It is the established policy of the United States' government to "support unequivocally" international investment in the United States, "consistent with the protection of the national security."  In particular, foreign investors seeking to merge with or acquire a U.S. company should have an understanding of the United States national security review process supervised by an interagency group know by its acronym: CFIUS. This overview provides foreign investors and their U.S. partners with an outline of this process and some of its complications. Although the CFIUS process can be complex, it is designed to encourage foreign investment while safeguarding U.S. national security.
An Overview of CFIUS
The Committee on Foreign Investment in the United States (CFIUS or the Committee) reviews foreign acquisitions, mergers and takeovers of U.S. businesses that raise national security issues. CFIUS, working by consensus, has the power to approve a transaction or send it to the President for his decision. CFIUS operates on statutory deadlines consisting of an initial 30-day review, a possible further 45-day investigation, and a possible Presidential decision lasting 15 days. CFIUS is chaired by the Department of Treasury (Treasury), and includes representatives from 15 other United States government departments, agencies and offices. While filing with CFIUS is generally voluntary, and the Committee reviews less than 10% of all inbound foreign transactions, it has the authority to compel a review of a transaction that is not filed voluntarily.
The Origins of CFIUS
CFIUS was created in 1975 by executive order (in reaction to Middle East investments) and was charged with monitoring the impact of and coordinating U.S. policy on foreign investment in the United States, but had no explicit enforcement power. Subsequent investments from Japan and other countries led to the passage of the "Exon-Florio Amendment" in 1988 as part of the Defense Production Act of 1950, which provided the President express authority to review the national security effects of foreign investments and block such investments, if necessary. The President delegated his review authority to CFIUS, but retained his authority to block foreign investments. Following the uproar caused by the Dubai Ports World investment in 2005, Congress enacted the Foreign Investment and National Security Act of 2007 (FINSA), which codified and amended the CFIUS process.
CFIUS includes nine member agencies: the Departments of Treasury, Commerce, Defense, Homeland Security, Justice, State and Energy; the U.S. Trade Representative; and the White House Office of Science and Technology. The following offices also observe and, as appropriate, participate in CFIUS's activities: the Office of Management and Budget, the Council of Economic Advisors, the National Security Council, the National Economic Council and the Homeland Security Council. The Director of National Intelligence and the Secretary of Labor are ex-officio members of CFIUS with roles as defined by statute and regulation.
CFIUS Process and Timetables
The CFIUS review process generally begins when the parties to a transaction file a voluntary notice with Treasury. Once Treasury determines that the filing is complete, it circulates the filing to the other CFIUS members, beginning a 30-day review period. During a 30-day review period, Treasury assigns a "lead agency" to the case and may request additional information from the filing parties. CFIUS also receives a report from the intelligence agencies regarding any threats. After this 30-day period, all CFIUS agencies must either approve the proposed transaction or determine that a 45-day investigation is needed. Any CFIUS agency can individually seek an investigation. If, after a 45-day investigation period, any CFIUS agency still has unresolved concerns that have not been fully addressed by the parties, CFIUS will send a report to the President. The President must then either permit or block the transaction within 15 days following the end of the 45-day investigation. Thus, the entire CFIUS process can take up to 90 days. However, there is some flexibility in this timeline. First, CFIUS encourages parties to consult with CFIUS prior to formally submitting their transaction. Also, CFIUS may allow parties to withdraw their case during the course of a 30-day review and 45-day investigation and re-file (usually after modifying the transaction or providing additional information). Re-filing a withdrawn case resets the calendar to day one, but CFIUS may not need all 30 days to review a resubmitted case.
Investments Reviewed by CFIUS
CFIUS can review "any merger, acquisition, or takeover by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States." Importantly, CFIUS only has jurisdiction to review investments that could result in a foreign person's acquisition or "control" of a "U.S. business." Investors should consider carefully whether their investment constitutes a controlling investment of such a business under CFIUS regulations.
CFIUS focuses solely on addressing national security issues when reviewing proposed investments, and not on other national interests. While CFIUS law does not define "national security," it does provide a list of indicative factors of consideration. These include an investment's effects on: domestic production needed for national defense; U.S. critical technologies; long-term requirements for critical resources; and critical infrastructure (e.g., major energy assets), among others. Many CFIUS cases involve classified defense or homeland security-related contracts, sole-source contracts with federal, state or local governments, critical or emerging technologies and infrastructure, export control restrictions, and foreign government-controlled investors making sensitive investments. Although the majority of CFIUS cases involve defense-related acquisitions, CFIUS has reviewed transactions in the telecommunications, aerospace, software, information and advanced technologies, energy, finance, engineering, logistics and chemicals and pharmaceuticals industries, among many others. CFIUS does not typically review transactions in the financial services sector, unless they involve national security assets or considerations, due to the existence of other broad regulatory authorities over this sector.
