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A CFIUS Primer: Important Considerations for Foreign Investors and U.S. Companies

China Law Update Matthew C. Vogel

What is CFIUS, and How Could CFIUS Affect My Transaction?

CFIUS is a committee of the U.S government made up of representatives from nine federal agencies and chaired by the Secretary of the Treasury. CFIUS is composed of representatives from agencies such as the Department of Defense, Department of State and Department of Homeland Security and has the authority to review certain transactions involving foreign buyers when the transactions potentially affect U.S. national security. Regulations enacted in December 2008 under the Foreign Investment & National Security Act of 2007 ("FINSA") have broadened the scope of transactions that fall under the authority of CFIUS. Covered transactions now include both acquisitions of control by foreign-controlled entities of U.S. businesses that are involved with products or services related to national security and those related to critical infrastructure of the United States. For purposes of FINSA, both "critical infrastructure" and "control" are broadly defined and determined on a case-by-case basis under the facts and circumstances of the particular transaction.

 

The Acquiring Party's Country Matters.

CFIUS is tasked with safeguarding U.S. national security and critical infrastructure, and it must withstand scrutiny from both the United States Congress and from the president. Therefore, it is not surprising that CFIUS may be far more willing to allow a transaction with investors based in an ally of the United
States - for example, Australia, the United Kingdom or Japan - than with some other countries. In particular, expect CFIUS to look especially closely at transactions when investors are based in China or in certain parts of the Middle East. Another important consideration for CFIUS is whether the acquiring investor is ultimately controlled by a foreign government.

 

Reasons for Filing - Voluntary Notice with No Filing Fee

Filing a notice for review by CFIUS is voluntary and does not involve payment of any filing fee. Unlike the antitrust-related Hart-Scott-Rodino premerger notification process, companies are not required to file a CFIUS notice merely because a transaction meets a predetermined size threshold. Instead, the need to file is determined purely by the potential effects of the transaction on U.S national security or critical infrastructure, which means that some very small transactions may merit a CFIUS filing while some very large transactions may not.

The benefit of filing to an acquiring party is two-fold. First, both the president of the United States and CFIUS itself have the authority to initiate a transaction review even if the reviewing parties have not filed a CFIUS notice. Voluntarily filing avoids the appearance of impropriety, if the federal government would be likely to investigate a transaction in any case. Second, if a filing is not made and CFIUS later determines that the transaction adversely affects national security or critical infrastructure, the transaction may be unwound even after the transaction has closed and entities or assets have been mixed together.

Filing a notice with CFIUS may also be necessary to reduce future risk. For example, particularly aggressive competitors may use political muscle to request that their Congress members urge CFIUS to open its own investigation following the signing or closing of the transaction if the acquisition would result or has resulted in increased competition by the acquired entity.

 

Consider Filing in Questionable Cases.

Determining whether to file requires significant forethought in conjunction with experienced legal counsel. Weighing the costs and benefits of filing when it is not certain whether a filing is clearly advisable can be particularly challenging. The ultimate determination of whether to file in these marginal situations will be largely dependent upon the acquiring firm's risk tolerance. Many companies that make frequent investments in the United States, or that hope to do so in the future, prefer to file a CFIUS notice in virtually all of these marginal cases. Doing so, these firms believe, signals to CFIUS that the firm is a good corporate citizen, thereby possibly securing goodwill with the Committee for a future transaction that the Committee might be reluctant to approve. It is in weighing considerations such as these that forthright discussion with legal counsel at the front end can make obtaining CFIUS approval and the closing of a deal substantially smoother.

 


Pre-Filing Coordination

A single CFIUS notice is filed jointly by all of the parties to the transaction. Parties filing a CFIUS notice typically coordinate the process in advance of making their joint filing and do so in conjunction with CFIUS. This coordination typically includes submitting a draft of the voluntary notice approximately one week before the filing is expected to be made. CFIUS uses this advanced coordination and the pre-filing draft submission, to gain an understanding of the business that is being acquired, and of the acquiring party, which allows CFIUS to begin to determine what national security or critical infrastructure risks may be implicated even before the official notice is filed with the Committee. The pre-filing also provides an opportunity for CFIUS staff to request modifications to the filing and can help avoid frustrating delays in the CFIUS review process.

 

Anticipate the Effects of the Review Period on Transaction Timing.

