CFIUS and its basic functions
CFIUS is a federal multi-agency panel chaired by the Secretary of the Treasury that is charged with the review and investigation of certain “covered transactions” which threaten to impair the national security of the United States. CFIUS investigations may be conducted regardless of whether the parties to the transaction submit a filing to CFIUS. If a CFIUS investigation concludes that the covered transaction poses a threat to national security, it may require that the parties agree to specified mitigating conditions. If these conditions are not agreed, or in any event, if CFIUS elects, it may refer the covered transaction to the President, who has the authority to suspend, prohibit or order the unwinding of the transaction.
Prior to the passage of FIRRMA, the “covered transactions” subject to CFIUS review were limited to “[a]ny merger, acquisition or takeover…by or with any foreign person that could result in foreign control of any United States business, including such a merger, acquisition or takeover carried out through a joint venture.” For purposes of this definition, “foreign person” means any foreign national, government or entity, or any entity controlled by any of them. A “United States business” is any entity to the extent that it is engaged in interstate commerce, regardless of the nationality of the person or persons who control it.
Persons engaged in transactions which may be classified as “covered transactions” under this definition should consider submitting a voluntary notice for review by CFIUS prior to closing the transaction.
Section 721(f) of the Exon-Florio Act, which was not amended by FIRRMA, sets forth the following factors which may be considered by CFIUS in its review of covered transactions:
Parties considering a voluntary filing should also note that political sensitivities and potential publicity surrounding a transaction may make CFIUS more eager to review or investigate a transaction and, as a practical matter, may affect the outcome of any review or investigation.
Until FIRRMA was signed, the process of submitting notices to CFIUS for review and potential investigation was entirely voluntary. This remains the case for all transactions except those covered by the pilot program described below. CFIUS retains the ability to request that parties file a notice with CFIUS and may take action with respect to a covered transaction regardless of whether a notice is filed. Historically, many (but not all) parties to covered transactions have submitted notice filings in order to avoid the risk of CFIUS imposing unpalatable mitigating conditions on the transaction post-closing or recommending that the President order that the transaction be unwound.
Information and documentary material submitted as part of a CFIUS filing remain confidential and exempt from public disclosure.
Prior to FIRRMA, CFIUS was charged solely with review of transactions which could result in foreign control of a U.S. business. This excluded from CFIUS’s purview non-controlling investments, investments which involved the acquisition of discrete assets or rights (but not a business), and changes in existing investments which could result in foreign control of a U.S. business. These limitations allowed certain types of sensitive foreign investment to proceed without the same CFIUS scrutiny as a more straightforward asset or equity sale or merger.
FIRRMA addresses this discrepancy by expanding the definition of “covered transaction” substantially, adding the following categories to CFIUS’ jurisdiction:
FIRRMA includes changes at two stages of the CFIUS review process that are intended to introduce greater efficiency and certainty into the process:
Section 1706 of FIRRMA establishes a new class of transaction for which filing with CFIUS is mandatory rather than voluntary. Affected transactions include investments in the following categories of U.S. businesses by a foreign person:
If a “covered transaction” falls within one of the categories described above, then a mandatory declaration must be filed if it either represents (1) a direct or indirect acquisition of a substantial interest in a U.S. business by a foreign investor in which a foreign government has a substantial investment, or (2) a “pilot program covered transaction”.
“Pilot program covered transactions” are limited to a specific set of industries designated by the Department of Treasury. The regulations approved in connection with the pilot program establish the following as “pilot program industries” within which filing of a declaration is now mandatory:
Regulations issued by the Department of Treasury specifically carve-out investments through certain investment funds and investments involving air carriers.
Filers may submit a short-form declaration (expected to be no more than about five pages in length) for these mandatory filings. Section 1706 of FIRRMA contemplates that any party to a covered transaction will be permitted to file a short-form declaration; however, the regulations approved in connection with the current pilot program state that voluntary declarations are not being accepted at this time. Parties to all types of covered transactions may submit a traditional notice rather than the short-form declaration, at their option.
Although CFIUS has not yet issued regulations imposing a filing fee, FIRRMA authorizes CFIUS to charge a filing fee equal to the lesser of one percent of transaction value and $300,000 (subject to annual inflation adjustment).
Unless a transaction falls within the scope of the new pilot program, CFIUS notice filings remain voluntary. Parties to a cross-border investment should take into account several factors in determining whether to submit a notice filing to CFIUS.
Prior to FIRRMA’s enactment, practitioners reported that a CFIUS review could take three to four months even without a subsequent investigation, which could take another month (or more if CFIUS requested that the notice with withdrawn and resubmitted). Portions of this delay were caused by long wait times in the pre-filing process, which FIRRMA now limits to 10 business days. However, the review process has been extended from 30 to 45 days, and investigations can last up to 60 days further under extraordinary circumstances. A delay of this length can make an investment or acquisition bid by a foreign investor substantially less competitive than one submitted by a domestic buyer.
CFIUS is able to investigate transactions for which notices were not filed—even after the transaction has closed. If CFIUS conducts its own review and investigation and concludes that the transaction presents national security risks, it may later recommend either that mitigating conditions be imposed or that the President order that the transaction be unwound (likely at great cost to the temporary acquirer). If a transaction is likely to be reviewed regardless of whether a voluntary notice is submitted, the parties may prefer to frame the transaction in the most favorable way possible and demonstrate good faith to CFIUS in order to facilitate a more favorable outcome of the review and investigation.
In determining whether CFIUS is likely to conduct its own review and investigation of a transactions, parties may consider the factors under Section 721(f) of the Exon-Florio Act (as described above). Parties may also consider whether the investment target has material government contracts or if the underlying transaction is likely to be politically sensitive, prominently covered in the media or subject to competing bids by influential domestic parties.
Obtaining CFIUS clearance may make it easier for the parties to obtain approval from other regulatory agencies that consider the impact of investments on U.S. national security.
The most important effect of FIRRMA will likely be the expansion of the set of “covered transactions” that CFIUS may review. In a geopolitical environment in which countries such as China and Russia are identified as strategic competitors and are acknowledged to have an interest in obtaining certain U.S. technological resources, the new powers granted to CFIUS will likely have a chilling effect on investments by Chinese and Russian parties in U.S. businesses that own or operate critical infrastructure and critical technology, or that operate in close relationships with, or proximity to, U.S. government and military installations. Transactions involving these investors will inevitably take longer and cost more to close than transactions involving domestic partners, and they may be subject to unattractive mitigating conditions or prevented from closing at all.
While investments from friendly nations such as Japan, Canada, the United Kingdom and European Union member states may be perceived as less of a threat to national security, these investments will be affected by wider CFIUS jurisdiction, as the timing and transaction costs involved in a CFIUS filing will likely create some competitive disadvantages for these investors, as well. The more streamlined filing associated with the new pilot program may make it easier for these investors to obtain CFIUS clearance for low-profile transactions, but until the scope of the pilot program is expanded beyond select industries, most transactions will be processed within the older filing framework.
Persons contemplating inbound investment to the United States which may be subject to CFIUS jurisdiction should work with their legal and transaction advisors at an early stage of the investment process to evaluate the costs and risks of making or foregoing a CFIUS filing and to establish expectations and terms relating to the transaction which are favorable to the investor and agreeable to all parties to the deal.
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