International Investment Considerations: CFIUS
By: Greer M. Wellstead
When a foreign party is involved in the potential acquisition of or investment in a U.S. business, they are doing much more than just investing in the U.S. Transactions in which a foreign party is involved, may also bring along CIFUS compliance considerations. The Committee on Foreign Investment in the United States (“CFIUS”) is a federal committee tasked with examining potential national security concerns with foreign investment into the U.S. Under the Biden administration, CFIUS investigations are ramping up.
CFIUS has the ability to review certain transactions, generally these are called “covered control transactions” or “covered investments”. “Covered control transactions” are generally transactions that, irrespective of the actual arrangements for control, result in a foreign party gaining control (i.e., the ability to determine, direct or decide important matters) of any U.S. business. “Covered investments” include any direct or indirect non-controlling investment by a foreign party that gives the foreign party access to or abilities to control any “TID” U.S. business. A “TID” U.S. business is a business that develops or holds critical technologies, critical infrastructure, or sensitive personal data (though the definition under the applicable statutes and regulations is more complex).
Before entering into a transaction with a foreign party, it is up to the parties to determine if they will need to file a declaration or notice with CFIUS to alert them of the transaction. This filing will need to include the basic information about the transaction, including, but is not limited to the parties, rationale, structure, value, financing and terms, control percentage and ownership rights given to the foreign party, the nature of the U.S. business entering into the transaction and the status and expected timing of the transaction. This filing is treated as confidential by CFIUS and must not contain any material misstatements or omissions, otherwise the filers may be subject to penalties of up to $250,000. Sample forms of certifications for declarations and notices are available on the Treasury Department’s website.
Once the filing is made, a timer starts. CFIUS then has 30 days (if a declaration is filed) or up to 105 days (if a notice is filed) to review the filing and notify the parties if the transaction will be subject to their review. CFIUS may request additional information from the parties to the transaction, and the parties must respond to this request within two (2) days of receipt. Essentially, the parties must “play-ball” with CFIUS and their requests until CFIUS signs-off that the transaction can go to close.
It is critical that the parties evaluate if they should file a declaration or notice with CFIUS concerning their transaction. On the front-end, compliance with CFIUS will likely make the transaction more expensive and can slow the transaction down without proper planning. However, if the parties decide to file a declaration or notice and they receive a letter from CFIUS stating that the transaction has been cleared, that letter bars CFIUS from reviewing the transaction in the future (subject to some exceptions, such as a party submitting false information).
If the parties decide not to make any filing with CFIUS, but a filing should have been made, CFIUS at any time can independently investigate the transaction and impose penalties, up to and including unwinding the transaction entirely.
There are some transactions that are required to file notices with CFIUS. If notices are not filed in these circumstances, it can result in civil penalties of up to the greater of: (i) $250,000 or (ii) the transaction value. Additionally, CFIUS can unwind the transaction after it closes. Transactions that require a CFIUS filing include:
Foreign-Government-Linked Transactions – transactions that result in the direct or indirect acquisition of a substantial interest in a TID U.S. business by a foreign person in which a foreign government has, directly or indirectly, a substantial interest.
Critical-Technology-Linked Transactions – any transaction with a U.S. company that produces, designs, tests, manufactures, fabricates or develops critical technology for which a U.S. regulatory authorization would be required for the export, reexport, in-country transfer or retransfer, of critical technology.
Whether a transaction would trigger a Mandatory Filing is a complex analysis and should be completed well in advance of the transaction.
If CFIUS determines that a covered transaction threatens U.S. national security (pre- or post-closing if a transaction was not filed on), CFIUS has the authority to:
- Suspend a proposed or pending transaction;
- Negotiate, enter into, impose, and enforce a mitigation agreement or condition with the transaction parties that resolves the national security concerns;
- Negotiate, enter into, impose, and enforce an agreement evidencing the decision by the transaction parties to voluntarily abandon the transaction and mitigating any risk to national security arising from the covered transaction; and
- Refer the transaction to the President of the United States for action.
Common mitigation measures can also include:
- Governance controls;
- Third-party oversight;
- Reporting requirements;
- Facility, sensitive information, and personnel security controls; and
- Operational restrictions
If you have any additional questions about CFIUS, or if they might play a part in your transaction, please contact a member of your BrownWinick Business Transactions Team for further evaluation.