Investments in US entities by non-US firms increasingly are subjected to US government review. This is due in large part to the recently broadened understanding of transactions that involve national security issues as directed in legislation passed by the US Congress and implemented by the US Department of Treasury’s Committee on Foreign Investment in the United States (CFIUS). Once generally confined to foreign acquisitions related to the US defense industrial base, CFIUS now considers a broad range of transactions pursuant to its expanded authority under the Foreign Investment and National Security Act of 2007 (FINSA) (Pub. L. No. 110-49) and recent interpretive guidance thereof. Under FINSA, CFIUS review includes any national security impact on US “critical infrastructure” and critical information technology. The move toward including critical infrastructure sectors within the realm of national security review began in earnest after September 11, 2001 and was well-illustrated by the Dubai Ports CFIUS review. The term “critical infrastructure” is now defined by FINSA to include businesses and assets so vital to the United States that their failure “would have a debilitating impact on national security, national economic security, national public health or safety.” Sectors specifically identified as critical infrastructure include telecommunications, public health, chemicals and hazardous materials, energy, banking and finance, and others.
For China-based firms, particularly firms with government ties, the prospect of a CFIUS investigation can be a daunting one. This is due in large part to several highly publicized attempted acquisitions by China-based firms that were found to negatively impact US critical infrastructure. Most notable among these were the China National Offshore Oil Corporation’s (CNOOC) failed attempt to purchase Unocal in 2005 and the proposed merger between China-based electronics firm Huawei and 3Com in 2008, which was terminated due to the parties’ inability to remedy CFIUS concerns. These examples are no doubt discouraging to would-be investors. In many cases, however, upfront planning and forethought in careful selection of targets and tailoring investments with an understanding of likely CFIUS concerns can make the process far more predictable and help parties manage costs and avoid missteps.
CFIUS is an interagency committee chaired by the US Department of Treasury, with membership that includes, among others, the Department of State, Department of Justice, Office of Homeland Security and Department of Defense. It is officially tasked with reviewing transactions that could result in control of a US business by a non-US person (so-called “covered transaction”) to determine the effect of such transactions on US national security. “Control” as the term is used here does not only mean majority ownership; a non-US acquisition of a minority stake – particularly a dominant minority stake – can be subject to CFIUS review.
The notification of a proposed transaction to the CFIUS is voluntary but in most cases is recommended. Covered transactions voluntarily notified to the CFIUS enjoy a “safe harbor” from further review, while others risk government intervention, even post-transaction. Whether or not they choose to file a voluntary notification with CFIUS, firms based in China considering a US acquisition are advised to address US national security issues as early as possible in the process. In many cases, careful planning of the structure of proposed transactions can help minimize or address national security considerations. One such consideration is whether a covered transaction could result in control of a US business by a non-US government, its agencies or state-owned enterprises. Such transactions involving non-US governments do not necessarily present national security risks, and there are measures parties can take to address such risks in advance of a CFIUS notification. These include adopting governance structures that provide for a measure of autonomy and ensuring transparency of the investment purpose, arrangements and finances of the acquiring firm. Finally, investors should consider, before a voluntary CFIUS notification, possible mitigation agreements with the US government to deal with national security concerns.