CFIUS effects of a foreign investment transaction

Published: Mar 21, 2022
By: Michael P. Rose; Michael Rosenberg
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The Committee on Foreign Investment in the United States ("CFIUS"), formed in 1975, focuses entirely on U.S. national security. The committee consists of nine member agencies and the Office of the President. The nine members are the Departments of the Treasury (Chair), State, Commerce, Defense, Energy, Homeland Security, Justice, the Office of the U.S. Trade Representative, and the Office of Science and Technology.

CFIUS examines the effects of a foreign investment transaction and assesses their impact on the national security of the U.S. Terrorism, economic security, environmental security, food security and cybersecurity are all considerations under the national security umbrella.

The number of CFIUS reviews continues to remain very high, as the number of transactions notified to CFIUS began increasing significantly in 2020, and more investors started notifying CFIUS via declarations. Declarations are for an abbreviated or light filing process that could result in shorter review timelines (30-day assessment period). Although not always advisable, the option of declarations often proves useful for investors, especially for transactions that do not raise national security concerns. Declarations are not always advisable because, despite the shorter assessment period, sometimes declarations may not get clearance, and it may take more than 90 days to complete the assessment.

Four Key CFIUS Trends:

1. Russia/Ukraine Conflict – With the existing hostilities and U.S sanctions, it is probable that any pending Russian investments in the U.S. will not gain approvals at this time, and previous investments from Russia where a filing was not made may be looked at now as CFIUS continues to review older transactions, and these may be put in the forefront.

2. Focus on China – Several CFIUS and Foreign Investment Risk Review Modernization Act of 2018 ("FIRMA") concerns have been raised in relation to Chinese and Chinese-connected investments in the U.S. The focus is on new Chinese investments, including potential Chinese ties to foreign direct investment from other countries and non-notified transactions that were previously closed.

Recent examples of CFIUS’s involvement in Chinese transactions include the following:

CFIUS began a review in November 2021 after receiving a memo from a group of Icon’s American shareholders stating that the Chinese company, Shanghai Pudong Science and Technology Investment Co. (“PDSTI”), has been "installing board members and executives, pressuring others and laying plans to transfer Icon’s technology to China." In addition to CFIUS, the FBI opened a separate criminal probe.¹

During a panel discussion hosted by China Tech Threat, Nazak Nikakhtar, former acting head of the Bureau of Industry and Security, said that there is often a conflict between U.S. and Chinese laws for companies operating in both countries. The U.S. can block technology transfers, but China's "national security mandate" often requires companies operating there to turn over technology to domestic partner companies in China. These two opposing requirements are a tricky legal situation to navigate for companies, leaving many agreements that are "likely not legally feasible due to inherent conflict."²

3. CFIUS’s Pursuit of Non-Notified and Finalized Transactions – Often, investors can choose whether to voluntarily notify CFIUS of an impending transaction. The risk of not voluntarily filing is that CFIUS may become aware of the transaction, request a filing, and ultimately require modification measures or recommend divestment to tackle national security matters. After closing the deal, the investors have zero contractual protection against such measures. In the past, the risk of CFIUS taking an interest in a non-notified transaction was generally quite low. However, with a significant increase in resources and focus, a non-notified transaction has become a major risk.

An example of CFIUS’s action against a non-notified transaction includes the following:

Ralls Corporation, a Chinese-owned company, failed to notify CFIUS about its purchase of four smaller companies in an area near an Oregon military base. CFIUS went back to the transaction and ordered Ralls to sell off the four companies, destroy what they had constructed, and stay off the land. President Obama issued a similar order demanding that Ralls divest because its actions might "impair the national security of the United States."³

4. Excepted Countries – CFIUS qualifies a country as "excepted" when it has established and is effectively utilizing a vigorous process to assess foreign investments for national security risks. Another qualifier is to facilitate coordination with the United States on matters relating to investment security or that it has made significant progress toward these processes.

Investors from certain excepted countries may qualify as "excepted investors," which exempts them from CFIUS jurisdiction over certain transactions or from mandatory filing requirements.

In 2021, CFIUS stated that both Australia and Canada had satisfied the criteria to be excepted foreign states and excepted real estate foreign states. In 2022, CFIUS decided to identify New Zealand as an eligible foreign state until February 13, 2023.⁴

Can/Has CFIUS Blocked Transactions?

Only the president of the U.S. has the authority to block or prohibit a transaction due to national security concerns. However, the recommendation on which to block a transaction comes from CFIUS. Presidents, on the recommendation of CFIUS, have blocked several transactions in the past.

Alternately, CFIUS can impose modification/mitigation measures to the transaction agreement to ensure that the investment does not threaten any national security concerns. As a result of these mitigation requirements imposed by CFIUS, a transaction may get derailed, causing the firms to withdraw their applications during a CFIUS review. Firms have also withdrawn applications after CFIUS announced that they would investigate a transaction.

When in doubt about whether a filing with CFIUS may be required, ask the following questions:

Is the investor a foreign person/entity?
Does the U.S. firm invested-in require an export license?
Does the covered transaction involve a TID Business, which is a business that produces, designs, tests, manufactures, fabricates or develops critical technology?

How Long Will a CFIUS Filing Take?

A long-form notice includes a 45-day review plus a 45-day investigation. A short-form declaration includes a 30-day review.

What Penalties May Occur for Not Making a mandatory filing with CFIUS?

The penalty is up to $250,000 or the value of the transaction, whichever is greater, in addition to the potential unwinding of the investment.

For the reasons stated above, it is crucial to identify probable CFIUS issues early in the agreement process, assess whether mandatory filing requirements apply and, where relevant, incorporate CFIUS-related terms into transaction agreements.

Michael Rosenberg is director, EisnerAmper Digital, and co-leads the CFIUS Advisory Services. Michael Rose can be reached at michael.rose@eisneramper.com or 212.418.8487.

¹ Chinese Investment in U.S. Plane Maker Draws FBI, National-Security Reviews. Retrieved from The Wall Street Journal: https://www.wsj.com/articles/chinese-investment-in-u-s-plane-maker-draws-fbi-national-security-reviews-11642507206

² U.S. Needs to More Aggressively Track Non-Notified CFIUS Deals, Former BIS Official Says. Retrieved from Export Compliance Daily: https://exportcompliancedaily.com.
³ Ralls Case: How It Will Impact the CFIUS Process. Retrieved from Akin Gump: https://www.akingump.com/en/insights/blogs/ag-trade-law/ralls-case-how-it-will-impact-the-cfius-process-2
⁴ CFIUS Excepted Foreign State. Retrieved from U.S. Department of the Treasury https://home.treasury.gov/policy-issues/international/the-committee-on-foreign-investment-in-the-united-states-cfius/cfius-excepted-foreign-states