New rules and rapidly evolving policy priorities may raise doubts about whether the U.S. welcomes in-bound investment from certain parts of the world. But with patience and careful planning investors from across the globe (including China) can get U.S. deals done.
In an increasingly protectionist global trading environment – complicated by the U.S./China trade war and the increasing number of countries that have been imposing national security controls on in-bound foreign investment – one player has gathered more than its fair share of headlines.
The Committee on Foreign Investment in the U.S. (CFIUS), a relatively undersized but surprisingly powerful committee housed in the U.S. Treasury Department, has been more active than ever vetting proposed transactions, requiring parties to modify their proposed deal terms, and blocking transactions that it has concluded pose unacceptable risk to U.S. national security. Due in part to its increased workload, the timetable for obtaining CFIUS clearance has lengthened considerably. Timing delays, coupled with diminished certainty of obtaining clearance, are creating obvious deal challenges.
In reaction to CFIUS’ increased activity and media attention about recently blocked deals, an unknown (and likely increasing) number of parties have been more reluctant in pursuing deals that would necessarily incur CFIUS scrutiny. Others have been voluntarily withdrawing their transactions from consideration once CFIUS’ concerns have become apparent.
In addition, the introduction of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) reinforced the perception (which is at least partially true) that CFIUS possesses, and will continue to assert, enhanced authority.
Finally, prospective investors from countries that currently have ‘difficult’ relationships with the U.S., such as China, have been increasingly – and understandably – skittish about in-bound U.S. investment. So what does this all mean for dealmakers looking to invest in the U.S.? Can deals still get done? Is the investment of time, money and management resource required to seek and obtain CFIUS clearance worth making? Is the risk posed by the heightened U.S. government scrutiny, the lengthening time period CFIUS review requires, and the generally diminished certainty that CFIUS will ultimately issue clearance worth taking? In most cases, except where national security risks simply cannot be mitigated, the answer is yes.
A brief history
CFIUS was established in 1975 under President Ford, principally to monitor the impact of “foreign” investment in the U.S. and to coordinate related U.S. policy. Criticised for relative inaction, it began in 1980 (during the Reagan administration) to investigate more foreign investment transactions. During this period, it focused principally on in-bound investment by Japanese firms relating to military products and services.
In reaction to growing concern about Japanese investment during the 1980s, Congress passed the “Exon-Florio” amendment to the Defense Production Act. Exon-Florio gave the President the authority to block proposed in-bound transactions that threatened U.S. national security. It also put in place the basic process, supplemented by subsequent Treasury Department regulations, that CFIUS still follows. Several changes followed, including a requirement that CFIUS review transactions implicating U.S. national security concerns where the acquirer is controlled by – or acting on behalf of – a foreign government.
CFIUS’ focus and level of activity intensified following the 9/11 terrorist attacks. It faced withering scrutiny (much of it unfair) for its handling of a proposed port acquisition by Dubai Ports World in 2006, leading to intensified reviews of in-bound investment, focused in large part (but not exclusively) on acquisitions by Middle Eastern companies and sovereign wealth funds.
More recently, much of CFIUS’ most intense activity appears to be focused on Chinese investment. Reflecting this concern, Congress recently passed FIRRMA, which among other things:
- broadens the scope of transactions under CFIUS’ review authority;
- mandates the preparation of a report on Chinese investment in the U.S.;
- permits CFIUS to discriminate among foreign investors by country of origin;
- provides for mandatory filings in certain circumstances; and
- somewhat lengthens its review periods.
Following the China theme, all six of the transactions CFIUS has blocked in its history, including three by the Trump Administration since 2017, involved Chinese acquirers, or in one case, no direct Chinese parties but a Chinese connection. Most recently, President Trump ordered Beijing Kunlun Tech. Co. Ltd. (a Chinese company) to divest Grindr LLC, an online dating site, due to concern about non-U.S. persons’ access to personal information about U.S. persons. Recent public statements by Treasury Department officials, as well as our own experience, reinforce the view that China is a major CFIUS priority for now, and will be for the foreseeable future.
How does the process work now?
The Pilot Program for Short-Form Mandatory Declarations
The FIRRMA legislation, for the first time, introduces mandatory reporting of proposed transactions in certain circumstances and it is here where its impact is being felt most acutely. Previously, the process was entirely voluntary.
