The COVID-19 pandemic has created market conditions ripe for increased cross border investment as businesses scramble for capital and investors target distressed assets. In response, countries are using existing or new foreign direct investment (FDI) review tools to protect sensitive domestic industries and other interests. For example, the European Commission recently called upon its member states to use (or implement) FDI screening tools to protect European strategic assets1 and Australia's Foreign Investment Review Board lowered the monetary threshold for FDI review to zero, thereby subjecting all foreign investments into Australia to review by the FIRB.2
The Committee on Foreign Investment in the United States (CFIUS) is no exception. Senior Department of Defense officials have recently and repeatedly stressed the need for the active use of CFIUS reviews to protect against "adversarial capital coming into our markets for nefarious means" 3 during the current economic crisis, stating "we simply cannot afford this period of economic uncertainty to lead to loss of American know-how on critical technologies."4
Against this backdrop, U.S. businesses and foreign investors must be mindful of the CFIUS implications of acquisitions and financing transactions. We summarize below key CFIUS considerations for M&A activity and the exercise of creditors' rights—including under pre-existing agreements—in the current environment and under CFIUS's recently revamped rules.
I. CFIUS Considerations for Distressed M&A Transactions
A. Potential Mandatory Notifications
The first CFIUS-related question in any transaction is whether a mandatory notification is required, which can affect the overall timing of the investment. Regulations implementing the Foreign Risk Review Modernization Act of 2018 (FIRRMA) introduced limited mandatory filings to the historically voluntary CFIUS process.5
Those include: (i) investments that provide a foreign person with "control" (a standard far short of actual control and encompassing almost any significant governance rights) over or certain types of non-controlling rights in U.S. businesses that produce, design, test, manufacture, fabricate, or develop critical technology (a subset of exportcontrolled technologies) that is used in or specifically designed for use in specific industries;6 and (ii) acquisitions by investors at least 49% owned by a foreign government of at least a 25% stake in U.S. critical technology businesses, U.S. critical infrastructure businesses, and U.S. businesses that maintain or possess sensitive personal data (known as TID U.S. businesses, for technology, infrastructure, or data).7
Parties to any transaction subject to a mandatory notification requirement must notify CFIUS at least 30 days before closing or face potential penalties of up to the value of the transaction. Notifications can take the form of a declaration (which essentially is a short-form CFIUS notice with basic information regarding the transaction) or a traditional full CFIUS notice. Filing a short-form declaration immediately starts a 30-day assessment period (in contrast to full notifications, which are effective only after CFIUS accepts the notice). There is no automatic "safe harbor" at the end of the 30-day review; while CFIUS can provide a clearance resulting in a safe harbor, it can also request a full filing or reach no decision.8 However, unless CFIUS issues a very rare interim order prohibiting the parties from closing the transaction, the parties are free to close the investment—even in the case of a mandatory filing—30 days after a declaration is filed, taking the risk that CFIUS may later impose mitigation measures or require divestiture of the investment. CFIUS staff have also previously warned that closing a transaction while CFIUS review is still pending may limit the mitigation measures that are practically feasible and increase the risk of more radical measures (the parties may also close the transaction while a full notification is pending.)
B. Discretionary CFIUS Reviews
It is perhaps easier to think of reviews outside the mandatory filing provisions as "discretionary" rather than "voluntary." If parties do not submit a notification to CFIUS, CFIUS can still decide to review and impose mitigation measures on a transaction, before or after it closes. The challenge for the investor, then, is to identify and assess the risk of transactions that may be of interest to CFIUS, and then to weigh that risk against the cost and delay of a CFIUS filing.
1 For further information, please see our recent alert memo. Cleary Gottlieb, European Commission Urges Member States to Protect Suppliers of Essential Products from Foreign Takeovers (Apr. 2, 2020), available at https://www.clearygottlieb.com/news-and-insights/publication-listing/european-commission-urges-member-states-to-protectsuppliers. Additional information regarding Cleary Gottlieb's global FDI practice can be found at https://www.clearygottlieb.com/practice-landing/foreign-investment-review.
2 The Hon. Josh Frydenberg MP, Changes to Foreign Investment Framework (Mar. 29, 2020), available at https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/changes-foreign-investment-framework .
3 U.S. Dep't of Defense, Transcript: Department of Defense Acquisition and Sustainment Leaders Hold a Press Briefing on the Defense Department's COVID-19 Acquisition Efforts (Mar. 25, 2020), available at https://www.defense.gov/Newsroom/Transcripts/Transcript/Article/2125737/department-of-defense-acquisition-andsustainment-leaders-hold-a-press-briefing/ .
4 Federal Computer Week, DOD Hopes Small Business Engagement Will Stave Off 'Adversarial Capital,' (May 4, 2020), available at https://fcw.com/articles/2020/05/04/dod-adversarial-capital-williams.aspx.
5 For a summary of the final regulations implementing FIRRMA, please see our client alert. Cleary Gottlieb, CFIUS Releases Final FIRRMA Regulations (Jan. 22, 2020), available at https://www.clearygottlieb.com/-/media/files/alert-memos2020/cfius-releases-final-firrma-regulations.pdf (the FIRRMA Memo).
6 The list of industries and related NAICS Codes is included as an appendix to the final FIRRMA regulations. 31 C.F.R. Part 800, Appendix B. For more information, see the FIRRMA Memo at 3, 6, 16.
7 This mandatory notification requirement applies to virtually all state-owned or controlled investment entities other than a narrow range of entities linked to Australia, Canada, and the United Kingdom. See 31 C.F.R. § 800.401(e)(1).
8 Declarations are now available for all transactions within CFIUS's jurisdiction but are subject to the noted limitations.
Originally published 9 May, 2020
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.