CFIUS Reporting Requirements
The Committee on Foreign Investment in the United States (CFIUS) is an interagency committee that reviews certain transactions involving foreign investment in the United States. Its role is to identify and address any national security risks that could arise from these potential investments. With increasing global tensions over technological competition and supply chain security (especially around China), CFIUS scrutiny of cross-border deals has intensified in recent years. We expect this tension and increased scrutiny to continue through the election this year and into the future, no matter the outcome of the election.
As non-US companies navigate potential foreign investments or acquisitions, they must understand when CFIUS reporting requirements may apply. In the worst-case scenarios, failure to make required filings can result in the US government unwinding a completed deal and imposing significant penalties. Below is a breakdown of the key factors that determine if CFIUS has jurisdiction over a transaction.
Transactions Subject to CFIUS Review
Although there are currently four safe harbor countries (“excepted foreign states”), CFIUS has the authority to review a wide range of transactions involving a foreign person or entity, including:
– Acquisition of a controlling ownership interest in a U.S. business, including through stock purchases, asset acquisitions, mergers, conversion of quasi-equity interests, or other creative structures like loan defaults. Control is extended to include shadow control of an entity, whether by written contract or unwritten agreement;
– Acquisition of a non-controlling ownership interest in a U.S. business that constitutes an investment of critical technologies, critical infrastructure, or sensitive personal data, especially if that investment will result in the investor gaining access to information (for instance, through a board seat, advisor role, or general access to data); and
– Real estate transactions nearby sensitive U.S. government facilities, including property leases, easements, licenses, and related concessions.
And for the creative minds out there, CFIUS jurisdiction extends to any transaction that could result in foreign control of a U.S. business, even if that business itself has limited operations in the United States.
Industries of Particular Concern
CFIUS pays especially close attention to certain industries deemed critical to U.S. national security interests. These include:
Critical Technologies: Businesses involved in developing leading-edge or “foundational” technologies like 5G+ communications, semiconductors, artificial intelligence, quantum computing, and others identified as critical by U.S. export control regulations.
Critical Infrastructure: A broad swath of assets and systems considered vital to U.S. interests, including telecommunications, energy, transportation, healthcare, manufacturing, and others. Thanks to China’s strong grip on pharmaceutical precursors, as emphasized through Covid, healthcare manufacturing continues to be at the forefront of this discussion.
Sensitive Personal Data: Companies that collect or maintain sensitive personal data on U.S. citizens, such as electronic health records, geolocation data, or other personal preferences or habits that could potentially be used as leverage against those individuals.
Filing Requirements and Process
If a proposed transaction falls under CFIUS jurisdiction, there are specific filing requirements and processes to follow, which will almost certainly stretch out the closing date for a particular transaction:
Declaration vs. Full Notice Filing: Parties can opt for a shorter “declaration” filing or submit a longer, more comprehensive written notice. A declaration is largely voluntary, with no filing fee, on a relatively straightforward eight-page form. This submission can result in a safe harbor letter. Full notice filings are much more robust and will result in either a safe harbor letter or additional mitigation requirements to comply with if the parties want the deal to proceed. It is largely a two-sided effort between the parties requiring openness and cooperation. CFIUS may also require a full notice filing after reviewing a declaration.
Timing: Declarations must be filed at least 30 days prior to closing. Full notice filings must be submitted at least 45 days prior, after which CFIUS can initiate an additional 45-day investigation period if needed, plus a 15-day presidential review period if needed.
Disclosure: Filings require disclosing extensive documentation on all parties, the transaction details, ownership structures (down to the beneficial ownership level), business operations, and more. Submissions are confidential but may reveal highly sensitive proprietary information and take significant time to prepare.
Filing Fees: Depending on the transaction value, filing fees can range from no fee for transactions under $500,000 and up to $300,000 for deals over $750 million.
The Consequences of Non-Compliance
Not filing a mandatory CFIUS notice is extremely risky, as the committee maintains jurisdiction to suspend or unwind non-notified transactions that raise national security concerns. CFIUS can also assess a separate penalty per violation, up the entire value of the transaction.
Prior high-profile cases where CFIUS forced parties to abandon deals due to non-filing include Qualcomm’s acquisition of Dutch company NXP, Lattice Semiconductor’s sale to a Chinese-backed firm, and the purchase of dating app Grindr by a Chinese company. The 2022 CFIUS report can be found here. The 2023 report is due later this summer.
Conclusion
With CFIUS scrutiny on the rise, mapping out potential CFIUS implications early is crucial for any cross-border deal. Experienced counsel can assess jurisdictional issues, manage the filing process, and negotiate mitigation measures to increase deal certainty. While the process can be complex, the costs of non-compliance are significant and should not be ignored.
For more information to help with cross-border investment, see:
What is the Newly Implemented US Corporate Transparency Act (CTA)?
What Do US Investment Bankers and Private Equity Groups Think About China and the Global Economy?
