CFIUS 101: A Primer on the Committee on Foreign Investment in the United States
What is CFIUS?
CFIUS is the Committee on Foreign Investment in the United States. It is a federal regulatory panel composed of the heads of various federal agencies, chaired by the Secretary of the Treasury. CFIUS reviews investments by foreign persons or companies into U.S. businesses and determines the impact of those transactions on U.S. national security. Where a transaction could threaten to impair the U.S. national security, CFIUS may place conditions on the transaction prior to approving it, or, if the threat cannot be mitigated, CFIUS refers the transaction to the President of the United States to block the transaction.
The following federal bodies are voting members of CFIUS:
- Department of the Treasury (serves as the chair of CFIUS and formal point of contact during the process)
- Department of Justice
- Department of Homeland Security
- Department of Commerce
- Department of Defense
- Department of State
- Department of Energy
- Office of the U.S. Trade Representative
- Office of Science & Technology Policy
The following offices also observe and/or participate in the CFIUS process:
- Office of Management & Budget
- Council of Economic Advisors
- National Security Council
- National Economic Council
- Homeland Security Council
What types of transactions fall under CFIUS jurisdiction?
CFIUS reviews acquisitions of “control” of U.S. businesses by foreign persons or companies. The CFIUS standard for control is very low, however, and not subject to a bright-line rule. Acquisitions of 10% of the voting equity of a company have been found to constitute “control” for CFIUS purposes. A general guideline is that any investment under 10%, absent other factors that may indicate “control” (such as special governance rights, a significant commercial relationship that may afford “informal” influence by the investor, or other factors), is likely not subject to CFIUS jurisdiction. The CFIUS regulations explicitly exempt any investment under 10% that is held for solely for the purpose of passive investment. Conversely, a 10% voting stake plus any special governance rights (such as a board seat or a board observer seat), or a 15% or greater voting stake irrespective of governance rights, likely does trigger CFIUS jurisdiction.
CFIUS generally does not have jurisdiction over debt investments or commercial arrangements. Consequently, CFIUS approval of convertible debt investments is often not sought at the time of the initial investment, but rather prior to conversion if the post-conversion position would trip the CFIUS jurisdiction for equity investments described above. If the timing of conversion is not within the investor’s control, then CFIUS approval should be sought at the time of the initial investment.
It should be noted that CFIUS has explicit authority to compel filings where transactions were structured specifically to avoid a CFIUS filing. “Structuring around” CFIUS is not advisable.
The scope of CFIUS jurisdiction may soon change. There is bipartisan support for a bill, the Foreign Investment Risk Review Modernization Act (FIRRMA), that would expand CFIUS jurisdiction to address perceived holes in current CFIUS authority. Most observers anticipate that significant changes to the legislation will occur, possibly in 2018.
What industries does CFIUS apply to?
While there is no single industry or set of industries that CFIUS applies to, companies with any of the following factors should pay careful attention to CFIUS issues when considering investment from abroad:
- operation within the U.S. “critical infrastructure” (e.g., energy, financial, transportation, and telecommunications sectors, among many others);
- possession or use of any export-controlled technologies in its operations;
- access to consumer data such as personally identifiable information, credit information, protected health information or other sensitive data;
- provision of service or goods, directly or indirectly, to the U.S. government;
- possession, development or contribution to products, technology or projects of strategic importance to the U.S. national security; or
- locations near U.S. government installations.
These are factors that indicate generally that CFIUS is an issue to consider in a transaction, but transaction specific factors always must be considered as well. Additionally, the identity of the buyer can impact the likely need to file.
What does the CFIUS process entail?
The CFIUS process involves a post-signing, pre-closing review, similar to other regulatory reviews such as antitrust, federal communications commission or state public utility regulatory reviews. It is possible to file a transaction prior to signing definitive documents, but CFIUS rejects filings for transactions that it deems speculative.
The process is typically initiated voluntarily by the parties to a transaction by their filing a draft notice with CFIUS (commonly referred to as a “joint voluntary notice” or “JVN”). The draft JVN contains responses to the required disclosures set forth in the CFIUS regulations at 31 C.F.R. Part 800.402, including a high-level description of the transaction, the business activities and operations of the parties, and ownership structures. Treasury then reviews the JVN for completeness, and the parties work with Treasury to resolve any outstanding issues. At the end of this stage, the parties submit the formal JVN. Once CFIUS accepts the notice, the review lasts 30 calendar days. During the review, the Office of the Director of National Intelligence develops a “risk-based assessment” of the transaction. The RBA describes the threat posed by the acquirer, the risks attributable to the U.S. business and the consequences to U.S. national security of malicious use of or disruption to the U.S. business. The RBA is classified and is not made available to the parties.
If the CFIUS agencies do not identify issues of concern, Treasury will issue a letter, typically on Day 30 of the review, stating that there are “no unresolved national security concerns” with respect to the transaction, and that therefore CFIUS is concluding action.
If on Day 30 the CFIUS agencies have not identified any issues, or need more time to conduct diligence, the agencies will send the review into a second-stage investigation that lasts an additional 45 days. Approximately half of all cases proceed to investigation, and while timing to close the transaction is impacted, investigation does not necessarily signal a problem. To the parties, the process will continue as during the review stage—when agencies have follow-up inquiries, Treasury will send written inquiries.
