What was once an obscure and relatively quiet interagency committee has been getting big headlines lately. The committee has been playing a bigger role on the global M&A stage, figuring prominently in the U.S.-China trade war and putting the breaks on some giant acquisitions. The Committee on Foreign Investment in the United States (CFIUS) is authorized to review — and block, if necessary — transactions involving foreign investment to determine whether they threaten national security.
The committee operates pursuant to Section 721 of the Defense Production Act of 1950, authorizing the president to suspend or prohibit transactions. The committee was formed in 1975 by President Gerald R. Ford, Jr., and was given authority over M&A deals with foreign companies in 1988. Since its inception there have been executive orders, amendments and new regulations. The most recent changes were made in October and November 2018 as part of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), including the launch of a pilot program expanding the scope of investments to include foreign persons and critical technologies, such as artificial intelligence, big data, nanotechnology, and biotechnology. That pilot is scheduled to end in March 2020.
The Secretary of the Treasury chairs the committee, with daily operations coordinated by the Staff Chairperson CFIUS, who is the Director of the Office of Investment Security in the Department of the Treasury.
In addition to the Treasury Department, the committee comprises representative from the U.S. departments of Justice, Homeland Security, Commerce, Defense, State and Energy. The Office of the U.S. Trade Representative and Office of Science & Technology Policy are represented as well. Other offices that are allowed at times to observe and participate are: the Office of Management & Budget; Council of Economic Advisors; National Security Council; National Economic Council; and the Homeland Security Council. The Director of National Intelligence and the Secretary of Labor are non-voting, ex-officio members of CFIUS.
“A creature from the shadows of the administrative state” that “defines obscurity in the federal government.” That’s how financial writer and author Robert Teitelman described it in an article for Barron’s. And yet, he says, it is “gaining the kind of power that threatens to reshape U.S. mergers and acquisitions in cross-border deals” for years to come, long after the U.S.-China trade war.
Teitelman wrote that the refurbished CFIUS “encourages the very practices the administration condemns in China: the kind of aggressive industrial policy that was last seen in the U.S. when the Clinton administration tentatively took it for a spin.” The author noted that the European Union is getting on the bandwagon, too, also in response to China’s growing economic power, passing a new framework for vetting foreign investment that “looks a lot like CFIUS.”
Hernan Cristerna, co-head of global mergers and acquisitions at JPMorgan Chase, told the New York Times that CFIUS is the “No. 1 weapon in the Trump administration’s protectionist arsenal,” calling it “the ultimate regulatory bazooka.”
That bazooka has taken out some colossal deals. One highly publicized case occurred in March 2018 when CFIUS determined that computer chip giant Broadcom’s proposed acquisition of fellow giant Qualcomm posed a national security risk. In its determination letter, CFIUS explained that the decision was all about which will be the dominant nation when it comes to 5G – the U.S. or China – and how important that is to U.S. security.
“Qualcomm has become well-known to, and trusted by, the U.S. government,” said the letter to the attorneys for the chip makers from CFIUS Deputy Assistant Secretary of Investment Security Aimen N. Mir. “Having a well-known and trusted company hold the dominant role that Qualcomm does in the U.S. telecommunications infrastructure provides significant confidence in the integrity of such infrastructure as it relates to national security. Reduction in Qualcomm’s long-term technological competitiveness and influence in standard setting would significantly impact U.S. national security. This is in large part because a weakening of Qualcomm’s position would leave an opening for China to expand its influence on the 5G standard-setting process.”
CNBC technology report Ari Levy wrote that that, as part of President Donald Trump’s trade dispute with China, CFIUS is scrutinizing more Chinese investments and “increasingly scuttling deals.”
Spate of Blocked Transactions
“The effects are being felt in tech start-ups,” Levy wrote. “Ad-tech company AppLovin was set to be acquired in 2017 for $1.4 billion by a Chinese private equity firm until CFIUS stepped in.”
The expansion of CFIUS’s purview to the biotech industry via FIRRMA has set off alarm bells for companies in that sector, one that previously was not concerned with CFIUS. Biotech companies generally focus on research to fight diseases, which is not typically a national security issue, except for the “limited areas of bioterrorism and toxins,” wrote attorneys at McDermott Will & Emory for the National Law Review this month. “The enactment of FIRRMA in late 2018, and Treasury’s implementation of FIRRMA via interim rules establishing a temporary pilot program, abruptly put the U.S. biotech sector in CFIUS’ cross-hairs,” they wrote, adding that the law now includes cases where the investment does not even result in a controlling interest.