In contrast to HSR premerger antitrust filings, CFIUS does not grant "early termination" of the initial
30-day transaction-review waiting period. In addition, the initial waiting period will not begin until the Committee has determined that the notice substantially complies with the requirements of the CFIUS regulations, which often does not occur for several days after the day on which a notice is first filed. Furthermore, CFIUS has been known to interpret the requirements of the regulations strictly and will reject filings that do not precisely follow the regulations. As a result, it is essential that, once the parties have decided to submit a notice, the parties factor in the effects of each of these various delays, as well as the possibility of an additional 45-day waiting period, in working toward closing. This consideration is especially important where the target company is distressed and requires a capital infusion from the buyer on a short timeframe as well as for publicly traded companies whose market prices can be substantially harmed by any delays in the closing of a transaction. To be safe, submit your final notice
5-10 days before the date you desire the 30-day review period to begin, in case CFIUS requires changes to the notice before it will effectively start the 30-day period. Otherwise, you may miss a critical closing date.

 


Confidentiality of the Filing

Information that is filed with CFIUS, including information that is pre-filed, is afforded strict confidentiality protections, including protection from Freedom of Information Act requests. Disclosure occurring as part of an administrative or judicial action and disclosure to Congress is, however, permitted. Congress, when it is briefed on a particular CFIUS investigation, is required to adhere to the same confidentiality restrictions that are imposed upon CFIUS itself.

Joint Filing; Waiting Period(s)

Once a submission has been made and CFIUS has deemed the filing to be complete, the parties observe a 30-day waiting period while CFIUS determines whether to clear the transaction or to investigate it further. During this 30-day period, the Committee often contacts representatives of both the acquiring and acquired party to obtain additional information about them and about the transaction, and if such contact is made, the parties must re-certify that the information in the filing is accurate before the transaction can be cleared. The vast majority of transactions are cleared after the initial 30-day waiting period, when CFIUS certifies to Congress that there are no unresolved issues relating to national security or critical infrastructure arising because of the transaction.

However, if CFIUS opts to investigate the transaction further, the parties must observe an additional 45-day waiting period while CFIUS conducts a comprehensive investigation. Based on this analysis, the president must make a final, unreviewable determination within 15 days as to whether the transaction may close, and if so, on what terms it may close. In practice, it is exceedingly rare that the president would ever review a transaction - in the event that a transaction is not cleared during the initial waiting period, the Committee typically asks the parties to consent to a modified form of the transaction (e.g., one involving a partial divestiture of certain assets or businesses) rather than requesting presidential review.

 

Consider Remedies Early.

If CFIUS believes that a transaction creates a risk to U.S. national security, broadly conceived, then it will oppose the transaction outright or request that the parties take steps to alleviate the concerns CFIUS has. The two most common ways to alleviate any concerns is through partial divestiture of a facility or product line. If there is to be a divestiture, be sure to understand whether there is any technology or intellectual property used by the divested portion of the business that is also used in remaining areas of the business to be acquired by the acquiring entity. If so, a license from the remaining business to the new owners of the divested portion of the business to use that technology will be a necessary step to ensure that, while the acquired entity continues to own the technology, the new owners of the divested assets have the ability to operate a viable facility or product line going forward. It is impossible to predict with any certainty whether CFIUS will request any of these types of remedies in a particular situation; it is, however, possible to anticipate that CFIUS could intervene. It is therefore prudent to consider in advance what remedies might satisfy CFIUS while still preserving most of the business value of the transaction. Proactively considering remedies will allow the parties, and not CFIUS, to shape the discussion on any remedy that is ultimately imposed.

 


Information Required In Acquiring Foreign Entity Filing

The information required in a CFIUS filing is described in federal regulations. The CFIUS notice must include a comprehensive description of the substance of the transaction and the parties involved in the transaction, including the identities of any parent companies of the acquiring party, the anticipated closing date of the transaction, the approximate cash and any other consideration involved in the transaction, and the names of all financial institutions involved in the transaction, including advisors, underwriters or sources of financing. The acquiring foreign party is required to provide extensive background information about itself and its parents, as well as their respective executives, directors, owners and affiliates, along with information about the acquiring party's intentions with respect to the business that it is acquiring.

Information Required In Acquired U.S. Entity Filing

Information required to be included in the portion of the filing relating to the acquired U.S. entity includes a description of the business and product lines that are being acquired, estimated U.S. market share for those product lines, lists of written or informal agreements relating to products or services supplied to the U.S. government and a description of technology having potential military application, whether offensive or defensive.

Summary

In brief, deciding whether to file a CFIUS notice is based on the interaction of the following factors:

  • Home country of acquiring company.

  • Government control or ownership in acquiring company.
  • Percentage of or actual "control" in a U.S. company.
  • Type and potential uses of the U.S. company's technology and products.
  • History of U.S. government agreements or relationships by U.S. company.

CFIUS is an important consideration for any purchaser or seller in the U.S. and should be considered early during the potential transaction to ensure compliance and an on-time closing.

For more information, please contact Matt Vogel at 414-277-5817 / matthew.vogel@quarles.com or your Quarles & Brady attorney.