This week, Cleveland-based Aleris Corporation announced that it was abandoning a planned acquisition by Zhongwang USA LLC, an affiliate of China’s Zhongwang International Group, due to concerns that the deal would not receive approval by the Committee on Foreign Investment in the United States (CFIUS). This is just the latest example of the increasingly critical role that CFIUS has been playing in reviewing – and in some cases blocking or unwinding – mergers, acquisitions or takeovers of U.S. companies by overseas investors.
Recently proposed legislation promises to greatly enhance CFIUS’s oversight and gatekeeping functions over foreign investment in U.S. companies. If passed, this legislation would require mandatory CFIUS review in some cases, and provide the interagency committee the authority to block, cancel or unwind an even broader range of transactions. The covered transactions may even include overseas joint ventures, acquisitions, and certain licensing arrangements or other transactions whereby a U.S. company conveys to a foreign person intellectual property related to technologies deemed by CFIUS to be “critical” to U.S. national security.
The proposed legislation – the Foreign Investment Risk Review Modernization Act of 2017 (FIRRMA) (S. 2098) – was introduced on November 8 by Senators Cornyn (R-TX), Burr (R-NC) and Feinstein (D-CA) and Representatives Pittenger (R-NC) and Loebesack (D-IA) (among others in the House) and is currently under review by the Senate Committee on Banking, Housing, and Urban Affairs. While it does not mention China, FIRRMA is squarely aimed at increasing CFIUS oversight of investment activities by Chinese companies – a point emphasized by Senator Cornyn, who, in announcing the legislation, strongly criticized China’s efforts to “exploit gaps in the existing CFIUS review process” to “degrad[e] our country’s military technological edge by acquiring, and otherwise investing in, U.S. companies.”
Consistent with this focus, FIRRMA would authorize CFIUS to review an expanded range of investments by foreign persons, with a focus on those involving “countries of special concern” and technologies, materials and infrastructure deemed by CFIUS to be “critical” to U.S. national security. CFIUS review may include downstream, raw material product categories that do not immediately appear to be related to national security, such as metal or chemical products.
Moreover, the types of transactions within CFIUS’s jurisdiction would also be expanded from mergers, acquisitions and takeovers to include joint venture agreements (both inside and outside the United States), minority position investments of any size in U.S. companies, and certain purchases or leases of real estate located in “close proximity” to sensitive U.S. government installations and facilities. FIRRMA also makes explicit that CFIUS’s authority extends to transactions that arise from bankruptcy proceedings and other forms of default on company debt.
Exemptions for U.S. Allies
At the same time, CFIUS would be given authority to exempt from review certain transactions that do not implicate national security concerns. These include transactions involving investors from close U.S. allies that have their own CFIUS-like processes for reviewing foreign investments and mutual defense cooperation agreements with the United States. These countries are not named in the bill, but could conceivably include Australia, Canada, Japan, the U.K. and certain other NATO allies. FIRRMA would also exempt passive investments by foreign persons that do not constitute mergers, acquisitions or takeovers, but only when the passive investor would not gain access to certain non-public technical information, gain board membership, board nomination, or observer rights, or become involved in the company’s substantive decision-making.
New Review Procedures
FIRRMA would also make significant changes to the procedures governing CFIUS reviews. Under current law, companies can voluntarily participate in the CFIUS review process and do not need to notify CFIUS of proposed investments – subject to the risk that CFIUS can investigate, block or unwind transactions that do not receive its approval.
Under the proposed FIRRMA legislation, companies would be required to file declarations with CFIUS for all transactions in which a foreign investor with at least 25 percent foreign government ownership makes an acquisition of 25 percent or more of the voting interests of a U.S. company. Mandatory declarations may also be required for deals involving certain technologies or areas of the economy specified by CFIUS. Any mandatory declaration would have to be made at least 45 days before the transaction closes, and CFIUS would have discretion to decide if a full notification or review is needed, or otherwise approve the transaction. In addition, the proposed legislation allows CFIUS to assess a fee of 1 percent of the transaction value or $300,000 (annually adjusted for inflation), whichever is less.
Companies could also choose to make voluntary declarations for other types of covered transactions. CFIUS would then review the declarations and decide to clear the transaction, request that the parties file a formal voluntary notice, initiate a review of the transaction, or request that the parties provide additional information. Under current law, CFIUS historically had a relatively limited docket of reviews compared to the total volume of foreign investment in the United States. The number of CFIUS reviews has been on the rise in recent years, and foreign investments are increasingly subject to CFIUS scrutiny – as the case of Aleris Corporation illustrates. FIRRMA would subject potentially thousands of additional transactions to CFIUS scrutiny, and would greatly increase the burden on companies to demonstrate that their investments do not raise national security concerns related to critical technologies, materials or infrastructure. The new legislation also contemplates penalties for failure to comply.
Against this backdrop, U.S. companies and foreign investors contemplating potential investment deals should:
- Evaluate whether their products and technologies may be considered “critical” to U.S. national security such that an investment could implicate CFIUS’s jurisdiction. Even under the current CFIUS legislation, CFIUS has been interpreting the scope of “national security” concerns that could prompt reviews quite broadly, meaning that many transactions that may not appear at first glance to involve cutting-edge technology, intellectual property or high dollar values can inadvertently raise CFIUS issues.
- Consider CFIUS issues at the outset of any potential transaction involving foreign investment. CFIUS can impact the timing, valuation, financing and chances for regulatory approval of a deal. Buyers, sellers and lenders should account for CFIUS issues at the earliest stages of a deal, including when negotiating a term sheet, arranging financing and conducting pre-offer diligence.
- Closely monitor the progress of FIRRMA legislation. Given the strong bipartisan support it has received, the legislation has higher-than-average chances of passing. Once signed into law, several of the key provisions of the legislation will require regulatory action by the U.S. Treasury Department to implement, but the impact of the law on the market (and on certain CFIUS review procedures) will be felt immediately.