There have been a number of other China-related deals that have been halted, threatened, or undone for U.S. national security reasons. CFIUS blocked the Chinese owners of a California-based gay-dating app, Grindr, from executing an IPO, and is now pushing the Chinese gaming company to divest the Grindr business. CFIUS ordered the divestiture of China’s iCarbonX’s majority stake in the health care services company PatientsLikeMe. President Trump has threatened to use his authority under CFIUS to halt China Three Gorges’s plan to acquire a major European energy provider, Energias de Portugal. China’s Ant Financial’s proposed acquisition of MoneyGram International was shut down by CFIUS last year in what would have been a $1.2 billion deal. Most recently President Trump has warned Israel against doing too much business with China.
In what has been hailed as a breath of fresh air, last month CFIUS gave the go-ahead for Shanghai Will Semiconductor Co. to acquire Beijing OmniVision Technologies Co., Ltd. Citing an April 16, 2019, filing with the securities regulators in China, Pillsbury Winthrop Shaw Pittman Attorney Thomas M. Shoesmith, called this “welcome news after a string of negative decisions by CFIUS.” He explained that OmniVision is a Santa Clara, Calif., digital imaging company that was purchased by Chinese private equity investors two years ago.
Impact on the M&A Law Community
Attorneys, in-house counsel and other professionals deeply involved in cross-border transactions are already experiencing some nuts and bolts changes that other professionals want to be aware of as they venture into international waters.
Expect delays. CFIUS’s reach is now much broader than before. No longer are deals that would give foreign companies “controlling interest” the only deals the committee will examine; it is now interested in deals that would transfer non-controlling but “substantial interest” when critical technologies, critical infrastructure, or the private data of U.S. citizens are involved. Filings regarding deals that fall into these categories are now required; previously they were optional. Deals that would once have sailed through scrutiny may now be delayed by investigations. CFIUS also has more time to review transactions. The initial stage ends within 45 days and the second phase can last from 45 to 60 days. Filing fees are set, but cannot be more than 1% of the value of the transaction or $300,000, whichever figure is lower. And, of course, there is increased risk that they be ultimately be blocked.
Anticipate more definition. The Committee is required by FIRMMA to define “substantial interest” by taking into consideration “the means by which a foreign government could influence the actions of a foreign person, including through board membership, ownership interest, or shareholder rights.” Some interests will be excluded from the definition. A less than a 10 percent voting interest will not be considered a substantial interest, for example, according to the rules.
Provide basic information. “A party to any covered transaction may submit to the Committee a declaration with basic information regarding the transaction instead of a written notice under clause,” the rules say. CFIUS now provides a new abbreviated declaration for low-risk transactions.
Step forward. Should companies voluntarily file with CFIUS if they think there may be an investigation, or if they feel they will be at a competitive disadvantage because of an investigation? Should they be proactive in anticipating problems with a deal and proposing solutions to any concerns CFIUS may have? Should they connect with Treasury early, even before announcing a deal? This is a case where being proactive has distinct advantages, not the least of which is reducing the time it takes to get to approval or disapproval. But the next point is critical.
Enlist expertise. Companies will want to have someone with CFIUS expertise and experience on their team. Having team members who have some prior relationship with Treasury officials to help navigate the process is a plus.
Mitigate the risk that a deal will be blocked. How can companies doing deals protect themselves from greater risk that a transaction will either be delayed or ultimately fail. Attorneys Adam O. Emmerich and Robin Panovka at Wachtell, Lipton, Rosen & Katz said in a 2018 article that deal makers are trying to find ways to protect themselves. “Although practice varies, some transactions in recent years have sought to address CFIUS-related non-consummation risk by including reverse break fees specifically tied to the CFIUS review process. In some of these transactions, U.S. sellers have sought to secure the payment of the reverse break fee by requiring the acquiror to deposit the amount of the reverse break fee into a U.S. escrow account in U.S. dollars, either at signing or in installments over a period of time following signing. While still an evolving product, some insurers have also begun offering insurance coverage for CFIUS-related non-consummation risk, covering payment of the reverse break fee in the event a transaction does not close due to CFIUS review, at a cost of approximately 10% to 15% of the reverse break fee.” Read the full article at the Harvard Law School Forum on Corporate Governance and Financial Regulation.
We will continue to watch developments at CFIUS. Look for updates on the MoginRubin Blog.