Foreign Investments in the U.S. - CFIUS Update
The Committee on Foreign Investment in United States (CFIUS or Committee) has recently reminded both U.S. and foreign investors of the potential need to have cross-border transactions involving foreign direct investment reviewed for clearance and approval by the Committee. CFIUS is charged with reviewing any proposed foreign acquisition, merger, takeover of, or significant investment in, U.S. companies to ensure that the transaction will not threaten national security.
A major political firestorm which started in early 2006 over foreign direct investment in U.S. companies and national security concerns ended quietly on mid-2007, when President Bush signed into law the Foreign Investment and National Security Act of 2007 (“FINSA”)(Pub. L. No: 110-49). While coming to a quiet close, this new law made significant changes to the manner in which the United States will scrutinize foreign direct investment in United States’ companies. (CFIUS background). Members of CFIUS have recently been discussing the increased role the Committee will play in reviewing foreign direct investments in certain sectors of the U.S. economy. This comes in the midst of the President’s January 2008 Executive Order which clarified how the administration would implement FINSA, and forthcoming regulations of the same nature.
CFIUS Reviewing Foreign Investments which have not Undergone Review
In a recent discussion before the annual meeting of the American Society of International Law, Stewart Baker, Deputy Assistant Secretary for Policy for the Department of Homeland Security, stated that CFIUS had begun “a process
of asking ‘who didn’t file and should they?” He indicated that the Committee would prefer parties considering a transaction involving foreign direct investment to file and have their proposed transaction
reviewed by the U.S. government rather than have the Committee determine outside the CFIUS process that a transaction could threaten U.S. national interests. In such instances, where national security interests would have otherwise
prohibited the transaction, the United States does have the authority to undo a deal. Voluntarily submitting a proposed transaction for CFIUS review offers “safe harbor” upon approval of the transaction by CFIUS.
Mr. Baker noted that transactions where parties do not elect to file for a review by CFIUS could be subject to greater scrutiny. “One of the questions that arises is whether it was a deliberate choice to avoid national security scrutiny and that only makes us more likely to look closely at the transaction,” he told the ASIL attendees. “If you file, you have certainty. If you don’t file you don’t have certainty,” he added.
Compliance with Mitigation Agreements
Mr. Baker also indicated that CFIUS has imposed fines in the past several years for failure of the involved parties to an approved transaction to comply with mitigation agreements – an agreement which sets forth, for some
transactions, restrictions or conditions under which the foreign direct investment was approved. CFIUS is now seeking to implement significant financial penalties for any violations of agreements or conditions placed on foreign
investors by the United States. The Financial Times has reported that in one investigation, CFIUS proposed potential penalties worth nearly 10 percent of the company’s sales should there be any violations of
any final mitigation agreement. The Committee has also established an audit team to validate that companies are living up to their mitigation agreements.
Filing for a CFIUS Review
Troutman Sanders is reminding clients that they should consider notifying CFIUS of a transaction if it will allow a foreign entity to control a U.S. company and the deal arguably could raise political, national-security related concerns.
For example, investors from countries like China, Russia, and the Middle East will likely receive heightened scrutiny. Furthermore, you should consider notifying CFIUS if the proposed investments involve “critical infrastructure”
– defined as systems or assets so vital to the United States that a breakdown in them “would have a debilitating impact on national security, national economic security, national public health or safety.”
The Committee defines the term “control” broadly as being direct or indirect power, whether or not exercised, to determine, direct or decide matters affecting a company. Such control does not mean solely by ownership of a majority or significant minority of the voting securities of a company, but may also be by contractual arrangement or other means. The term “national security” is intentionally left undefined allowing the government broad discretion to interpret the term and determine whether a particular transaction constitutes a risk.
Troutman Sanders LLP provides advice on regulatory and legislative matters related to U.S. national security and CFIUS issues.