ACI held its annual CFIUS conference from April 27 to 28 in Washington, D.C., bringing together practitioners and government officials to discuss a range of CFIUS topics. On the government side, the two-day event involved significant participation by the Department of Defense (DoD), which was represented by officials on a majority of the panels. The following are the key takeaways.
- China, China, China. DoD
continues to focus on transactions where the foreign buyer is a
Chinese entity. Chinese transactions are a priority for DoD's
non-notified team when it searches for transactions that were not
voluntarily filed with the Committee. In addition, DoD's
mitigation team continues to find that Chinese transactions are
difficult to mitigate. Although inbound investment from China is
increasingly difficult, DoD made clear that at least some Chinese
transactions continue to make it through the Committee without
requiring a proxy agreement or voting trust.
- CFIUS is on the lookout for third-party
risks. DoD noted that it is concerned not only
when the foreign buyer's country of origin is China but also
when a non-Chinese foreign buyer has significant relationships with
Chinese entities. CFIUS looks at whether a non-Chinese foreign
buyer has joint ventures with Chinese entities. CFIUS also looks at
whether the foreign buyer uses equipment made in China or has
supply arrangements with Chinese vendors.
- Emerging and foundational technology is a major
focus. One of DoD's biggest areas of
concern—if not its main focus—is protecting U.S.
businesses that are developing emerging and foundational
technologies. DoD is risk averse in general, but it is especially
risk averse when analyzing technology that is still in its infancy.
DoD must try to assess how the technology will be used in the
future, and DoD officials find it difficult to conduct that
assessment within CFIUS's statutory deadlines.
- Export classification exercises are increasingly
important. Whether CFIUS has jurisdiction over
some transactions, and whether a CFIUS filing is mandatory in
certain cases, is now determined in part by whether the U.S.
business involved in the transaction makes products that are
controlled for export. Accordingly, it is more important than ever
for any U.S. business that is interested in obtaining foreign
investment to know the export classification of its products.
- Data cases are on an upward
trend. DoD noted that there are more and more
data cases. According to DoD, data cases are the hardest to
mitigate, and CFIUS is still trying to figure out how to mitigate
data cases effectively.
- Be careful when deciding to file a
declaration. DoD finds it difficult to conduct
a risk analysis within 30 days because it has a large bureaucracy
with numerous stakeholders. Multiple DoD officials noted that
DoD's CFIUS staff has approximately 10 working days to review a
declaration before it has to submit its findings up the chain of
command in order to get the package approved by the statutory
deadline. DoD cautioned that declarations are best for cases that
have a low risk, and that declarations are not best for control
transactions, high-dollar transactions, and transactions where the
U.S. business has numerous touchpoints with the U.S. government. In
addition, DoD warned that declarations are not a good option for
foreign buyers who have previously been before CFIUS and had their
transactions mitigated.
- DoD is actively searching for non-notified
transactions. Although the non-notified process
is administered by the Department of the Treasury, DoD has built
its own non-notified team to look for transactions that were not
filed with the Committee but may have DoD equities. DoD's
non-notified team is focused on China, emerging and foundational
technology, and data. DoD noted that it has already reviewed 2,000
transactions this year. DoD further noted that prime contractors
will notify DoD's CFIUS team if a subcontractor is getting
bought out by a foreign company.
- Non-notified transactions may be starting to impact
deal documents. One panelist noted that he has
started to see provisions in deal documents that address how the
parties will behave if CFIUS's non-notified team inquires about
a post-closing transaction (e.g., cooperation provisions or
redemption rights).
- CFIUS is questioning the transaction parties more
aggressively. During the conference, it was
recognized by practitioners and acknowledged by government
representatives that CFIUS is questioning transaction parties more
aggressively during the review and investigation period. DoD noted
that it has developed standard questions that it asks transaction
parties that go above and beyond the information required by the
regulations.
- Excepted Foreign State (EFS) status— "much ado about nothing." Although foreign governments want to be recognized by CFIUS as "excepted foreign states," there was widespread agreement at the conference that EFS status has had little impact. To date, CFIUS has given four countries EFS status—Canada, the United Kingdom, Australia, and New Zealand. Not every investor from these countries is entitled to the benefits of EFS status. Rather, a foreign investor receives the benefits of its home country's EFS status only if the investor qualifies as an "excepted investor." But the criteria for qualifying as an "excepted investor" are incredibly stringent and very few foreign investors qualify, which means that very few foreign investors receive the benefits of EFS status.
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.