In Part 1 of this four-part series on international mergers & acquisitions, we developed the types of due diligence issues that arise in acquisitions involving companies that produce, operate in, or sell to foreign destinations. In certain cases, cross-border acquisitions can draw into play considerations relating to the Committee on Foreign Investment in the United States (CFIUS or the “Committee”). This article provides an overview of how CFIUS functions; Parts 3 and 4 of this series will provide additional considerations relating to when a mandatory filing is required and when a voluntary filing should be considered, as well as considerations relating to mitigating measures.
CFIUS is an interagency committee that evaluates the national security implications of foreign investments on the U.S. economy and infrastructure. CFIUS possesses statutory authority to “make an investigation to determine the effects on national security of mergers, acquisitions and takeovers … by or with persons which could result in foreign control of persons engaged in interstate commerce in the United States.”
Multinational companies should be aware of CFIUS’s processes and procedures when it comes to cross-border investments and transactions of U.S. companies and foreign investors or purchasers. Parties seeking to engage in potentially “covered transactions” under 31 C.F.R. part 800 or “covered real estate transactions” under 31 C.F.R. part 802 (collectively referred to here as “covered transactions”) may elect to submit voluntary submissions to the Committee prior to the closing on a transaction. By doing so, companies can know in advance of closing whether the transaction will be subject to any national security concerns by CFIUS. More recently, under the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), as covered further below, certain transactions are now also subject to mandatory CFIUS filings. If CFIUS approves the transaction, the parties have a safe harbor against the transaction later being subject to a divestment order based on national security reasons. In addition, pre-closing Committee review provides an opportunity for parties to modify the transaction or enter into “mitigation agreements” to obtain CFIUS approval.
CFIUS reviews happen in the form of Joint Voluntary Notices (“Notices”), or shorter filings called Declarations. Both require detailed descriptions of the U.S. business, the terms of the transaction, and information on the foreign purchaser/s or investors. A description of the process and timeline at each stage of CFIUS review is set forth below:
Notices
Pre-Filing Stage.Before filing a Notice, parties must submit a draft Notice to the Committee, to receive comments and feedback to address before formally filing their Notice. Such feedback often helps the parties to prepare more detailed answers in the formal filing than they otherwise would have, which can be helpful given that CFIUS provides significantly less time to respond to questions during the formal review stage.The pre-filing stage is an open-ended one, as there is an undefined time for comments on pre-filing versions of CFIUS filings. Although CFIUS tries to get back comments within 10 business days, the possibility of multiple rounds of comments and requests for resubmission can stretch this timetable out considerably. The potential for such delays is why we recommend that companies view CFIUS as a five- or six-month process, including the time for preparing the initial submission.
Review Stage.Once all comments are handled, the submission of a formal filing starts a 45-day review period. In this regard, it is important to note that CFIUS — and not the time of filing — determines when this time period begins. It is common for a week or more to go by without word from anyone on the Committee staff, as the time period only begins once the filing is “accepted” by the Committee. Once the clock starts ticking, CFIUS is very good about meeting the 45-day period. During this review stage, CFIUS often will ask the parties to respond to question sets, the responses of which generally must be submitted within three business days.
Potential Investigation Stage. If CFIUS cannot finish the review within 45 days, it can proceed to an additional 45-day investigation period to handle issues related to the complexity of the transaction, to address unresolved questions, or because of the general workload of the CFIUS staff. It is fairly common to proceed to a full investigation stage, and doing so should not be viewed as a negative sign for approval.
Potential Presidential Review Stage.Finally, for extraordinarily complex filings, or ones that raise special concerns, there is the possibility of an additional 15-day presidential review period.
Withdrawal
Parties may withdraw a Notice after acceptance by the Committee only if the Committee approves a written request for withdrawal from the parties. Over time, parties have requested withdrawals for a number of reasons. In some cases in which the parties are unable to address all of the Committee’s outstanding national security concerns within the initial review phase or subsequent investigation period, the parties might request to withdraw and refile their Notice to provide themselves with additional time to answer questions or to attempt to resolve the Committee’s national security concerns via a mitigation agreement. In other cases, the parties might request to withdraw and refile their Notice because a material change in the terms of the transaction warrants the filing of a new Notice. In still other cases, the parties might request to withdraw their Notice because they are abandoning the transaction for commercial reasons, because the parties do not want to agree to CFIUS’s proposed mitigation measures or in light of a CFIUS determination to refer the matter to the president.
Practice Point: In addition to the informal ability of the Committee to stretch out the pre-filing period and to give itself an extra week or more by delaying the start of the review period after it receives the formal Notice, it also is important to note that the time spent initially drafting the lengthy Joint Voluntary Notice and gathering supporting evidence also can take a month or more. The payoff, however, is that a thorough filing can enhance the ability to get the filing done during the initial 45-day review period. Thus, it is important to communicate to everyone involved in a transaction involving CFIUS review that deals can take five or six months to complete, to accommodate the drafting and formal CFIUS filing process. This makes it very important to consider CFIUS issues at the outset of the deal and also to put together the CFIUS filing in advance of the negotiation of the final terms of the deal.
