Mergers Acquisitions and Investment by Foreign Entities Subject to CFIUS Reviews

CFIUS role in mergers and acquisitions expanding

If you are a foreign company and have loads of money to purchase a U.S. business, the U.S. has generally welcomed your foreign cash. But there are limits regarding the kinds of businesses foreign companies are allowed to acquire. This article provides an overview of The Committee on Foreign Investment in the United States (CFIUS) and its role in reviewing transactions in which a foreign company is buying an interest in a U.S. company.

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CFIUS was formally formed in 1975 and given broader authority in 1988. CFIUS is an interagency committee initially authorized to review any transaction proposed or pending after August 23, 1988, by or with any foreign person, which could result in control of a U.S. business by a foreign person.

The major mandate of CFIUS is to review the potential effect of transactions on the national security of the United States.

Although CFIUS was authorized to reject deals, it was not active—until recently. Up to  2018, CFIUS performed the role of reviewing direct foreign investment into the United States. In 2018, CFIUS’s authority was expanded under The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA).

Under new authority, starting November 10, 2018, any transaction by or with any foreign person that could result in foreign control of specified U.S. critical technologies business, or any covered non-controlling investment by a foreign person in such a U.S. business is subject to mandatory notification to CFIUS.

Key terms in CFIUS

The range of transactions is quite broad as transactions mean not only mergers and acquisitions, but also joint ventures, leases, and other investments.

Foreign persons generally mean a foreign entity, including a partnership, corporation, trust, or other entity organized abroad. The term also includes foreign nationals and foreign governments.

The other key term in CFIUS is “control,” which is defined broadly as the power to directly or indirectly determine, direct or decide important matters affecting the U.S. business, no matter if such power is actually exercised.

Recent changes to CFIUS

The two major changes to CFIUS legislation are that non-controlling investments are now covered; and certain transaction require mandatory notice. And if you don’t submit the proper notice, there are substantial civil penalties that may be imposed.

Critical technologies

To give you an idea of what kinds of technologies are covered, you will not be surprised to learn that critical technologies include aircraft manufacturing and aircraft engine parts manufacturing. They include military armored vehicle and nuclear electric power generation.

Critical technologies also include other broad categories such as search, detection, navigation, guidance, aeronautical, and nautical system and instrument manufacturing, telephone apparatus manufacturing and electronic computer manufacturing. In other words, you have to look at the list very carefully because critical technologies includes a wide breadth of technologies.

Non-controlling investments covered

A significant change to CFIUS’ authority was for “non-controlling” investments. Until FIRRMA, CFIUS reviewed only investments that could result in foreign control of a U.S. business. Under this expanded mandate, CFIUS reviews certain non-controlling investments. This is a major change.

Non-controlling investment means a foreign person gets any of the following rights: access to any material nonpublic technical information in the possession of the pilot program U.S. business; membership or observation rights on the board of directors or the right to nominate an individual to the board of directors; or any involvement, other than by voting its shares, in substantive decisions regarding the use, development, acquisition or release of critical technology by the U.S. business.

Who must give notice to CFIUS

Mandatory notice

Mandatory notice may be the most significant change to CFIUS.

Under FIRRMA, any transaction by or with any foreign person that could result in foreign control of specified U.S. critical technologies, business, or any covered non-controlling investment by a foreign person in such a U.S. business, is subject to mandatory notification to CFIUS.

The mandatory declaration must be filed 45 days before closing of the transaction. Parties to a transaction subject to the mandatory notice requirement can also opt to file a joint voluntary notice instead of a declaration.

Failure to notify CFIUS can result in a civil penalty in an amount up to the value of the transaction in question. CFIUS has 30 days to consider mandatory declarations. During its consideration, CFIUS may request filing of a full notice by the parties, self-initiate CFIUS review or notify the parties of the completion of all actions.

Voluntary notice

An official CFIUS process begins when parties to a proposed or pending transaction jointly file a voluntary notice in accordance with the instructions that can be found on the CFIUS website.

For efficiency purposes, CFIUS strongly encourages parties to consult with CFIUS at least five business days before filing a notice by submitting a draft notice to CFIUS and allowing the Committee an opportunity to review the transaction and request additional information to be included in the actual notice.

Information required in the CFIUS notice includes a description of the transaction; the parties involved; and background on business activities etc. More information on contents of voluntary notice can be found in Section 800.402 of the Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons.

After receiving the notice, the staff chairperson will make a determination on whether it satisfies requirements for completeness under the regulations. If it does, the chairperson circulates the notice to all CFIUS members. A review period of up to 45 days will begin on the next business day.

Factors in a CFIUS review

CFIUS members examine the covered transaction in order to identify and address, if necessary, any national security concerns that arise as a result of the transaction and whether foreign investment in critical technologies is interfering with U.S. technological superiority.

The Committee considers the following factors:

• Whether the US business has contracts with US government agencies possessing national security responsibilities;
• Whether the US business performs (or has previously performed) under any classified contracts;
• Whether the US business possesses or otherwise deals in critical technologies or products (i.e., commodities software or other technology controlled under US export laws etc.);
• Whether the transaction would result in foreign control over physical or virtual “critical infrastructure;” and
• Whether the US business has any offices or facilities in locations near sensitive government facilities.

Members of the Committee can request additional materials and information from the parties. The Committee may request follow-up information. The parties should respond within three business days.

In certain circumstances CFIUS can initiate a subsequent investigation, which must be completed within 45 days. The Committee can also refer a particular transaction to the President, who has 15 additional days to act. The President has the authority to suspend, prohibit or impose conditions on the deal.

The parties to the transaction may withdraw their notice at any time, upon approval by CFIUS. CFIUS tracks withdrawn transactions. The Committee may also reject voluntary notice if it is incomplete, if the parties do not respond to follow-up information request, if there is a material change in the transaction or material information contradicting information provided in the notice is discovered.

CFIUS decision

If CFIUS finds that the transaction does not present any national security or loss of technology risks, or that the law provides adequate authority to address these risks, CFIUS will notify the parties of completion of all actions with respect to the transaction. The parties receive notification from CFIUS and the transaction  comes within a “safe harbor.”

CFIUS generally does not outright reject a transaction. If CFIUS finds that a covered transaction presents a national security or loss of technology risk, or that the law does not provide adequate authority to address these risks, then CFIUS may enter into an agreement with, or impose conditions on the parties to mitigate the risk. It can also refer the matter to the President.

CFIUS today

The number of transactions that have to comply with CIFIUS’s notice requirements has increased significantly in recent years and the trend is expected to continue. Part of the growth is attributed to the increase in volume of Chinese investments in the U.S. but the most significant part of it is due to a new mandatory notice requirement under FIRRMA.

If you have questions regarding how CFIUS applies to any particular transaction, you should contact a CFIUS attorney.