What Triggers A CFIUS Review?
- Since FIRRMA, the scope of CFIUS’s authority was greatly expanded. Now, CFIUS can review “other” investments that are non-controlling foreign investments.
- While there no list of “triggers” that CFIUS considers before reviewing a proposed transaction, certain situations make a review more likely such as acquisitions that would result in foreign control over U.S. TID businesses; lending arrangements that give the foreign party an interest in the profits of a U.S. business, or the foreign acquisition of a U.S. business that is involved in defense contracts with the U.S. government.
- The CFIUS review process could have one of three end results: (1) cleared transaction without mitigation measures; (2) cleared transaction with mitigation measures imposed; or (3) blocked transaction.
- Examples of mitigation measures include the divestiture of certain assets; restructuring the transaction to avoid foreign control of U.S. assets; or cancelling certain government contracts.
- Consider hiring a team of attorneys who can advise your company on how to proceed with a CFIUS review.
Experienced Defense Team in CFIUS Review
If you need advice regarding an impending CFIUS review of a proposed foreign investment in your company, contact our team of defense attorneys today.
In any transaction that involves foreign investment or foreign control of your business, it is strongly advisable that you secure the advice of competent counsel.
At Oberheiden, P.C., we can help you determine whether a CFIUS notice may be needed as well as identify any CFIUS-related risks pertaining to your proposed foreign investment.
We can also help you decide whether you should file a notice with CFIUS, how to structure your notice, and whether your transaction should be accompanied with any favorable mitigation measures.
Do not wait to get in touch with a qualified attorney today. Put Oberheiden, P.C. on your side to advise you on these legal issues involving a CFIUS review.
Pre-FIRRMA vs. Post-FIRRMA
On August 13, 2018, President Trump signed into law the NDAA 2019, which incorporated the Foreign Investment Risk Review Modernization Act (“FIRRMA”).
FIRRMA introduced significant reforms to the process used to investigate foreign direct investment into U.S. businesses. First and foremost, FIRRMA strengthens the Committee on Foreign Investment in the United States (“CFIUS”) by expanding its jurisdiction to review covered transactions and respond to national security threats.
Before the enactment of FIRRMA, CFIUS reviews were typically triggered by a proposed acquisition that would result in foreign control of a U.S. business and that would threaten U.S. national security interests. This was the prior scope of CFIUS’s jurisdiction and the extent of CFIUS’s covered transactions.
However, since FIRRMA, the scope and extent of CFIUS’s authority was greatly expanded. Now, CFIUS can review “other” investments that are considered non-controlling foreign investments—meaning that CFIUS is not limited to reviewing only those proposed transactions that would result in foreign control of a U.S. business.
After FIRRMA, CFIUS has the authority to review these “non-controlling” foreign investments in U.S. businesses that related to critical technologies, critical infrastructure, or sensitive personal data—the “TID” businesses.
This is important because non-controlling foreign investments in U.S. TID Businesses can also involve substantial harm to U.S. national security and result in the unwanted foreign access to non-public and material information in these sectors.
Additionally, prior to FIRRMA, CFIUS could not review certain real estate transactions that were exempt as “greenfield” investments such as those concerning undeveloped land.
Now, thanks to FIRRMA and the new regulations, CFIUS can review real estate transactions that are located by covered ports, within close distance to government facilities, within an extended range of specified military installments, real estate involving missile fields, or any part of specified operating areas within the U.S. territorial sea.
While there is not a defined list of factors regarding the triggers or warning signs that may prompt a CFIUS review, there are indeed situations that spark the watchful eye of CFUIS.
Below we present some of the most common situations:
- Certain loan agreements or defaults that result in a foreign lender receiving significant control of a U.S. business involving critical technology, critical infrastructure, or sensitive personal data sectors—TID Businesses.
- Acquisitions that would result in foreign control over U.S. TID businesses.
- Certain debt restructurings that confer equity or debt rights to the foreign lender’s interest or other lending arrangements where the foreign lender acquires additional rights upon conversion of the instrument.
- A lending arrangement that gives the foreign party an interest in the profits or other financial rights of a U.S. business.
- A foreign investment in or acquisition of a U.S. business that has worked or is working under a classified governmental contract with the United States.
- A foreign investment in a U.S. business that regularly deals with U.S. governmental agencies that possess U.S. trade or national security secrets.
- Foreign investment in a U.S. business that has facilities near government facilities, military bases, or other sensitive infrastructure.
- Foreign acquisition of a U.S. business that is intricately involved in defense contracts with the U.S. government.
- Foreign investment that is state-funded and presents national security threats (e.g., foreign direct investment from China or Chinese-controlled entities).
CFIUS has the authority—as enhanced under FIRRMA—to review a foreign investment in a U.S. business that may have a negative impact on U.S. national security interests.
The parties to the proposed transaction are not required to file a notice for CFIUS review. However, there is a consequence of not doing so.
If CFIUS determines that a notice should have been filed because the proposed transaction raises national security concerns or involves critical technology, critical infrastructure, or sensitive personal data industries, then CFIUS has the power to unwind or deny the approval of that transaction. CFIUS also has the power to clear the transaction only if the parties agree to mitigation measures.
Brief Overview of the CFIUS Review Process
CFIUS’s job is to review proposed or pending foreign investments for national security risks. Over the past several years, CFIUS has been especially busy reviewing foreign investments in U.S. businesses due to the rise in emerging economies such as China.