Declarations
Prior to the enaction of FIRRMA, parties needed to submit lengthy written Notices to CFIUS, responding to a long list of regulatory questions with detailed information about each company involved in the transaction and the product lines, business operations, personnel, technologies, and other information about the U.S. company that was the subject of the transaction and the foreign purchaser looking to acquire the U.S. company. To help deal with the administrative burden of these filings, in 2018 FIRMMA was enacted to create abbreviated filings (“Declarations”) requesting CFIUS review that are no longer than five pages. These short-form declarations are mandatory for certain transactions in which a foreign government has a “substantial interest” (excluding transactions for less than a 10 percent voting interest) in a U.S. business involved in critical infrastructure or critical technologies, or one that maintains or collects sensitive personal data of U.S. citizens (with exemptions for investment funds and potential waivers for some foreign-government investors).
As the review time for the Declaration process is 30 days, as opposed to the 45 days, for Notices, Declarations can serve as a more streamlined process for parties to attain CFIUS clearance. Given the more limited information required in Declarations, and depending on national security implications of the transaction, CFIUS may require the parties that filed a Declaration to then submit the longer- form Notice and go through an additional 45-day review process before providing clearance for the transaction, thereby increasing the time for review by almost double.
Thus, given the characteristics of a particular transaction, it may be more efficient in the long run for parties to submit the longer Notice, even if a Declaration is mandatory and seems sufficient at the outset. For example, transactions involving purchasers from China tend to represent higher national security concerns. In 2023, Chinese investors filed the highest number of Notices from a single country, accounting for 14 percent of total Notices filed.[1] China did not represent even one of the top three countries that filed Declarations in 2023. This is likely because the parties were able to recognize that if they filed Declarations, they likely would be asked by CFIUS to submit a long-form Notice at the end of their 30-day review.
2023 Statistics[2]
The recently released 2023 annual CFIUS report provides useful clues regarding the types of transactions that merit CFIUS reviews. The majority of Declarations and Notices made it through the CFIUS review process without being rejected, underscoring that CFIUS review is more about properly informing the Committee of applicable transactions and providing the requisite information, and less about the government attempting to block as many transactions as possible. At the same time, experienced CFIUS filers develop a good sense of what types of transactions have little chance of being cleared by CFIUS and thus can serve the important gatekeeping function of counseling acquiring entities to avoid making filings that have little chance of being cleared.
Declarations
- In 2023, investors from Canada accounted for the most Declarations (13 declarations). Investors from Japan and France accounted for the second- and third-most declarations, with 11 each.
- In 2023, 109 Covered Transaction Declarations were submitted. Of these, 83 were concluded, 20 resulted in CFIUS requesting that the Parties file a full Notice, and in 6 CFIUS was unable to conclude action.
- For Declarations submitted in 2023, the average number of calendar days that elapsed between the date a Declaration was submitted (i.e., became complete) and the date on which the Committee accepted the Declaration was 4.2 days.
Notices
(Numbers not adjusted for those transactions where the original notice was withdrawn and then refiled):
- There were 233 written Notices of transactions filed with CFIUS in 2023 that CFIUS determined to be covered transactions.
- CFIUS conducted a subsequent investigation with respect to 128 of those 233 Notices.
- One notice was subject to an extension under Section 721(b)(2)(C)(ii)(I) of the Defense Production Act of 1950, which allows for one 15-day extension of the investigation period in extraordinary circumstances.
- Of the 233 Notices, CFIUS concluded action after adopting a mitigation agreement or order to resolve national security concerns with respect to 35 notices.
- Only two Notices of covered transactions were rejected by CFIUS in 2023.
- For Notices filed in 2023, the average number of business days that elapsed between the date of the submission of a draft Notice and the date on which the Committee provided written comments on the draft Notice was 7.86 days.
- The average number of business days that elapsed between the date of the submission of a formal written Notice and the date on which the Committee accepted the Notice was 4.92 days.
- In 2023, investors from China filed the highest number of Notices, accounting for 14 percent (33 notices) of total Notices, followed by investors from the United Arab Emirates at 9 percent (22 notices). Investors from the United Kingdom (19 notices), Singapore (19 notices), and Canada (16 notices) rounded out the top five countries of foreign investors respectively.
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[1] See Committee on Foreign Investment in the United States Annual Report to Congress (2023), available at: https://home.treasury.gov/system/files/206/2023CFIUSAnnualReport.pdf
[2] All of the following statistics are adapted from Committee on Foreign Investment in the United States Annual Report to Congress (2023), available at: https://home.treasury.gov/system/files/206/2023CFIUSAnnualReport.pdf.
