The Committee on Foreign Investment in the United States (CFIUS or the Committee) has increasingly sought to expand its authority. That effort has accelerated markedly this year.
The muscle-flexing means that the Committee—which reviews foreign investments for national security implications—creates more risk for foreign investors and their US counterparties. This risk can be managed, but first it has to be recognized.
We have been involved in a number of cases that demonstrate this risk. Those cases have reflected the Committee’s growing inclinations to:
- Compel notices for previously non-filed transactions
- Find national security risk based on proximity to sensitive defense installations
- Issue substantive orders
- Assert authority with respect to matters other than foreign control
CFIUS has been looking broadly at transactions for which the parties did not file a notice seeking clearance from the Committee.
If a non-filed transaction touches on national security—from the perspective of the Committee or any Committee member—there is a good chance CFIUS will offer the parties an opportunity to file a notice. And to paraphrase Don Corleone, this is an offer that should not be refused: CFIUS has authority to initiate a review of a transaction on its own if the parties do not file “voluntarily,” and a notice filed by the parties will invariably put the transaction in a better light than a refusal. There is no time limit on the Committee’s authority to review non-filed transactions; transactions that closed years ago still can be reviewed. We are familiar with one recent case in which CFIUS compelled a filing for a transaction that closed three years previously.
While CFIUS has examined non-filed transactions for many years, it has become much more aggressive on this front. CFIUS searches the press and other sources for transactions that touch on national security, and the number of non-filed transactions for which CFIUS has requested filings has risen. Whereas CFIUS requests for parties to file a notice used to be relatively rare, they now regularly occur every year.
This development creates several risks. First, when CFIUS requests a filing, the parties are starting off on the wrong foot. These transactions receive additional scrutiny—both because CFIUS already has decided that the transaction may raise national security concerns and because CFIUS generally is suspicious that the parties deliberately sought to avoid review. Second, because CFIUS generally requests a filing only after the transaction has closed, there is greater commercial risk if the deal is rejected or if burdensome conditions are imposed. There is no opportunity in such cases for the parties to restructure the deal in a way that helps address CFIUS concerns. Third, there is greater risk that CFIUS will reject a non-filed transaction or impose very burdensome conditions, because CFIUS often finds it harder to mitigate national security risk after a transaction has closed.
All of these risks weigh heavily in favor of careful CFIUS consideration at the outset of virtually any foreign investment in the United States. That is particularly so if the foreign investor is from a country whose intelligence establishment has a tense relationship with the US intelligence community, such as China, Russia, Israel, France, and Venezuela, among others. That does not mean that all investments, or even all investments from these countries, need to be notified to CFIUS—many do not. Nor does it mean that CFIUS aims to throttle foreign investment; to the contrary, CFIUS (like all US government entities) follows the official US policy that foreign investment in the United States generally is to be encouraged. But it does mean that the risks of not filing may be acute and must be considered at the outset of any foreign investment.
Proximity as a National Security Risk
CFIUS frequently has rejected foreign acquisitions of assets located close to sensitive defense facilities, regardless of the nature of the assets that the foreign party would control.
In the past, CFIUS focused its analysis on the acquirer and the nature of the assets being acquired. But CFIUS increasingly considers the risk inherent in proximity of the assets to certain facilities. While CFIUS has never publicly articulated the reason for this concern, it presumably is related to espionage risk. There may be easier ways to spy on US military bases than acquiring a nearby business, but CFIUS has used this rationale to block several recent transactions. In some cases, CFIUS appears to have taken a hard line that proximity to sensitive locations presents such a risk that no conditions can mitigate the risk, and the deal must be rejected.
This concern has most publicly affected deals by Chinese buyers. However, it also has been at play in deals involving companies in other countries that do not have cooperative intelligence relationships with the United States.
This focus on location has important implications for parties to foreign acquisitions. First, it may make CFIUS approval difficult or impossible in certain situations. If CFIUS is concerned about a particular location, the parties may not be able to resolve the matter by agreeing to conditions on the deal. And second, successful CFIUS due diligence may be very difficult because it may be hard to determine the location of relevant defense or security installations.
Authority to Issue Orders
In another important development, CFIUS recently has asserted authority to issue orders during the pendency of a CFIUS case.
CFIUS’ authority traditionally was understood as limited to two types of actions: (1) recommendations to the President that he block a foreign investment (or unwind one that had occurred) to protect national security; and (2) negotiation of conditions with a foreign investor, where the foreign investor would commit to security measures sought by the Committee (e.g., the right to conduct on-site inspections and review the foreign investor’s books). CFIUS’s ability to negotiate agreements flowed from its ability to recommend that the President block a deal—that was the leverage that the Committee had to extract commitments by a foreign investor.
But CFIUS recently has found authority that it previously did not know it had—the authority to issue its own orders, rather than merely making recommendations to the President or negotiating conditions on a deal. This newfound authority to issue orders alters the calculus of negotiations with CFIUS. Indeed, it dramatically diminishes parties’ ability to negotiate with CFIUS because CFIUS now can issue a substantive order if agreement with the parties cannot be reached.
CFIUS has found this authority in the 2007 law that amended the CFIUS process. That law provides the Committee may “negotiate, enter into or impose, and enforce any agreement or condition” with the foreign investor. Before the 2007 legislation, CFIUS’s statutory authority to negotiate agreements was unclear, and one of the purposes of the amendments was to put that authority on solid footing. CFIUS’ reading of this provision—to enable the Committee not only to negotiate agreements but also to issue orders during the pendency of a case—is subject to debate, as there are reasonable interpretations that would not permit the issuance of orders by the Committee. But by interpreting the statute to permit CFIUS to issue orders, the Committee has transformed itself from a national security watchdog and Presidential proxy into a full-scale regulatory body.
This development substantially raises the stakes for CFIUS cases. Whenever the Committee perceives national security risk, there is now a real possibility that CFIUS could unilaterally impose conditions.
Jurisdiction Beyond Foreign Control
A final development relates to the fundamental risk that CFIUS examines: the risk of foreign control. CFIUS’ jurisdiction is limited by statute to reviewing transactions that result in foreign control of US businesses. In several recent cases, however, CFIUS has asserted that once it has a case under review, it may impose conditions unrelated to foreign ownership.
For example, a number of recent cases have concluded with the foreign acquirer selling the business under pressure from CFIUS. In these cases, CFIUS generally has sought to dictate conditions on the sale, even when a US company has been among the possible purchasers. Further, CFIUS has asserted the authority to preclude the use of foreign equipment or foreign personnel by the US buyer.
Absent a foreign investment over which it can exercise jurisdiction, CFIUS never has asserted authority to block the sales of foreign equipment or the use of foreign personnel. But once CFIUS has a case under review—that is, once the jurisdictional prerequisites are satisfied by virtue of a controlling foreign investment in a US business—CFIUS has claimed authority to dictate conditions such as precluding the use of foreign equipment or foreign personnel, or other conditions, even when the business at issue is transferred back to US ownership. Parties in CFIUS cases accordingly must be prepared for wide-ranging negotiations with CFIUS, even in cases when the foreign investor decides to divest the company or assets that triggered the CFIUS review.