- Non-US acquisitions of US-based companies are subject to expanded US security review
- Measures and planning can reduce security concerns
Investments in US entities by non-US firms are increasingly subject to US government review. This is due in large part to a recently broadened understanding of transactions involving national security issues, as directed in legislation passed by the US Congress and implemented by the US Department of Treasury, Committee on Foreign Investment in the United States (“CFIUS”). Once confined largely to foreign acquisitions related to the US defense industry, CFIUS now embraces a broad range of transactions as a result of its expanded authority under the Foreign Investment and National Security Act of 2007 (“FINSA”) (Pub. L. No. 110-49) and its recent interpretive guidance. Under FINSA, CFIUS review is required for any transaction that could have an impact on US national security related to the country’s “critical infrastructure” and critical information technology.
The move toward including critical infrastructure sectors within the realm of national security review began in earnest after 9/11 and is well-illustrated by the Dubai Ports CFIUS review. The tern “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 now include telecommunications, public health, chemical industries and hazardous materials, energy, and banking and finance.
For China-based firms, particularly those with government ties, the prospect of a CFIUS investigation can be daunting. This is due in large part to several highly publicized attempted acquisitions of US companies by China-based firms that were determined to have a potentially negative impact on critical US infrastructure. Most notable among these are the Chinese National Offshore Oil Company’s (CNOOC) failed attempt to purchase Unocal in 2005 and the proposed merger between the 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, 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, the Department of Justice, the Office of Homeland Security and the Department of Defense. It is officially tasked with reviewing transactions that could result in control of a US business by a non-US person (a so-called “covered transaction”), to determine the effect of such a transaction on US national security. “Control” as the term is used here does not mean only majority ownership; a non-US acquisition of a minority stake – particularly a dominant minority stake – can also be subject to CFIUS review.
Notifying CFIUS of a proposed transaction is voluntary, but in most cases is recommended. Covered transactions of which CFIUS is voluntarily notified 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, China-based firms considering a US acquisition are advised to address 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, even with respect to transactions that would result in control of a US business by the government of another country or its agencies or state-owned enterprises. Measures parties can take
to address such risks in advance of a CFIUS notification include adoption of governance structures that provide for a measure of autonomy, and ensuring transparency as to the investment purpose, arrangements and finances of the acquiring firm. Finally, investors should consider, before voluntarily notifying CFIUS, possible mitigation agreements with the US government that will successfully address and resolve national security concerns.