The Committee on Foreign Investment (“CFIUS”) is an inter-agency committee that reviews foreign acquisitions of U.S. companies that could pose challenges to our national security. For a country such as the United States, with its open door policy and history of welcoming foreign investment, it may come as a surprise to some that CFIUS even exists. Foreign companies acquiring domestic companies are encouraged to voluntarily notify CFIUS, though CFIUS may review any foreign investment. Although the Government typically reviews only a small percentage of those transactions involving U.S. entities acquiring domestic companies, and only in very rare cases has the U.S. Government actually blocked an acquisition, there is an increasing trend of foreign companies’ acquisitions being subjected to higher scrutiny. CFIUS has recently taken a more expansive view of its power, resulting in new issues that a foreign investor must consider.
For example, a real estate developer from China may determine that a voluntary filing for CFIUS review is unnecessary because, after all, why would the U.S. government be threatened by real estate development, and what is the connection between real estate and U.S. national security? However, the past decade has brought an expansion in CFIUS’s power that may tip the scales in favor of filing for a CFIUS review, even if that industry is not in a sensitive sector of the U.S. economy, such as defense or energy. For most investors the process will be straight forward and provide protections that are well worth the delay that a CFIUS review can entail.
What is CFIUS?
As provided in the Foreign Investment and National Security Act of 2007 (FINSA), CFIUS has the authority to review, investigate, and block any transaction or investment they deem to potentially result in the control of a U.S. business or assets by a foreign person that may implicate national security concerns, or involve critical infrastructure. The inter-agency committee is composed of the heads of nine separate departments and offices, including:
- Department of Treasury (Chair);
- Department of Justice;
- Department of Homeland Security;
- Department of Commerce;
- Department of Defense;
- Department of State;
- Department of Energy;
- Office of the U.S. Trade Representative; and
- Office of Science & Technology Policy.
When does CFIUS review transactions?
CFIUS may initiate a review of a transaction on its own, and may do so when an investment is a “covered” transaction. To be a covered transaction, and thus, subject to CFIUS review, an investment must meet the two following criteria:
- The completion of the transaction must result in foreign “control” of a person engaged in interstate commerce in the U.S.; and
- The transaction must raise potential U.S. security or critical infrastructure implications.
What it means for a transaction to raise potential U.S. security or critical infrastructure implications is not clearly defined in the statute or regulations. As a result, CFIUS has inherited a large amount of discretion in deciding what implicates these concerns.
How does a foreign national get “control?”
Control of a U.S. business is defined as the power to determine, direct, or decide matters affecting an entity including, but not limited to:
- The sale, lease, pledge, or other transfer of the company’s assets;
- The dissolution of the company; or
- The closing or relocating of research and development facilities.
Control can be acquired through majority ownership as well as a substantial minority of the outstanding voting securities.
When does an investment implicate national security or critical infrastructure?
FINSA does not define “national security,” which results in CFIUS having broad discretion to decide what implicates national security. Additionally, foreign investments that implicate “critical infrastructure” fall under CFIUS’s mandate. Critical infrastructure is defined as “a system or asset, whether physical or virtual, so vital to the U.S. that the incapacity or destruction of the particular system or asset would have a debilitating impact on national security.” Infrastructure related to power or telecommunications is an example of what would arguably be implicated.
Among the factors CFIUS must consider, is the impact a covered foreign investment may have on U.S. “critical technologies.” Critical technology includes:
- United States Munitions List (USML) defense items controlled under the International Traffic in Arms Regulations (ITAR);
- Items controlled under the Export Administration Regulations (EAR);
- Items controlled under the Export and Import of Nuclear Equipment and Materials Regulations; and
- Items controlled under the Export and Import of Select Agents and Toxins Regulations.
How does the CFIUS review process work?
CFIUS has the authority to require investors to unwind a transaction at any time, without review by a U.S. court. However, foreign investors can avail themselves of a voluntary review process, which provides a “safe harbor” from the possibility that CFIUS may later determine that a completed transaction must be unwound. To enjoy the safe harbor, either party to the transaction must voluntarily inform CFIUS and begin a review, typically before the transaction has closed. CFIUS will then analyze the transaction and determine whether it is “covered,” and if so, whether it implicates a national security concern. Typically, the parties will receive a “no action” determination from CFIUS within a 30-day time frame established in CFIUS’s implementing regulations.
