U.S. Senator Debbie Stabenow’s recent and much publicized unveiling of legislation to expand the CFIUS review process of transactions likely caused businesspeople everywhere to ask: “What’s the CFIUS?”
In short, the Committee on Foreign Investment in the United States (“CFIUS”), comprised of high-level Washington bureaucrats, reviews certain domestic transactions involving foreign parties and determines or recommends whether the U.S. President should disallow transactions. Over the last five years, the CFIUS has reviewed more than 500 transactions and investigated almost 170 – and the proportion of investigations has sharply increased in recent years. Senator Stabenow’s legislation (and similar legislation recently introduced in the U.S. House) would expand the scope of review by the CFIUS.
Given the increasing relevance of the CFIUS, even before the recent legislation, over the next weeks we will be posting a series of articles that summarize: (1) the organization of the CFIUS and its review process; (2) recent CFIUS investigations, trends, and court decisions; and (3) the potential effect of the recent legislation on transactions going forward.
What is the CFIUS?
The CFIUS was established by a combination of statutes, regulations, and executive orders between 1975 and 2008. Collectively, they authorize the President to review mergers, acquisitions, and takeovers by or with any foreign person or entity which could result in foreign control of any entity engaged in interstate commerce in the United States, determine the effects of such transactions on the national security of the United States, and elect to block transactions when there is credible evidence that leads the President to believe the foreign interest exercising control might take action that threatens to impair the national security.
The CFIUS is comprised of officials from a wide swath of the federal government. The CFIUS statute requires that the Secretary of the Treasury serve as chairperson and further appoints the Attorney General and the Secretaries of Homeland Security, Commerce, Defense, State, and Energy as CFIUS members. Executive orders added the U.S. Trade Representative and the Director of the Office of Science and Technology Policy as CFIUS members, the Secretary of Labor and the Director of National Intelligence as non-voting members, plus any additional members appointed by the President. The Director of the Office of Investment Security in the Department of the Treasury is charged with the unenviable task of coordinating the many CFIUS members.
What is the CFIUS review process?
The President, acting through the CFIUS, is authorized to review “covered transactions,” which are defined as ‘‘any transaction… by or with any foreign person, which could result in control of a U.S. business by a foreign person.” The CFIUS regulations describe some of these terms in a general sense. “U.S. business” refers to parties actually engaged in interstate commerce, does not include start-ups or ‘‘greenfield’’ investments, and includes only a very limited type of long-term leases. “Foreign person” includes: (1) any entity over which control is exercised or exercisable by a foreign national, foreign government, or foreign entity or (2) any entity “organized under the laws of a foreign state if either its principal place of business is outside the United States or its equity securities are primarily traded on one or more foreign exchanges.” “Control” refers to any arrangement “to determine, direct, or decide important matters affecting an entity.”
The CFIUS process begins with a voluntary filing seeking review of a proposed or consummated covered transaction, or the CFIUS itself initiating a review. Unlike the Hart-Scott-Rodino process, there is no filing threshold or other definitive criteria that mandates a notice to the CFIUS. Rather, the parties to a transaction determine themselves whether and when to provide a notice based on the nature of the transaction, which often consists of a careful balancing of the voluntary notice risks (e.g., notice costs, transaction delays, and potential concessions) against the benefits (e.g., increase certainty and limit potential of “unscrambling the egg” post-closing).
While it is common for parties to have informal communications with CFIUS members prior to submitting a notice of a transaction, the formal CFIUS process typically begins when parties to a proposed or pending transaction jointly file a voluntary notice with CFIUS containing information required by 31 C.F.R. § 800.402. These regulations require disclosure of wide range of business and transaction information, including disclosure of: (1) transaction details; (2) identities, nationalities, and places of business of parties subject to the transaction; (3) parents, owners, and shareholders of certain foreign parties subject to the transaction; (4) expected transaction completion date; (5) identities of financial institutions involved; (6) the assets and business activities of the U.S. business subject to the transaction; (7) any contracts with the U.S. government; (8) any contract involving classified information, technology, or data; (8) any products or services supplied directly or indirectly to the U.S. Government; (9) any involvement of foreign governments in transaction; and (10) any cyber security plans.
After the CFIUS receives a complete notice for all parties to a covered transaction, a statutory 30-day review period commences. During the review period, the CFIUS members examine the transaction in order to identify and address any national security concerns that arise as a result of the transaction. During the review, the parties may request a meeting with CFIUS staff, and the CFIUS may request additional information, identify concerns, and may even propose means to address them. At the end of the 30-day review, the CFIUS will clear the noticed transaction or initiate a more in-depth 45-day investigation.
A decision by the CFIUS to conduct a 45-day investigation usually results in the submission of additional information and documents (like a “second request” for HSR). At the conclusion of the 45-day investigation, if the CFIUS finds that the covered transaction does not present any national security risks or that other provisions of law provide, address the risks, the CFIUS will advise the parties in writing that its review has concluded. However, if the CFIUS finds that a covered transaction presents national security risks and that other provisions of law do not provide adequate authority to address the risks, the CFIUS may enter into an agreement with the parties, impose conditions on covered transaction to mitigate the risks, or refer the case to the President for consideration and action. The President, of course, may decide to clear or block any covered transaction submitted to the CFIUS. And, the CFIUS statute provides that the President’s decision “shall not be subject to judicial review.”
At the conclusion of the review, if the CFIUS does not take action, or the President has announced a decision not to exercise the authority to block the covered transaction, the parties receive a “safe harbor,” which means the President cannot order divestment for a covered transaction that was submitted for review.
While the statutes, regulations, and executive orders provide a general procedure for the review of covered transactions by the CFIUS, there remains much uncertainty—which is exacerbated by the overall lack of transparency in the CFUIS decision making process and the apparent inability to challenge decisions. Recent CFIUS investigations and court decisions, reviewed in the next installment, provide some helpful guidance.