Foreign investments by China or Chinese-controlled entities have repeatedly demonstrated high national security risks that CFIUS heavily scrutinizes. This has led to enhanced CFIUS authority and jurisdiction from FIRRMA.
Therefore, the CFIUS review process can be expected to increase in depth, scope, and extent—especially with respect to Chinese-backed investments in U.S. TID businesses.
The CFIUS review process could have one of three end results: (1) cleared transaction without mitigation measures; (2) cleared transaction with mitigation measures imposed; or (3) blocked transaction.
Determining Whether to File a CFIUS Notice
The CFIUS review process can differ depending on whether the transaction involves a routine deal or whether it is a sensitive or complicated foreign investment that is proposed.
If the parties believe their proposed transaction is a “covered” investment, they must decide whether or not to notify CFIUS of the investment and seek approval.
If the parties agree not to file a notice, CFIUS may still determine that the transaction should be subject to review. In such cases, CFIUS will unilaterally initiate a review to determine if the foreign investment raises potential national security issues.
If the parties agree to file a CFIUS Notice, they submit a voluntary filing of a Notice, which typically includes details such as the parties to the proposed transaction (foreign investor and target U.S. business), details on the business activities, and a description of the proposed transaction. It may also include the disclosure of additional information such as passports and visa information, the parties’ addresses, and any connections to certain foreign governments.
CFIUS Review of the Proposed Foreign Investment for National Security Issues
Following their submission, CFIUS conducts its review of the draft notice. At this initial stage—which may take several weeks depending on the transaction—CFIUS may have questions and other follow-up procedures for the parties.
CFIUS then initiates its 30-day review to prepare its report on risk assessment and other national security concerns. CFIUS will either clear the investment or commence a 45-day investigation, which is basically a continuation of the initial review process.
45-Day Investigation and Post-Investigation Procedures
CFIUS sometimes extends its initial review in cases where it needs more time to investigate the proposed or pending foreign transaction.
At the end of this period, CFIUS makes a formal recommendation to the President of the United States regarding whether the proposed transaction should be cleared or blocked.
The President has an additional 15 days to approve or block the proposed transaction. The President could also impose conditions on the transaction in order for it to be approved—mitigation measures.
Thus, the results could be (1) a cleared transaction, (2) a blocked transaction, or (3) a transaction with mitigation measures imposed (approved with mitigation).
(1) Cleared Transactions: “No-Action Letter”
If CFIUS concludes that the proposed foreign investment poses no national security threats, it issues a “No-Action Letter” that approves the transaction for the parties.
This could also result from situations where CFIUS initiated the 45-day investigation and was unable to conclude or resolve any national security issues and the President approves the transaction without imposing mitigation measures.
It is important to note that transactions are more likely to be cleared where the parties negotiate and agree to appropriate mitigation procedures, discussed in greater detail below.
(2) Blocked Transactions
Either CFIUS or the President may reach the conclusion that the proposed or pending foreign investment presents unavoidable national security risks or threatens critical technology, critical infrastructure, or sensitive personal data industries.
In such cases, the transaction is blocked or forced to unwind.
However, in some cases, the parties are required to take certain steps to mitigate the identified risks in order to have the transaction approved. This can avoid having the transaction blocked.
(3) Transactions with Mitigation Measures Imposed
Mitigation measures may include additional controls on the transaction including enhanced monitoring procedures and compliance checks. These conditions are made an integral part of the foreign investment’s approval.
CFIUS generally imposes or requests these mitigation measures during the 45-day investigation.
Examples of mitigation measures include the following: divestiture of certain assets; appointment of certain compliance officers; restructuring the transaction to avoid foreign control of U.S. assets; or cancelling certain scheduled sensitive contracts or other government contracts with the United States.
Following the mitigation discussion, CFIUS will either block or approve the transaction. If CFIUS recommends that the transaction should be blocked, the recommendation is sent to the President, who then makes the decision as to whether the transaction with the mitigation should be approved.
If the transaction is approved, CFIUS issues a “No-Action Letter” along with the required mitigation measures. Otherwise, the transaction is blocked.
Additionally, the parties may also wish to withdraw the filing and begin anew; however, they would need the approval of CFIUS to withdraw.
Presidential Review of the Foreign Transaction
As mentioned, the President has an additional 15 days to approve or deny the proposed transaction.
Specifically, the President has the authority to suspend the covered transaction where, in his judgment, there is credible evidence that other U.S. laws are inadequate to protect U.S. national security and that the foreign person that would exercise control over the U.S. business threatens U.S. national security interests.
FIRRMA outlines a set of factors for CFIUS and the President to consider when determining whether the transaction poses an undue threat to U.S. national security such as whether the foreign transaction involves a country of special concern; whether the foreign person has a track record of maintaining compliance with U.S. law; whether the transaction threatens U.S. cybersecurity or could result in cyber attacks; or whether the proposed foreign transaction exposes sensitive U.S. data to foreign persons or to foreign governments.
Need Advice on the CFIUS Review Process?
We understand that it is hard to stay abreast of legislative reform, especially those that seek to impose greater scrutiny and regulations on proposed foreign investments into your business.
Nevertheless, these measures in FIRRMA such as the enhanced CFIUS authority are necessary for the protection of U.S. national security interests.
If you need advice regarding the CFIUS review process, you need the advice of a skilled attorney from Oberheiden, P.C..
Call us at 888-680-1745 or contact our office for a free consultation to help resolve these legal challenges.