Those investors going down the mandatory reporting route are offered the chance to use a short-form filing, requiring less information and with the “promise” that the investigation will be squeezed into a reduced 30-day review period.
However, this promise is often unkept. Frequently, CFIUS has been advising parties who have made short-form filings under the new pilot program mandate to neverthless make a full long-form voluntary filing, which is subject to the now-longer review and investigation period. As a result, rather than save time and money by relying on the short-form filing, these costs are added onto the costs of submitting the long-form filing and ushering it through to completion.
Of course, where approval is granted within 30 days, everyone is happy. However, parties to deals that raise potentially significant national security issues would be wise to consider foregoing the 30-day abbreviated review and move straight to the full review and investigation process.
Long form filings
Parties that forego or do not qualify for the mandatory declaration, will submit a full joint voluntary notice (JVN), which is subject to a 45-day review period, potentially followed by a 45-day (and up to 60-day) investigation period. Following the investigation period, if a referral to the President is made, the President has 15 days to clear or block the underlying transaction.
These time periods are deceptive, because the entire process is preceded by an informal consultation with CFIUS, during which CFIUS reviews and comments on an initial draft submitted by the parties. CFIUS also often takes several weeks (due primarily to its own internal workload management challenges) to review drafts and begin the various applicable timetables.
As a result, transaction parties contemplating making a filing should assume a reasonable worse case of up to six months or more from start to finish (which includes time for preparing of draft filing, CFIUS’ review of the draft filing, addressing CFIUS comments, submitting final filing, initial lag time for CFIUS to “start the clock” after receiving the final filing, and then progressing through the course of the review and investigation periods).
In addition, it is not uncommon for CFIUS to ask parties to withdraw and refile their JVNs, often because CFIUS needs more time to determine if any unresolved issue effecting U.S. national security exists.
How are dealmakers approaching CFIUS now?
Most dealmakers are now well aware of the potential challenges CFIUS can pose. There are, however, some nuances in how various categories of dealmakers approach the process.
Strategic buyers, especially those with an existing or aspirational U.S. presence, are prone to file even where it could be argued that filing is not warranted (such as where there does not appear to be significant national security risk at issue). The rationale for this approach is often the perceived value of establishing and/or maintaining a transparent relationship of trust with the U.S. government, particularly where future transactions are contemplated. Where investors (or their targets) have significant U.S. government contracts, they also tend to be especially focused on preserving relationships with the relevant government counterparties.
Private equity buyers’ approaches will vary considerably. In an auction, PE bidders will often seek to justify not filing – or not condition their bid on a filing – in order to avoid making their bid comparatively less attractive relative to bids from U.S. bidders or other non-U.S. bidders who know less or care less about U.S. deal practice or present less CFIUS risk.
This approach has become somewhat obsolete with the passage of FIRRMA and the possibility that a filing would be mandatory regardless of the parties’ preferences.
However, for transactions where the new pilot program requiring a filing is not applicable, the “CFIUS question” is often the subject of prolonged discussions about auction tactics and strategy. Repeat buyers will, like strategic buyers, also be interested in ensuring that CFIUS perceives them to be a trusted player.
Funds with complex ownership structures face particular challenges. The CFIUS process requires that parties disclose details about their significant shareholders and management structure, and be prepared to answer additional questions (typically within 72 hours).
For some, ultimate ownership is evolving, and individual owners may demand that their holdings and roles be kept confidential. Finally, investors with significant links to sensitive jurisdictions are – and should be – cautious. For example, at this point in the cycle of the U.S./China relationship, Chinese investors will face an uphill battle in acquiring businesses involving critical technology or infrastructure, significant intellectual property, or any access to U.S. persons’ personal data. Such deals would not be impossible, however, if the investors were willing to completely ring-fence the U.S. business or assets and CFIUS could be made comfortable with the arrangements.
However, acquisitions of non-critical assets or technologies with no apparent national security connection (including physical proximity to sensitive U.S. government locations), should be and are in fact quite possible and doable.
This last example illuminates an important point. It is abundantly clear of course that the U.S. government is sincerely focused on protecting U.S. national security. And we know from our dealings with CFIUS and its stakeholders that the professionals who work there take this responsibility seriously. On the other hand, these individuals (and the U.S. government more broadly) are also to varying degrees committed to ensuring that foreign investment into the U.S. continues, albeit safely and appropriately. Non-U.S. investment is critical to the U.S. economy and will continue to be so.