According to public reporting, in January 2016, Phillips’s deal to sell its lighting business to Chinese buyers was blocked by the Committee on Foreign Investment in the United States (CFIUS), a multi-agency U.S. government body that evaluates inbound foreign investments that create foreign control of U.S. entities to determine whether they pose any national security risks to the United States.1 CFIUS has the authority to take various actions that can impose significant costs on businesses. For example, it can block proposed mergers and acquisitions, order the divestment of assets acquired by foreign companies in deals that have already been closed, and direct the transacting parties to take other steps to mitigate any risks that it determines could arise in connection with the transaction.
Over the past year, CFIUS has been at the center of several large and high profile international bids for investments in the United States. In August 2016, for example, it reportedly approved the US$43 billion bid by China National Chemical Corporation to purchase seed giant Syngenta AG. Congress has also entered the fray. Members have publicly called for legislation to extend CFIUS’s mandate and expand the legal standard it uses to evaluate national security risks in ways that would potentially make it more difficult for deals to gain CFIUS approval.
These trends have increased the regulatory risk that foreign investors face in the United States. However, we feel that companies should not be dissuaded from investing in the United States and should instead embrace the CFIUS process.
In our experience, there are steps that investors can take to help them gain CFIUS approval. These include:
1. Be proactive
While the government’s concerns are not always foreseeable to the parties, in many cases the issues are knowable. Both the acquiring company and the target entity should engage in a concerted due diligence exercise, focusing on the types of issues of greatest concern to CFIUS, such as the technical sensitivity of the products and knowledge base of the U.S. target and the backgrounds, reputations, and level of ties to foreign governments of the contemplated acquirer. Being proactive helps all parties identify any potential concerns the deal might face under CFIUS review. The parties are then better informed to decide whether to pursue the deal and, if so, whether to file with CFIUS.
2. Be transparent
With better information about the issues that CFIUS is likely to focus on during its review, the parties are empowered to be fully transparent with the committee about any identified issues that may be of interest or concern to it. Doing so will provide the parties with two concrete benefits:
- Being transparent sends a clear message to CFIUS that the genuine focus of the companies is to pursue a business venture, and that they are absolutely committed to working with CFIUS, not against it, as it undertakes a national security review of the transaction.
- Through early transparency, the parties to the transaction can be proactive in discussing with the committee ways to mitigate the issues they have identified. Far too often, negotiations with the committee become hurried as the statutory deadlines for a CFIUS decision approach. Early transparency affords the companies involved and CFIUS invaluable negotiating time to find a way forward that addresses the committee’s concerns and is acceptable from a business operations perspective.
3. Be collaborative
Where CFIUS concerns relate to the exchange of sensitive information or product know-how from the U.S. target to the foreign investor, the committee may impose
- certain protocols and protections that essentially isolate the U.S. information from the foreign entity and
- the creation of auditable records regarding compliance with those protocols and protections.
Given the committee’s lack of direct insight into the business operations of the parties, its proposed mitigation terms could be difficult to implement from efficiency and cost perspectives. Parties that anticipate CFIUS’s concerns and proactively offer well-conceived and auditable mitigation options to the committee can demonstrate their singular focus on the success of the transaction and willingness to adopt measures to satisfy U.S. government national security concerns. More importantly, doing so allows the parties to set a baseline to begin discussions with the committee. It’s better to work from your draft than from theirs. And CFIUS will appreciate the head start.
1. All statements of fact, opinion, or analysis expressed are the author’s alone and do not necessarily reflect the official positions or views of the Department of Justice (DOJ) or any other U.S. government agency. This article has been reviewed by DOJ to prevent the disclosure of classified or otherwise sensitive information.