CFIUS Implications for Foreign Lenders
Foreign lenders participating in U.S. transactions should be aware of the possibility that those transactions may be ripe for a national security review by the Committee on Foreign Investment in the United States (CFIUS), a U.S. federal government body. While, historically, lending transactions have not been “covered” by CFIUS scrutiny, such review may be appropriate in two circumstances:
- Where a foreign lender receives warrants, convertible debt, or other security instruments that provide such foreign party with control over U.S. business decisions; and
- Where a foreign lender finds itself in a position of control upon the default of the debtor company.
The practical impact on the foreign lender in such circumstances is a regulatory review process that may take on average three to four months, but can run concurrently with other deal diligence and negotiations. In almost all cases, CFIUS filings are voluntarily submitted jointly by the foreign entity and the U.S. business. Most transactions that come under CFIUS review are either cleared by CFIUS or CFIUS requires the implementation of deal terms that mitigate the national security risk. Even so, foreign lenders should not ignore the possibility of CFIUS jurisdiction, as CFIUS has been known, in a few instances, to force a divestment of a foreign acquisition that raised national security concerns and was not voluntarily filed.
Foreign lenders should consult with counsel as to whether a transaction is ripe for CFIUS review based on the presence of the following factors: (a) a foreign investor, (b) that is gaining control as a result of the transaction, (c) in a U.S. business involved in interstate commerce, (d) with possible impact on national security arising from the transaction. The scope of national security in CFIUS reviews includes more than defense or intelligence community contractors. CFIUS reviews have also included transactions in the areas of: (i) energy and other critical infrastructure, (ii) potential offshoring of a sole or limited supplier of an important defense product or service, (iii) technology, particularly with cutting edge military applications, (iv) potential for tampering with a significant food or pharmaceutical supplier, and (v) real estate located near military or intelligence installations.
What Can a Foreign Lender Do to Protect its Interests?
At the time of conducting due diligence of a transaction, the lender should consider including inquiries regarding national security factors involving the debtor. This can include intelligence, military tenants, or neighbors in a real estate deal, sensitive government contracts, and cutting edge intellectual property, research, and development programs, particularly with military and intelligence applications.
As noted above, if a deal involving a U.S. business with national security considerations is structured so that a lender gains the right to impact management decisions, exercise control over, or gain financial or governance rights in the U.S. business, the foreign lender and the U.S. debtor should consult with counsel to consider filing for a CFIUS review prior to concluding the lending transaction. Even in an otherwise traditional debtor-creditor relationship that does not trigger “control,” a foreign lender could trigger CFIUS jurisdiction upon the default of the U.S. debtor if the foreign lender obtains a sole or controlling interest over the U.S. business. A foreign lender could potentially shield itself from CFIUS jurisdiction if it is part of a syndicate led by a U.S. lender, and the foreign entity would not gain control over the U.S. business in case of a default.
If the debtor’s default would trigger CFIUS jurisdiction, the foreign lender could consider ensuring that a U.S. party would be available to temporarily manage the U.S. business in case of a default while the foreign lender considers potential steps to minimize CFIUS exposure. In such cases, CFIUS may provide the foreign lender with the time needed to dispose of the U.S. business collateral.
If a default appears imminent or foreclosure proceedings begin, and the nature of the debtor’s business or location would be of interest to CFIUS, the lender should consider notifying the Committee and requesting advice regarding potential CFIUS jurisdiction and concerns. A prompt informal inquiry or formal filing by the lender and the debtor can minimize delay and risk for the lender’s take over.
Whether as part of a workout in case of a default or upon entering an unusual lending deal that provides ownership rights to a foreign lender, foreign entities providing credit in U.S. transactions that present potential national security risks should consult with counsel and consider factoring in a review by CFIUS counsel as part of their due diligence. Being informed and thereby in a position to proactively change certain aspects of the transaction, or proceeding with a CFIUS review in tandem with the negotiation of the transaction, can potentially avoid an additional regulatory delay.