Many foreign investors making investments in US companies or projects are unaware that the federal government has sometimes set aside such investments on national security grounds, including a recent sale by a Greek developer of a wind project in Oregon to a US subsidiary of a Chinese company. Foreign investors can protect themselves by informing CFIUS, a federal interagency committee, in advance of the proposed investments. The following is a conversation that took place at the 24th annual Chadbourne global energy and finance conference in June between Amanda Forsythe, a Chadbourne lawyer in Washington who handles CFIUS filings, and Keith Martin, also in the Washington office.
MR. MARTIN: Amanda Forsythe, we are going to talk about something called CFIUS. What is it?
MS. FORSYTHE: CFIUS is the Committee on Foreign Investments in the United States. It is an interagency committee under the US Department of the Treasury that reviews transactions that could result in a foreign person controlling a US business. Over the course of the review, the committee focuses on whether these transactions present national security risks. The Treasury Department chairs the committee. There is a core staff within Treasury, but the committee itself is made up of the heads of various government departments, so everybody from the National Security Council to the Office of Management and Budget is involved in these decisions.
MR. MARTIN: Do acquisitions in the power sector have to be reported — for example, an acquisition of a small wind farm or an acquisition of a wind company? Are such acquisitions potentially of interest to CFIUS?
MS. FORSYTHE: Yes, they are potentially of interest. CFIUS filings are voluntary for the most part. The parties to the acquisition are not required to file a notice. However, in certain instances, CFIUS can initiate a review if it thinks there are potential national security concerns. One thing that the committee has specifically noted as being potentially a national security concern is the effect that the transaction will have on what CFIUS calls critical infrastructure. The regulations state specifically that major energy assets are part of our critical infrastructure.
MR. MARTIN: When is an energy asset a “major” asset?
MS. FORSYTHE: The word “major” is undefined.
MR. MARTIN: Does it matter if the foreign investor is buying only a minority interest?
MS. FORSYTHE: For the most part, if the foreign person buys a minority interest, then the transaction is probably in the clear. If the minority interest holder has special powers so that it is a dominant minority and it is the one who makes decisions about the US business, then the acquisition of a minority interest could cause the transaction to be subject to CFIUS.
MR. MARTIN: Does it matter if the foreign investor uses a US subsidiary or US company to make the acquisition. Is that considered a non-foreign acquisition?
MS. FORSYTHE: You have to look up the ownership chain. CFIUS looks at the ultimate owner. If there are power blocks in between the foreign company and the US subsidiary so that the US subsidiary is not controlled by the foreign company, then the transaction should not be subject to CFIUS review. If the foreign company is exerting control over the US subsidiary that is making the acquisition, then CFIUS would be interested in it.
MR. MARTIN: Who has to report — the seller or the buyer?
MS. FORSYTHE: For the most part, transactions are reported jointly by the parties simply as a logistics matter because there is a significant amount of information that is required from both sides in the filing.
MR. MARTIN: And what happens if someone does not report a foreign acquisition?
MS. FORSYTHE: If you do not report a transaction, then you run the risk of being forced later to unwind the transaction. If you file on your own and you get CFIUS clearance, then it is essentially a safe harbor that the government will not try to unwind the acquisition later.
MR. MARTIN: Does CFIUS really want to hear about deals where Canadian or British companies buy US wind or solar projects? Canada and Great Britain have been long-standing US allies. Does CFIUS want to be buried in paperwork about transactions involving investors from such countries?
MS. FORSYTHE: Yes. Actually, most reported transactions involve foreign persons from our allied countries. The most recent report that CFIUS gave to Congress covers 2009 to 2011, and about half of the transactions at which CFIUS looked during that period involved investors from France, Canada or the United Kingdom. Chinese in-bound transactions are also increasingly a subject of filings.
MR. MARTIN: How long does it take to get a response from CFIUS after one files?
MS. FORSYTHE: The CFIUS process involves four discrete periods. The first is the pre-filing period when the parties can submit a voluntary pre-filing notice that allows CFIUS to ask questions about the transaction and request certain information be included in the formal filing. This voluntary period is essentially mandatory at this point. There is not a defined time frame for the pre-filing period. In our experience, it runs a couple of weeks most of the time. The second stage is the actual CFIUS review, and that is a statutorily mandated 30-day review period. CFIUS then has the option to initiate an investigation if it thinks there are national security concerns. Investigations are 45 days. If there are still issues after the investigation, then, in practice, there is period for negotiation. If the deal terms are not changed enough to accommodate the US government’s concerns, then CFIUS makes a recommendation to the President. That, for the most part, happens quickly. Overall, you are looking at anywhere from two months plus preparation time to six months if it drags on through an investigation and possibly a Presidential intervention.
MR. MARTIN: Is there a filing fee and, if so, how much?
MS. FORSYTHE: There is not a filing fee.
MR. MARTIN: How often does CFIUS turn down acquisitions in practice?
MS. FORSYTHE: Before 2006, at most one or two transactions a year were withdrawn. During the period 2006 through 2009, 64 transactions were withdrawn, or roughly 14% of the 469 transactions submitted to CFIUS for review during that period. From 2009 through 2011, 9% of transactions were withdrawn. Some of the transactions withdrawn are later resubmitted. For example, there were 111 CFIUS filings in 2011. Of that number, 40, or 36%, took another 45 days beyond the initial 30 for an investigation. In eight, or 20% of the cases that went to investigation, the parties agreed to mitigation measures to address government concerns.
MR. MARTIN: Are acquisitions by Chinese or Near Eastern companies more likely to be turned down?
MS. FORSYTHE: You are probably more likely to encounter problems if you are a Chinese company. There have been only two Presidentially-ordered divestments. Both involved Chinese companies. In the most recent case, involving a wind farm in Oregon, the Chinese company failed to file with CFIUS.