With the complexities inherent in many cross-border transactions – from cultural differences to the growing number of competition authorities demanding paperwork – the last thing one may want to think about is whether to submit a voluntary report of a transaction to the Committee on Foreign Investment in the United States (CFIUS). The recent decision to block a transaction on CFIUS grounds, however, demonstrates that CFIUS should not be overlooked. So, deciding whether to report to CFIUS is one more issue that should be considered when doing transactions.
CFIUS reviews certain mergers or acquisitions that could result in foreign control of entities engaged in interstate commerce in the United States, and determines, or recommends to the president, whether to disallow or block transactions when there is credible evidence that they threaten national security. (This process was explained in detail in a prior post.)
The CFIUS process begins with a voluntary filing seeking review of a proposed (or consummated) transaction that is covered by CFIUS regulations. Unlike the Hart-Scott-Rodino process, there is no filing threshold or other definitive criteria that mandate notice to the CFIUS. Rather, the parties to a transaction determine themselves whether and when to provide a notice. Depending on the nature of the transaction, deciding whether to submit notice to CFIUS can raise a number of strategic considerations that can impact the outcome of the transaction at issue.
A threshold consideration, of course, is determining whether the transaction at issue is within CFIUS’s jurisdiction. CFIUS has jurisdiction to review “covered transactions,” which are mergers, acquisitions, or takeovers by or with foreign persons or entities that could result in the foreign control of any U.S. entities. Entities are considered to be “U.S.” if they engage in interstate commerce in the United States Similarly, persons are considered “foreign” if they are not U.S. nationals, and entities are considered “foreign” if they are owned or controlled by foreign persons, governments, or entities. These peculiar definitions allow for some entities to be considered both U.S. and foreign, such as foreign entities that own subsidiaries that do business in the U.S.
Another threshold consideration is whether there might be national security implications – since CFIUS’s original mandate was limited to transactions that threaten to impair U.S. national security. What constitutes “national security” is not identified in CFIUS legislation, although it does provide a broad list of “factors” to be considered, including:
- Domestic production needed for projected national defense requirements
- Ability of domestic industries to meet national defense requirements
- control of domestic industries and commercial activity by foreign citizens as it affects U.S. ability to meet requirements of national security
- Potential effects on sales of military goods, equipment, or technology to any country
- Potential effects on U.S. international technological leadership in areas affecting U.S. national security
- Potential national security-related effects on U.S. critical infrastructure, including major energy assets
- Potential national security-related effects on U.S. critical technologies
- Whether the covered transaction is a foreign government-controlled transaction
- Current assessment of the adherence of the subject country to nonproliferation control regimes, the relationship of such country with the U.S., and the potential for transshipment or diversion of technologies with military applications
- Long-term projection of U.S. requirements for sources of energy and other critical resources and material
- Any other factors the president or CFIUS may determine to be appropriate
In practice, CFIUS holds a very expansive view of what constitutes a national security threat. This is illustrated by CFIUS’s recent review of the sale of New York’s Waldorf Astoria hotel to a Chinese company, a transaction that presumably reflects CFIUS’s view that even government officials staying at a foreign-owned hotel can constitute a national security risk.
CFIUS’s mandate was expanded in 2007 with the Foreign Investment and National Security Act of 2007. This legislation increased CFIUS jurisdiction to include transactions that involve “critical infrastructure,” which is vaguely defined to include “systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems or assets would have a debilitating impact on national security.” Investigations since 2007 reflect CFIUS’s view that critical infrastructure is broadly interpreted and can, for example, include bridges and ports, oil and gas pipelines and refineries, computer devices and software, and weapons technology.
Assuming a transaction might be “covered” and raises potential national security (or critical infrastructure) concerns, there are a number of additional issues to be considered in deciding whether to notify CFIUS of the transaction. One consideration is whether any aspect of the transaction appears likely to raise concern for CFIUS, including:
- Does transaction involve a type of foreign purchaser that often is scrutinized by CFIUS, such as Chinese entities or foreign entities with close ties to foreign governments?
- Does transaction involve products that may raise particular concern, such as pharmaceuticals, weapons, or other defense products?
- Does transaction involve contracts with security-related U.S. agencies, such as the Departments of Justice, Defense, or Homeland Security?
- Does transaction involve facilities or personnel with potentially sensitive information, such as security clearances or classified work?
- Does transaction increase ability of foreign nationals or entities to obtain sensitive U.S. government information or interfere with U.S. government activities?
- Does transaction involve assets that may be considered critical infrastructure, such as energy transmission grids or Internet infrastructure?
Another consideration is whether a voluntary report appears likely to improve the parties’ overall position vis-à-vis CFIUS. These considerations generally include:
- Does it appear the parties’ position could be improved by opening a dialog with CFIUS staff?
- Do the parties expect to be able to rebut CFIUS’s anticipated issues, including with evidence or data that supports the parties’ positions?
- Are the parties willing to incur any delays and expenses that might result from reporting to CFIUS?
- Are the parties willing to discuss and potentially agree to modify the transaction in response to any CFIUS issues?
- Could reporting (or not reporting) create public relations or government contracting issues for the parties?
- Is it likely that competitors or rivals will raise issues with the transaction, which could be addressed in the process of reporting to CFIUS?
- Would the transaction be difficult to “unwind” post-consummation – a risk the parties could avoid by seeking the “safe harbor” of reporting?
Given the plethora of issues involved in deciding whether to report a transaction to CFIUS, this is not a decision that should be given short shrift. A careful weighing of these issues, and involvement of counsel early in the process, should be on the to-do list for all cross-border transactions.