This time frame also includes a preliminary 7-14 day pre-filing discussion process with CFIUS in which the Treasury Department will ensure the application is complete so that the filing can be accepted as soon as the deal is signed.
However, some transactions must undergo a more comprehensive 45-day investigation after the 30-day review. For example, transactions that result in control by a foreign government, companies controlled by foreign governments, or sovereign wealth funds. Additionally, sometimes a transfer of control of “critical infrastructure” will result in an additional 45-day investigation.
During the 45-day investigation, CFIUS often proposes mitigation steps to address national security concerns. CFIUS does so by entering into agreements with companies to mitigate the issues identified by CFIUS as a condition of CFIUS’s approval. The President has the ultimate authority to block a transaction, although this power has rarely been used.
Which investors should be concerned?
All foreign investors (or U.S. companies being acquired by foreign entities) should consider the impact CFIUS could have on their transactions. This is due to the trend towards CFIUS’s growing exercise of authority. CFIUS’s authority was drastically expanded in 2007 with the passage of FINSA, which expanded a national security review to include investments in “critical U.S. infrastructure.” Furthermore, in a recent case, CFIUS blocked a transaction for only the second time in their history when a Chinese company, Ralls Corporation, attempted to acquire several wind farm projects in Oregon. One interesting aspect of the President’s decision to block this transaction was that it was based on the wind farms’ proximity to a U.S. naval base, rather than the national security issues that arose from the companies being acquired. This case demonstrates that foreign investors do not need to be acquiring a company involved in defense or sensitive technology in order to catch the eye of CFIUS. An investment’s physical proximity to something that CFIUS believes is important to national security can result in a transaction being reviewed or blocked.
What can investors do to protect themselves?
One of the ways the Ralls case serves as a cautionary tale is that Ralls had essentially completed the purchase of the wind farms. However, prior to doing so, Ralls did not notify CFIUS of the proposed transaction. As a result, Ralls had already acquired the wind farms by the time CFIUS reviewed the transaction and issued an interim order requiring Ralls to immediately cease all construction and remove all items from the properties. Furthermore, the order barred Ralls from accessing the properties or selling the wind farm turbines to third parties for future use at the properties, or selling the properties until all items had been removed. On September 28, 2012, the President issued a Presidential Order, which completely prohibited the transaction and forced Ralls to divest the wind farm companies. If Ralls had voluntarily filed for a CFIUS review prior to the transaction, they may have protected themselves from the final result of the self initiated CFIUS review, or would have at least had forewarning of the prohibition prior to acquiring the wind farm companies.
Furthermore, the Ralls case demonstrates the challenges that can result from the proximity of a domestic company’s location to national defense concerns. The “proximity” issue has created complications for foreign investors, due to the fact that CFIUS has not articulated a standard for review in any detail. Even seemingly harmless industries such as real estate, where the majority of foreign investments are directed, are implicated by the by proximity concerns.
Foreign investors should take CFIUS’s concern with proximity into consideration when making their investment. For example, investors may want to ascertain their investment’s location in relation to any defense-related building. By avoiding investments close to these sensitive locations, investors may be able to avoid the proximity issue entirely. Additionally, investors should be mindful of CFIUS when investing in an industry that presents inherent risk such as defense or energy, and should consider notifying CFIUS of their investments. Filing voluntarily avoids the high costs of reversing an investment if CFIUS orders divestment. Once CFIUS approves a voluntary review, they can never order an investor to divest or unwind a transaction.
CFIUS should be a consideration for all foreign investors who invest in the U.S. With the growing authority and discretion exercised by CFIUS, foreign investors may find themselves in CFIUS’s crosshairs unexpectedly. Foreign investors do not need to be acquiring companies that are involved in industries that are “high-risk,” or defense related, to implicate national security concerns, especially given CFIUS’s willingness to self initiate reviews of transactions based on proximity to national security concerns.