What U.S.-Based Private Equity Funds Should Know About CFIUS

U.S.-based private equity funds may need to file with the Committee on Foreign Investment in the U.S. (CFIUS) prior to certain transactions amid CFIUS filings that involve foreign merger and acquisition transactions. Specifically, where the acquired company is a U.S. company, they are required to go through a due diligence process to determine if they believe there may be national security concerns/risks associated with the transaction.  This may cause consideration of a voluntary or mandatory filing with the U.S. government.

As an overview, CFIUS is comprised of a combination of U.S. government agencies including the Department of Justice, Department of Defense and Department of Energy to name a few, depending on the acquired company’s industry, and chaired by the Secretary of the Treasury.  CFIUS oversees foreign investment in the United States with the purpose of reducing or mitigating national security risks.  While there are many white papers, articles and blogs aimed at foreign investors, here we examine why U.S. private equity funds should care about CFIUS and how it may impact their organization.

• Sell-Side Risk:  

U.S.-based private equity funds planning to exit their investment in a portfolio company by selling their interest in an asset may want to factor whether the buying transaction party is a foreign person which includes foreign nationals, governments or entities and entities controlled by a foreign national, government or entity other than excepted foreign states.¹  As far as CFIUS is concerned, a foreign person does not have to be a majority owner or investor to control or influence the U.S. company.  Further, non-controlling interest by a foreign person may require CFIUS review, in particular if the asset that is being sold is involved with the following:

• • Critical technology;
  • Critical infrastructure;
  • Sensitive personal data; or
  • Real estate located by certain airports, maritime ports, military installations or certain government facilities.
• Buy-Side Risk:
  There are also instances of U.S.-based private equity funds aiming to invest in U.S.-based assets that may trigger CFIUS filing.  Remember, CFIUS does not only factor in geography of where the business is domiciled. According to the U.S. Department of Treasury, CFIUS also aims to identify “all foreign investors that are involved, directly or indirectly, in a transaction, including limited partners in an investment fund.”   
  The U.S. Department of Treasury also states: “CFIUS often requests identifying information for indirect foreign person investors, including limited partners, their jurisdiction(s) of organization, and ultimate ownership, among other information, regardless of any arrangements that may otherwise limit the disclosure of such foreign person’s identity.  CFIUS may also request information with respect to any governance rights and other contractual rights that investors collectively or individually may have in an indirect or direct acquirer or the U.S. business….”²
  Identification of foreign indirect investment as well contractual rights may often be challenging.  This step may require a risk assessment and analysis before U.S. private equity funds can be sure the information they are using to determine whether a CFIUS declaration or notice is warranted, complete and accurate.    
   

¹ Excepted foreign states include Australia, Canada, New Zealand and the United Kingdom of Great Britain and Northern Ireland. CFIUS Excepted Foreign States | U.S. Department of the Treasury

² CFIUS Frequently Asked Questions | U.S. Department of the Treasury

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