Mergers and acquisitions that will result in the foreign ownership or control of an American business could be subject to prior review and approval by the multi-agency Committee on Foreign Investment in the United States (CFIUS). Various statutes over the last 35 years have renewed and strengthened the CFIUS process, originally established by President Gerald Ford under an executive order. The most recent action occurred in 2007, when Congress enacted the Foreign Investment and National Security Act (FINSA) in the wake of Dubai Ports World‟s ill-fated acquisition of a firm that managed several major US seaports. The attempted acquisition of the US business was ultimately undone.
Although CFIUS review is ostensibly voluntary, either CFIUS or the US President may unilaterally initiate a review of any merger, acquisition or takeover that could result in foreign control of any person engaged in interstate commerce in the US. Under FINSA, the purpose of CFIUS review is to identify and, if necessary, prohibit any transaction “that threatens to impair the national security of the United States.” Initial reviews run 30 days and are almost never shorter. Initial reviews follow an informal pre-filing to identify serious issues before the clock starts on the formal review. Initial reviews can be short, lasting just five to seven days. If problems are identified, however, or if the parties simply want time to vet issues with customers or member agencies, formal filing may be delayed for weeks or even months.
A CFIUS review generally concludes in 30 days. In complex cases, however, or in any case where an acquisition would result in control by a foreign government (including control by corporations owned or controlled by foreign governments), CFIUS will undertake an additional 45-day investigation, taking the review period to 75 days. If national security issues remain unresolved at the conclusion of the investigation, the case may be presented to the President for approval or disapproval following an additional 15-day review, although presidential reviews are exceedingly rare. More commonly, CFIUS will issue an administrative order imposing conditions on the acquisition. More commonly yet, the parties will withdraw and resubmit the transaction for review while they attempt to work through national security concerns, either through divestment or reorganization under a mitigation plan.
Once reviewed and cleared, transactions may not be reopened unless there have been misrepresentations by the parties during the review. If a transaction is not reviewed, however, it is forever subject to CFIUS investigation, and, if unresolved national security issues emerge, can be unwound.
Obviously, some transactions present little to no chance of CFIUS intervention. For instance, the merger of consumer goods companies rarely provokes concern. But a common misperception is that CFIUS is only concerned with transactions that involve major defense contractors who do classified work. Reviews do include “critical technologies,” defined as “critical technology, critical components, or critical technology items essential to national defense.” It would be incorrect to assume, however, that defense contractors are the only companies that manufacture “critical technology items essential to national defense,” or that CFIUS concerns begin and end with traditional views of national security.
Under FINSA, CFIUS review expressly extends to the potential national security implications of an acquisition that involves US “critical infrastructure.” FINSA defines “critical infrastructure” to mean “systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems or assets would have a debilitating impact on national security.” This definition, of course, includes public utilities, roads, airports and telecommunications. But whether a transaction does or does not fall within the scope of CFIUS review can only be determined on a case-by-case basis. There is no de minimis threshold for CFIUS review. CFIUS can review—and block—small transactions as well as large ones. Furthermore, although a transaction that involves classified or export-controlled technology is always a prime candidate for review, many transactions that are reviewed involve neither.
Transactions may complete review unscathed, but CFIUS has a number of tools available to it, and its options are not limited to voting yes or no. Acquiring firms seeking to maintain facility security clearances are likely to be required to enter into mitigation plans under the National Industrial Security Program Operating Manual (NISPOM). These plans impose restrictions on the foreign owner‟s ability to control the US company, including proxy agreements that vest control in independent US citizens with security clearances. If a company has no security clearance, CFIUS may still impose a mitigation order. Indeed, in some cases, CFIUS mitigation orders can exceed the requirements of the NISPOM. These orders can significantly affect the value of a transaction, as well as plans for synergies between the US company and its new foreign parent.
For all of these reasons, it is prudent to assess the prospects of CFIUS review in any acquisition that could affect US national security. Here are some factors that make CFIUS review likely:
- The US company holds a facility security clearance.
- The US company possesses technology controlled under the International Traffic in Arms Regulations or the Export Administration Regulations.
- The buyer is controlled directly or indirectly by a foreign government.
- The US company is engaged in the design, maintenance or construction of critical technology or critical infrastructure, including IT hardware and software (whether export-controlled or not), financial networks and telecommunications systems.
- The buyer is domiciled in a country that is subject to a US arms embargo or other export controls involving the technology being acquired.
- The buyer is domiciled in a country that is viewed as hostile to the US, as an uncertain ally, or as vulnerable to terrorist groups.
- The buyer has a history of industrial espionage.
Some transactions may present insurmountable problems. In most cases, however, with proper planning, deals can be structured successfully to address US national security concerns. Some of the biggest US defense contractors are foreign-controlled, and continue to grow through the acquisition of US companies. Foreign investment remains a key element of US economic recovery. National security can be enhanced by new investment, and by opening doors to cooperation in the development of new technologies. The task that CFIUS and its member agencies must perform is to strike the proper balance between foreign investment and national security. Properly managed, a successful CFIUS review can provide comfort to investors, lenders, government customers and political leaders, as well as provide US companies and their new owners with sound footing for growth.