Over the past two years, the Committee on Foreign Investment in the United States (CFIUS) has applied increased scrutiny to foreign investments in U.S. businesses. CFIUS reviews the national security implications of such transactions and, where necessary, places conditions on the sale to mitigate risks to U.S. national security. Where the risks cannot be mitigated, the president blocks the transaction.
Certain factors, within and outside of CFIUS, have colored the environment in which its reviews take place. In its annual report released in December 2013, CFIUS stated that, “Based on its assessment of 2012 activity, the U.S. Intelligence Community (USIC) judges it unlikely that there is a coordinated strategy among one or more foreign governments or companies to acquire United States companies involved in research, development, or production of critical technologies for which the United States is a leading producer.” This was a notable departure from its more aggressive stance a year earlier, when CFIUS stated that the USIC “judge[d] with moderate confidence” that such a strategy indeed existed.
Despite this more moderate position, the release of sensitive information relating to National Security Agency information collection highlighted the ease with which personnel with access to sensitive information can capture and disseminate it, underscoring the sensitivity of all classified U.S. government information. This sensitivity is most pronounced in reviews of transactions in the technology and telecom sectors, but filters through all reviews where the U.S. business has access to classified information.
Separately, the location of U.S. business assets remains a primary concern within CFIUS. In June 2013, CFIUS required the divestment by Chinese-owned Procon of its approximately 60 percent ownership interest in Lincoln Mining Corporation. This was a notable announcement that reminded many of President Obama’s widely reported September 2012 block of the Chinese-owned Ralls Corp. purchase of wind generation facilities abutting restricted U.S. Naval airspace. Reports indicate that, as in the Ralls transaction, U.S. government sensitivity stemmed from the location of certain of Lincoln’s projects. Also as in the Ralls transaction, the Procon-Lincoln deal had not been filed with CFIUS until after the committee became aware of the transaction and exercised its authority to compel a filing. The prolonged review of Canadian oil and gas company Nexen Inc.’s sale to China’s CNOOC in 2013 further highlighted the sensitivity relating to project locations, as Nexen sites in the Gulf of Mexico created U.S. government concern in that sale.
Finally, the political scrutiny surrounding the sale of Virginia-based Smithfield Foods, Inc., the world’s leading pork producer, to China’s Shuanghui demonstrated the necessity for a forward-leaning approach to public and government relations in high-profile transactions, even where the U.S. business may not seem particularly sensitive.
Taken together, these factors illustrate the need for thorough due diligence and a proactive approach to the CFIUS process in the early stages of a transaction.
Trends in the CFIUS Review Process
Based on a review of the CFIUS 2013 annual report (which discusses transactions through the end of calendar year 2012), as well as our experience working closely with CFIUS, we believe the following trends will factor most heavily into reviews in 2014.
CFIUS continues to investigate a high number of transactions and has remained aggressive in demanding filings post-closing. While the CFIUS process typically is initiated when the parties voluntarily notify the committee of their transaction, CFIUS has the power to compel filings when one is not made voluntarily. The spectrum of industries CFIUS reviews, from mobile app providers to pork producers, underscores its broad mandate and the numerous ways U.S. businesses may affect national security. Companies involved in cross-border transactions will need to consider whether a CFIUS filing could prove prudent.
Federal government disruptions have significantly hampered national security reviews. During the government shutdown in 2013, CFIUS was forced to stop accepting new notices, and pending notices were moved automatically into the additional 45-day investigation period once operations recommenced. We expect the backlog of cases created by the shutdown to continue to weigh on CFIUS in the early part of 2014. Additionally, operations of the Defense Security Service, which separately reviews transactions when the U.S. business has access to classified U.S. government information, were disrupted significantly during sequestration and the shutdown.
CFIUS required mitigation agreements in more transactions. CFIUS enters into mitigation agreements with parties to transactions to address national security concerns identified during the review process. Mitigation agreements generally govern the foreign purchaser’s access to sensitive information of the U.S. business and can affect operability and expected transaction synergies. The 2013 annual report indicates that in 2012, eight mitigation agreements were entered into among the parties to a transaction and the U.S. government, while an additional 10 transactions were abandoned by the parties, which may indicate the parties’ reluctance to accept mitigation terms required by CFIUS.
The length of CFIUS internal deliberations continued to increase. The CFIUS regulations require that mitigation agreements be approved unanimously by CFIUS member agencies. Because those agreements often reflect the concerns of one particular member agency but not others, the unanimity requirement has resulted in more time being spent in internal deliberations. The 2013 annual report indicates that a record 22 CFIUS notices were withdrawn voluntarily, more than a 400 percent year-over-year increase. Of the 22 transactions withdrawn in 2012, 12 were later re-filed with CFIUS, indicating that the withdrawals were made to provide CFIUS additional time to conduct its analysis (the other 10, as noted above, were abandoned altogether). We have found that CFIUS attempts to be as flexible as possible in allowing parties to file for review prior to execution of definitive transaction documents to expedite the process, while still adhering to its statutory timeframes once the review commences. Companies facing timing pressure should consider involving CFIUS counsel as early as possible.
Companies based in U.S. ally nations continued to file a significant number of transactions with CFIUS. In 2012, CFIUS reviewed more acquisitions by Chinese acquirers than by any other country. This was the first time Chinese acquisitions composed the greatest number of transactions reviewed by CFIUS, and we believe that data for 2013 will show that this trend continued. Nevertheless, a significant plurality of transactions filed with CFIUS involve foreign purchasers based in countries considered to be allies of the U.S. This likely illustrates a greater willingness by such nations’ companies to invest in U.S. businesses, but also highlights that CFIUS reviews transactions involving sensitive U.S. businesses regardless of the identity of the purchaser, and that even “low-risk” purchasers are wise to file for review.
Despite these trends and ongoing deal scrutiny generally, CFIUS continues to approve the overwhelming majority of transactions it reviews, including those in sensitive sectors. Notable examples include the successful sale of the assets of A123 Systems, Inc. to China’s Wanxiang Group Companies, as well as the completion of the Sprint/SoftBank transaction. As companies evaluate M&A opportunities in 2014, careful advanced planning and continued attention to issues raised by the U.S. government during a CFIUS review will remain vital to a successful transaction.
* This article appeared in the firm's sixth annual edition of Insights on January 16, 2014.