The Committee on Foreign Investment in the United States (“CFIUS”) screens significant foreign investments in U.S. businesses to assess their impact on U.S. national security. Investments deemed a threat may be blocked or unwound. Last year, the Department of the Treasury issued regulations making clear that any otherwise covered transaction “that arises pursuant to a bankruptcy proceeding or other form of default on debt is a covered transaction” – i.e., a transaction subject to potential review.1
For these reasons, the possibility of CFIUS review must be assessed when U.S. businesses and their lenders consider bankruptcy, foreclosure, and the conversion of debt instruments to equity. In fact, even non-equity workouts can come under review if they result in a U.S. business coming under foreign “control,” a term that CFIUS defines broadly. Although most transactions pass muster, it may be necessary to mitigate perceived threats to national security in order to clear review, including divestment of sensitive assets and changes in corporate governance.
To be clear, not every bankruptcy involving a U.S. business is a candidate for CFIUS review, foreign lenders notwithstanding. There must be a nexus to U.S. national security. Nevertheless, given the economic impact of the COVID-19 pandemic, many expect the wave of bankruptcies to continue, and a number of these filings will present CFIUS issues. Changes in law over the past several decades have broadened CFIUS jurisdiction to include businesses outside the defense sector, including not only critical infrastructure (e.g., transportation, food, and communications) but also firms with access to sensitive personal data (e.g., insurance, finance, hotels) and firms engaged in the production of critical technology. Even an asset portfolio of an otherwise innocuous business can trigger review if it includes (for example) properties in close proximity to sensitive facilities.
CFIUS jurisdiction is not generally created merely because a foreign party provides financing to a U.S. business.2 CFIUS jurisdiction may arise, however, in the event of default or other event (actual or imminent) which presents the possibility that a foreign person or persons may take control of a business or an asset that could affect U.S. national security.3 Indeed, if the business has operations involving certain classes of critical technology, infrastructure, or personal data, the foreign party need not even take control; the acquisition of any amount of equity, however small, if paired with certain rights, can give CFIUS authority to screen the transaction.
Note: Although CFIUS filings are generally voluntary, some are mandatory. Cleared transactions get “safe harbor” protections – but transactions that are not reviewed and cleared are subject to potential review forever. Post-closing reviews are not at all unknown, and CFIUS has recently created a task force to look for “non-notified” transactions. (A short-form “declarations” process put in place a few years back allows for expedited reviews in appropriate cases.)
All of this argues that foreign lenders and their partners – as well as U.S. businesses looking for white knights – should assess the likelihood of CFIUS review in the event of default – and consider strategic responses. In such cases, the lender’s ability to take possession of the defaulted U.S. business could be affected by the need to file with CFIUS. Because CFIUS jurisdiction is called into play by foreign control – or (in some cases) by foreign control rights or access even in the absence of outright control – some lenders have required that the assets of sensitive U.S. businesses be held by U.S.-domiciled designees in the event of default. Depending on the arrangement, such protections can help to mitigate national security concerns.
1 31 CFR § 800.213.
2 CFIUS jurisdiction may be triggered, however, if a loan or similar financing arrangement grants the foreign lender an interest in the profits of the U.S. business, the right to appoint board members, or other comparable financial or governance rights that are characteristic of an equity investment, but not typical of a loan.
3 1 CFR § 800.306(a)(1).