The U.S. continues to attract foreign investment at an unparalleled rate (to the tune of more than $225 billion in 2010). U.S. entities that find themselves across the bargaining table from foreign investors should consider the potential impact that review by the Committee on Foreign Investment in the United States (CFIUS) may have on their prospective transaction. Failure to understand CFIUS's mission and process can threaten a transaction and deprive your company of a valuable injection of foreign capital.
CFIUS, which is composed of nine federal agencies (and several agencies participating as observers and ex officio members) reviews transactions in which a foreign entity obtains control of a U.S. business to determine whether the transactions pose a threat to U.S. national security. If they do, CFIUS may impose conditions on the parties to mitigate those threats or, if the threats cannot effectively be mitigated, recommend to the president that he prohibit the transaction.
On average, CFIUS reviews approximately 100 transactions each year, but a company should consider CFIUS’s applicability and effect any time it is a party to a transaction in which a foreign entity acquires a significant share of a U.S. business.
1. Although CFIUS is vested with the authority to initiate its own review of transactions, in the vast majority of cases the parties to the transaction initiate review by filing a voluntary notice. Why would any party do that? Three reasons: Once a transaction has been reviewed by CFIUS, it enters a statutory “safe harbor” in which it is sheltered from further review. If, on the other hand, the parties proceed with a transaction without CFIUS review, they run the continuing risk that the government will unwind the transaction and force the foreign entity to divest its ownership of the U.S. business.
If that seems unlikely, consider that two years after encouraging a Chinese investor to withdraw its bid for a Nevada mine near a sensitive military base, reports have recently surfaced that CFIUS has initiated an investigation of the 2010 purchase by a Hong Kong-based company of another mine near the base which many expect will result in forced divestment.
2. CFIUS approves roughly 90 percent of the transactions it reviews, and approval, which requires CFIUS to notify Congress that there are no unresolved national security concerns with respect to a transaction, may insulate against poor publicity and other transaction-threatening pressures.
3. The CFIUS process is designed to identify and mitigate threats to U.S. national security. U.S. businesses should feel compelled by a sense of corporate responsibility and citizenship to participate in the process.
So there are good reasons to consider filing a voluntary notice with CFIUS. However, the CFIUS process is often referred to as a “black box” because deliberations are not public and are based, in part, on a classified intelligence assessment.
Here are steps corporate counsel can take to protect their company against undue delay or an adverse CFIUS determination.
- Seek expert advice early. An expert CFIUS attorney will often be able to advise your company that a contemplated transaction is not subject to CFIUS because it does not involve a foreign entity, does not result in control of a U.S. business or simply does not raise any national security concerns. If review is advisable, an expert can help you prepare a complete and thorough notice and navigate the CFIUS process.
- Coordinate with other parties to the transaction. The CFIUS process is most efficient when all parties to a transaction join in the notice and cooperate with CFIUS.
- Take advantage of informal consultation. Companies frequently engage with individual CFIUS member agencies that may have a particular interest in a transaction. CFIUS guidance issued by the government also encourages companies to consult the CFIUS staff informally prior to submitting a notice and even to submit a draft notice for informal review. By making good use of these opportunities for informal consultation, companies can increase their odds of receiving a timely approval from CFIUS.
Addressing the CFIUS process early and openly will protect not only your company, but also U.S. national security.