US rules are the most common fluid handling equipment categories that trigger export licencing requirements and one of the largest categories of export licences issued by the US government. So, it is not surprising that these controls would generate a lot of CFIUS reviews. For example, an air operated diaphragm pump, magnetic drive pump, and pumps with dual mechanical seals made from the listed materials on their wetted parts are controlled, and if your company is based outside of the US and your acquisition target makes those types of products, your company will almost certainly need a CFIUS review.
Other pump categories exist as well that cover quite unusual pump types (eg pumps to move molten metal), but they also trigger CFIUS reviews. Moreover, there is a very broad control category that covers all industrial pumps with electrical motors over five horsepower that may also trigger CFIUS review in some situations.
In addition to mandatory reviews that are triggered by export-controlled items, there are also mandatory reviews on certain products that are part of US critical infrastructure. In the industrial area, critical infrastructure is defined quite broadly to include such items as any US public water system which regularly serves 10,000 individuals or more, or which directly serves any military In the last few years, more than 2. » There are significant regulatory hurdles to overcome when a non-US company tries to buy a US pump company. Image: © Sushiman - stock.adobe.com M&A » installation, and any industrial control system utilized by a public water system or treatment works for those services.
Voluntary CFIUS reviews
Even if a mandatory CFIUS review is not required, many companies must consider whether a proposed acquisition should go through a voluntary CFIUS review process. It is quite common for US acquisition targets to want to see a foreign acquisition go through a CFIUS review because CFIUS retains the right to force an unwinding of a foreign acquisition, which can cause huge problems for all parties if required. If there are hints that national security issues may be present in the target company (eg they sell directly or indirectly to the US government, perhaps including the US military, even items that don't by themselves trigger export control concerns), that can trigger potential national security concerns. Many companies file voluntary reviews in such situations. Investors also need to look at themselves. Does the headquarters country of the acquiring entity or their international operations raise US national security concerns? For example, do company business units sell into US sanctioned countries like Iran, Venezuela, Russia, Cuba, Syria or other countries that set off US national security red flags? Is the acquiring company headquartered in China or does it have significant operations there? If the acquisition involves an investment fund, are there government funds involved? If so, those issues can trigger CFIUS concerns that can make a voluntary review a sensible choice. In short, it is quite common for the target and acquiring company to agree to go through a CFIUS process to avoid the risk of a required unwinding of the transaction, even if the process is the new, speedier Declaration process, and not a full CFIUS Joint Voluntary Notice (JVN), as discussed below.
The types of CFIUS review
As indicated, there are two types of CFIUS review processes. The newer, shorter process is termed a Declaration. Preparation of a Declaration filing involves the presentation of less information to CFIUS than the older full JVN process and the review process is just 30 days long. The process Companies that make multiple types of chemical processing equipment are also subject to mandatory CFIUS review. Image: © Scanrail - stock. adobe.com M&A » remains largely voluntary (with the exceptions noted above generally involving full reviews), and it involves parties submitting a short-form declaration notifying CFIUS of a covered transaction in order to receive a potential safe harbor letter in response (which limits CFIUS from subsequently initiating a review of a transaction except in certain limited circumstances). In some circumstances, filing at least a Declaration for a transaction is mandatory. In particular, under CFIUS regulation 31 CFR § 800.401, mandatory Declarations are required for covered transactions where a foreign government is acquiring a substantial interest in certain US businesses and for certain covered transactions that involve critical technologies - the export-controlled technologies described above, for example.
For companies that have some concern about potential national security issues, sales to the government who otherwise seek a government blessing of the acquisition (and a sort of safe harbor from possible forced unwinding) will want to consider the Declaration process. Other companies may evaluate the proposed transaction and determine that they are so confident there are no national security concerns that they are willing to avoid the CFIUS process entirely. That is certainly a possible approach, but before adopting that strategy, it is important to conduct the serious diligence and analysis process needed to determine that the proposed target definitely does not have export-controlled products/technology. Too many companies are making assumptions about these issues and not doing the research that is really needed to determine if CFIUS risk exists or not. For many companies it will make sense to get experienced counsel to assist with this review process or a CFIUS filing if needed to manage and reduce risk.
Simply put, the Declaration process can be very useful if the acquirer and the target company's CFIUS attorneys believe there may be a CFIUS issue, but there is a good chance that CFIUS does not care that much about the potential issue such that the Committee would be willing to allow the investment to proceed without a full review. There are a variety of circumstances where a Declaration process may be sufficient, but each case is different and it will make sense to speak with experienced counsel to evaluate whether a CFIUS filing must be, or should be made, and whether a filing should be a Declaration or a request for a full review.
If a more complete full JVN is needed because national security issues like controlled (critical) technology, critical infrastructure is involved, or some other national security issue is present (such Chemical processing equipment are the most common fluid handling equ. » as the location of target real estate close to US national security areas), the following processes apply to JVN submissions.
First is the Pre-Clearance and Notice Review Period. CFIUS staff distributes a filed notice to all CFIUS agencies and starts the CFIUS review clock only after having determined that the filing meets all legal requirements and, accordingly, is complete. That pre-clearance process typically takes 10-21 days, but it can take more or less time. Once the filing is formally accepted by the Department of Treasury, which chairs CFIUS, the next business day is the first day of the JVN review period, which lasts 45 days. On relatively rare occasions, CFIUS will issue a determination at the end of this 45-day review.
A second process is the Investigation Period. Not always, but often, as the initial 45-day review period winds down, CFIUS requires an additional 45-day investigation period. That investigation must be completed within the additional 45-day period.
Then there is the Presidential Review Period. In certain very rare circumstances, CFIUS may refer a transaction it is not willing to approve to the White House for a decision. In such case, the President is required to announce a decision with respect to a transaction within 15 days of CFIUS's completion of the investigation. The likelihood of a negative White House decision is very high since CFIUS only refers cases to the President that have significant national security concerns. Most parties will withdraw a CFIUS application before such a referral, often with the intention of revising the terms of the transaction or offering additional mitigation measures to reduce CFIUS national security concerns.
And finally, there is Withdrawal of Notice or Declaration. Parties to a transaction may request withdrawal of their notice or declaration at any time during the notice review or investigation periods or declaration assessment period. Such a request must be made in writing and is subject to the approval of CFIUS. Such approval may include conditions on the parties, such as requirements that they keep CFIUS informed of the status of the transaction or that they re-file the transaction at a later time. If things are not going well before CFIUS, parties sometimes withdraw their application to revise the transaction and try again, or they may abandon the deal.
European and other non-US companies that are considering buying US pump or other fluid handling companies, particularly in the chemical processing area, need to be aware of and plan around US CFIUS requirements. Required CFIUS reviews are triggered by the presence of export-controlled products and associated technologies and target company involvement in critical infrastructure projects. Export-controlled products and know-how are quite commonly found at US pump, valve, and fluid handling equipment companies, and so conducting the diligence/research needed to determine whether a CFIUS review is required or recommended is vitally important. Not CFIUS covers acquisitions of companies that pro. » conducting a mandatory CFIUS review can lead to a civil penalty up to US$250,000 per violation, or a penalty that equals the value of the proposed transaction, whichever is greater (not to mention the possibility of complicated and very difficult forced unwinding of acquisitions that have occurred).
In short, it is important to understand whether a proposed acquisition will require a review. If it does, it is critical to prepare an effective CFIUS submission and to take steps to make approval more likely, but those are topics for another article - or a discussion.
Did you know
The pre-clearance process typically takes 10-21 days
Many companies file voluntary CFIUS reviews.
Originally published by World Pumps Magazine.
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.