In circumstances where foreign persons – including all types of business associations – are contemplating buying or making an investment in a US business, it is prudent to consider whether the contemplated transaction will be subject to the purview of the Committee on Foreign Investment in the United States ("CFIUS").
The Committee on Foreign Investment in the United States ("CFIUS") is an inter-agency committee of the US government comprised of nine cabinet-level Executive Branch agencies and offices, and various other non-voting offices with national security responsibilities. CFIUS reviews certain foreign investment transactions within its jurisdiction (i.e., "covered transactions") and advises the President on matters of national security arising from foreign investments.
Power to block, modify, or unwind transactions
Relevant statutes and regulations (see 31 CFR Part 800) authorize the President to review mergers and other transactions by or with any foreign person that could result in foreign control of a US business. In connection with this review, and as advised by CFIUS, the President may "suspend or prohibit any covered transaction when, in the President's judgment, there is credible evidence to believe that the foreign person exercising control over a US business might take action that threatens to impair the national security[.]"
Accordingly, although notifying CFIUS of a proposed transaction is nominally voluntary, failing to file and receive the Committee's approval can subject a transaction to significant risk where national security issues are involved. Once CFIUS approves a transaction, it will not be subject to further government review except if false, incomplete, or misleading information was provided to the Committee during its review.
What is the scope of CFIUS's jurisdiction?
CFIUS is empowered to conduct national security reviews of "covered transactions," which regulations define as a proposed or pending "transaction" with any "foreign person" which could result in "control" of a "US Business" by a foreign person.
- A "transaction" is broadly defined to include mergers, acquisitions, joint ventures, leases, and other investments.
- A "foreign person" can be a foreign national, foreign government, or foreign entity, including a partnership, corporation, trust, or other entity organized abroad.
- A "US business" is any entity engaged in interstate commerce in the United States.
- "Control" is defined broadly as the power – whether or not exercised – to directly or indirectly determine, direct, or decide important matters affecting the US business.
In the context of a merger, acquisition, or other investment involving a foreign interest, these broad regulatory definitions can require careful analysis to determine whether CFIUS review is warranted or likely.
What constitutes a national security concern?
CFIUS may consider a broad range of factors when assessing the national security implications of a "covered transactions," and does not disclose the specific factors that comprise its analyses. Transactions that have triggered CFIUS's scrutiny have ranged from the obvious (the acquisition of a US business with federal defense contracts) to the seemingly benign (investments in offshore windfarm projects). CFIUS typically considers the following general factors when assessing the national security implications of a pending or consummated transaction:
- 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, including but not limited to commodities, software, or technology controlled under US export control laws;
- 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 (e.g., military bases, national laboratories, etc.).
CFIUS review process
Where parties believe that they may be engaged in a "covered transaction," they must decide whether to notify CFIUS of their transaction and seek the Committee's approval and safe harbor protections. The review process is initialed by the submission of a joint voluntary "Notice." The contents of a CFIUS Notice are prescribed by regulations, and include a description of the transaction, the parties involved, and additional background regarding their respective business activities. Absent a voluntary filing, CFIUS may unilaterally initiate a review of a covered transaction at any time, including after the transaction has closed.
CFIUS review timeline
After a Notice is filed, CFIUS initiates a 30-day review to prepare a threat assessment and identify national security concerns. If CFIUS identifies concerns during the initial review period, it follows with a 45-day investigation. During this investigation period, CFIUS may identify and impose "mitigation" measures on the parties before the transaction is permitted to move forward. Depending on the nature and severity of perceived national security risks identified during its investigation, CFIUS may impose the following types of mitigation measures, among others:
- Divestiture of assets or operations;
- Forfeiture of sensitive contracts;
- Appointment of special compliance personnel; and/or
- Appointment of proxy boards consisting of US persons.
When the Committee's investigation is complete, and acting on a final recommendation from CFIUS, the President will approve, disapprove, or approve with conditions the transaction within 15 days after the investigation concludes.
In practice, however, CFIUS reviews can take longer than 90 days to run their course. Because CFIUS has ways of informally stopping and resetting the regulatory "clock," these timelines are best viewed as rough estimates rather than binding deadlines on the Government.
Consulting with CFIUS counsel
In any transaction with the potential to involve a foreign buyer or investor, a brief consultation with CFIUS counsel at the outset can help to identify possible CFIUS-related risks, as well as opportunities to avoid delays and expenses associated with CFIUS review.
In the early stages of a transaction, CFIUS counsel can help determine whether it is prudent to notify CFIUS of a pending or proposed transaction. If a Notice is warranted, CFIUS counsel can assist in the preparation of the Notice and represent the transaction before the Committee. Regardless of whether the parties decide to submit a CFIUS Notice, CFIUS counsel can advise the parties and their transaction counsel on measures that the parties can take to facilitate an anticipated CFIUS review, or forestall potentially adverse mitigation measures.