The Importance of Filing with CFIUS
While the CFIUS process is voluntary, and less than 10% of all foreign direct investment-measured by transactions-is reviewed, CFIUS actively monitors investment activity and can compel parties to file or initiate a review on CFIUS's own motion. Thus, if national security issues may be involved in a transaction, parties should bring their investment to CFIUS's attention. Transactions that are not reviewed by CFIUS can be examined at any time in the future by CFIUS and can be exposed to mitigation remedies, including divestiture (see below). Accordingly, knowledgeable parties typically make a CFIUS clearance a condition to closing a sensitive acquisition.
Role of Congress
The new CFIUS law, FINSA, attempts to avoid potentially damaging politicization of foreign investment by providing a limited oversight role for Congress. CFIUS only reports its findings to Congress after it has completed all action on a case. However, for some transactions that have political implications, it makes sense for parties to brief Congress on the proposed deal before or during the CFIUS process.
Key Considerations for Getting a Deal through CFIUS
Early Engagement. As noted above, CFIUS encourages transacting parties to begin informal consultations-and submit a draft filing-before officially requesting a review ("pre-notice consultations" or "pre-filing"). This gives parties a clear sense of the information CFIUS needs, and any concerns it may have, prior to filing a case. It also provides CFIUS with additional time to work through issues, which may allow an otherwise complicated transaction to be cleared within the initial 30-day review period.
Preparation. Because CFIUS focuses its reviews on national security matters, parties should be well prepared to address all potential national security issues that could arise as a result of a transaction, including threats posed by the foreign acquirer and other vulnerabilities associated with the U.S. business being acquired.
Mitigation. CFIUS is authorized to enter into or impose, as well as enforce, agreements or conditions to mitigate any national security risk posed by a transaction. Such "mitigation agreements" can include provisions requiring the parties to take export control measures, appoint security officers, file reports with CFIUS or even implement controls on certain operations, among other provisions. CFIUS maintains an ongoing role in supervising compliance with mitigation agreements.
Foreign Government Control. FINSA presumes a 45-day investigation for all acquisitions resulting in foreign government control of a U.S. business, such as investments by sovereign wealth funds. However, the statute allows such cases to close during the 30-day review period with express approval from the Secretary or Deputy Secretary of Treasury and the "lead agency(s)" on the case.
Public Affairs and Press Strategy. While CFIUS focuses narrowly on the national security issues posed by a transaction and conducts its reviews without public participation, public opinion can play an important role in determining the fate of a proposed transaction. As demonstrated in the Dubai Ports case in 2005, it is important for parties to a transaction to have a public affairs and press strategy that includes media, public and Congressional outreach.
Recent Changes to the CFIUS Process
In November 2008, CFIUS issued final regulations governing its review of foreign investments and implementing FINSA. The regulations provide flexibility for CFIUS to review transactions that are likely to raise real or perceived national security issues, while maintaining CFIUS's narrow focus on national security. Among the key aspects of the regulations are:
Additional Clarifications on What Constitutes a Controlling Investment. The regulations maintain a broad and flexible definition of what constitutes "control" by a foreign person. They include clarifying examples of transactions and structures that do and do not give rise to control. They also provide additional minority investor protections that do not give rise to control under CFIUS, such as found in certain private equity investments.
Additional Information Requirements from Parties. The regulations include an extensive list of information that CFIUS requires from parties. While the list nearly doubles the amount of information requested compared to prior regulations, a number of additional items either will not be relevant to most U.S. parties and foreign acquirers or will be relatively easy to answer. The burden will be greater in transactions involving significant sales to U.S. defense and homeland security agencies and those involving large U.S. businesses with diverse product groups sold through extensive third-party channels.
CFIUS Response Timelines. The regulations require parties to respond to additional information requests from CFIUS within three business days.
Civil Penalties. The regulations include civil penalty provisions, which allow CFIUS to penalize parties up to $250,000 for certain extraordinary violations. The regulations also allow CFIUS to negotiate liquidated damages provisions in mitigation agreements.
Confidentiality. The regulations ensure that the CFIUS process remains confidential and clarify that confidentiality provisions apply whenever information is submitted to CFIUS, even after CFIUS concludes all action and even if a party engages in pre-notice consultations but does not then file a formal notice.
In conjunction with the regulations, Treasury also published informal guidance on the types of transactions that CFIUS has reviewed that have presented national security considerations. Treasury's guidance document provides key insights into the CFIUS process and how the Committee identifies the national security effects of transactions.
Overall, the key to an efficient CFIUS filing is advance preparation and familiarity with the process. Most cases (approximately 80%) are completed in one 30-day review period -although that percentage has been falling rapidly over the last several years. In 2008, out of 155 notices submitted to CFIUS, there were twenty-three 45-day investigations. By contrast, CFIUS conducted only fourteen 45-day investigations involving 313 notices filed from 2005 through 2007. Since 2006, only two cases have gone to the President.
Broadly, FINSA and the recent CFIUS regulations clarify the regulatory environment for foreign acquisitions that pose potential U.S. national security issues. The regulations establish procedures for protecting U.S. national security while encouraging inward foreign investment. With advanced preparation and experienced advisors, parties to a transaction can typically complete the CFIUS review process within time frames amenable to corporate mergers and acquisitions.