At the end of the investigation, CFIUS either clears the transaction (by sending a “no unresolved national security concerns” letter) or refers it to the President for a final 15-day review. Presidential reviews are exceedingly rare, and every case that has been referred to the President has either been blocked or abandoned. No case has been approved by the President.
How long does the CFIUS process take?
The formal process typically takes either 30 or 75 days, depending on whether an investigation is required. However, the amount of time after signing that elapses before the clock starts can vary significantly among transactions. It is common for the full process to take 4 to 6 months,.
What is mitigation?
Mitigation refers to any conditions CFIUS may require as a precondition to clearing the transaction. Where CFIUS has identified a threat to U.S. national security, it must mitigate that threat through an agreement with the transaction parties (typically either a Letter of Assurance or a National Security Agreement). Occasionally, parties can informally commit to take certain steps to avoid a formal agreement with CFIUS agencies.
The nature of mitigation varies extensively depending on the transaction. Components of mitigation may include limitations on the buyer’s ability to access portions of the target’s business, information, data, technology or products; governance restrictions; product delivery requirements for U.S. government customers; access rights for U.S. government agencies and periodic reporting/meeting requirements. In rare instances, CFIUS requires that the purchaser place the target into a voting trust or proxy structure, to be managed entirely by independent third-party directors, rendering the business inaccessible to the purchaser. Mitigation can significantly impact the ability of the purchaser to realize the expected economic benefits of a transaction.
If the process is voluntary, what are the benefits in filing with CFIUS?
While transaction parties are typically reluctant to introduce an additional regulatory dimension to a transaction, there are several compelling reasons why proactively engaging with CFIUS and voluntarily filing a notice can be in the parties’ interest.
- Manage Substantive Risk. CFIUS jurisdiction to condition or unwind a transaction extends in perpetuity. If the parties close a transaction without filing with CFIUS, and after closing CFIUS learns of the transaction, CFIUS has authority to take adverse action post-closing. Conversely, by filing, the parties avail themselves of the “safe harbor” provided in the law, which prevents any further action by CFIUS after it has reviewed and approved a transaction.
- Manage Timing Risks. By proactively filing with CFIUS, parties exert maximum control over the timeframe of their review. A number of instances have occurred where parties signed a transaction not intending to file with CFIUS, and were informally notified by CFIUS that they should file. The inter-agency process required to provide such notice (or formally compel a notice) is typically very slow, meaning notice from CFIUS can occur just as parties are finalizing their plans to close their transaction. On the other hand, by planning to make a filing and, by filing forcing CFIUS to act on the filing, the parties are accelerating the timeframe.
- Maintain Relationships with the U.S. Government. For a target that has relationships (regulatory or commercial) with the U.S. government, protecting those relationships should be a priority. Filing with CFIUS demonstrates good faith and a desire to be a reliable partner with the U.S. government, and filing assures customers that any risks associated with the investor will be addressed. Similarly, overseas companies wishing to do business in the U.S., or potentially acquire additional U.S. businesses, should prioritize their reputation for openness and transparency with the U.S. regulatory regime. Failure to do so can make future business plans more difficult to carry out.
- Establish and Maintain a Relationship with CFIUS. While the regulations do not specifically address presumptions or evidentiary burdens, it is well known among CFIUS practitioners that proactive engagement with CFIUS yields better results than engagement only after request or compulsion by CFIUS. By proactively filing, the parties begin the process from a position of transparency, which engenders trust with CFIUS. Many of the decisions CFIUS makes depend upon their ability to rely on companies as trustworthy parties in the process.
- Public and Customer Relations. Some transactions garner attention from trade and popular press. Competitors may seize on a foreign investment as an opportunity to pursue a company’s customers. Customers themselves may have questions about operational continuity and security in light of overseas investment. Proactively filing with CFIUS is a sturdy pillar to a public and customer relations strategy.
- General Posture of Transparency. In the global marketplace, a transparent approach to regulators helps to guard against unintended consequences. CFIUS is one of the preeminent national security review panels in the world. Review and clearance by CFIUS helps to assure other regulatory bodies, as well as future customers and targets, that a company and its parent entities are sophisticated, transparent participants in the global economy.
My transaction simply cannot be delayed for a CFIUS review. What should we do?
Proactively filing with CFIUS is the ideal scenario to manage CFIUS-related risk. There are, however, ways to manage the risk of adverse CFIUS action within the timing constraints of any particular transaction. These are highly case-specific considerations. If you find yourself in such a situation, contact experienced CFIUS counsel. As described elsewhere on www.kabealolaw.com, this firm will either assist you with your case or help you find top caliber CFIUS counsel at another firm.
How much is the filing fee?
There is currently no filing fee. However, any change to CFIUS authorizing legislation will likely require a filing fee to help CFIUS increase its staff and subject matter expert capacities. Under the current no-fee system, bandwidth at CFIUS is under constant strain. Under FIRRMA, the current proposal for a filing fee is 1% of transaction value, capped at $300,000.