The unprecedented economic dislocation and supply chain challenges that the Covid-19 pandemic has caused will have far-reaching consequences for cross-border investments. We can expect that the Committee on Foreign Investment in the U.S. will augment its focus on national security risks in the investment, real estate, and mergers and acquisitions spaces.
CFIUS’s attention to Covid-19’s impact will reflect longstanding worries about foreign strategies to acquire or steal critical technology through investment in a way that poses serious national security risks. The U.S. government will also try to ensure supply chain durability in the case of future emergencies.
Pandemic-related concerns will likely translate into the following five trends, which will drive CFIUS’s focus for the near future.
1. Accelerated Scrutiny of the Health and Biotechnology Sectors
As the search for Covid-19 treatment and a potential vaccine continues, governments are worried that their cutting-edge pharmaceutical companies are targets for foreign investors, particularly those linked to foreign governments.
The European Union’s March 2020 guidance warned about “increased risk of attempts to acquire healthcare capacities” including those involved in vaccine development. These investments may allow investors to gain access to underlying technologies—such as gene-mapping techniques or vaccine production capacity—or sensitive data, such as the results of clinical trials.
Governments will try to protect critical assets, balancing national security concerns with ensuring that pharmaceutical firms have the capital for research and development. As a result, CFIUS will enhance the scrutiny of investments in this sector that it began in the CFIUS Pilot Program, which focused on biotechnology and other sensitive industrial sectors.
CFIUS will likely bring in agencies like the Departments of Health and Human Services and Agriculture when health and biotechnology transactions are being considered. These new participants will add expertise, but may slow consideration as these agencies learn their role and mandate. Investors and investment targets should plan accordingly.
2. Aggressive Scrutiny of Predatory Acquisition of Undervalued Enterprises, Particularly Critical Technologies
Many companies find themselves with share prices at record lows, debt markets frozen, and, in some cases, not qualifying for stimulus funds. The technology sector in particular may see stark reductions in revenue forecasts and venture capital activity. These conditions make technology companies—especially start-ups—ideal takeover targets for foreign actors with healthy cash reserves.
Government officials engaged in the CFIUS process have identified “predatory capital” as a threat to the defense industrial base. Some lawmakers have even suggested a moratorium on mergers during the pandemic. Even if such interim investment-related measures would be helpful, however, more will be needed in the long-term, as the economic recovery is likely to be drawn out.
CFIUS will want to ensure that the pandemic does not induce a “fire sale.” Companies should expect more stringent mitigation conditions on transactions in order to limit access to sensitive data and control of business decisions, and the implementation of specific policies and procedures to guide compliance efforts.
The concern that state actors like China are deploying sophisticated strategies, backed by large capital pools, to acquire dominance in next-generation economic sectors, like artificial intelligence (AI), will increase as the pandemic and protectionist pressures strain bilateral relations. China’s President Xi Jinping has already promised additional investment in 5G, AI, transportation, and energy to help stimulate the economy.
3. U.S. Government Concerns About Supply Chain Integrity
Cross-border fights about personal protective equipment (PPE) and ventilators have reinforced pre-Covid-19 concerns that major importers are overly dependent on China. In a future crisis, no one will want a repeat of this competition.
As a result, countries will focus on building resiliency and redundancy into critical supply chains. This shift will require a new reliance on the private sector, which previously followed a “just in time” supply chain model that was disrupted by Covid-19.
The federal government may develop procurement rules, tax incentives, or other interventions to place to move manufacturing capacity to the U.S. or, at least, away from China. CFIUS will play a role here in determining whether transactions will drive the offshoring of manufacturing capabilities from the U.S. to China, and mitigating that potential.
Companies should demonstrate that they can rapidly scale up the provision of key resources in future emergencies. Companies may expect mitigation agreements to include provisions to protect continuity of supply, particularly in sensitive sectors.
4. CFIUS Will Continue to Clear Transactions, With Awareness of Challenges
Despite the increased scrutiny and greater potential for mitigation, CFIUS will continue to clear transactions, as an open investment regime will continue be important to the economic recovery.
The pandemic may impact the pace of CFIUS deliberations. Private sector actors, however, should be aware that CFIUS will focus intently on these trends, and will want answers to specific questions, though it may be on a slower timeline. As with financial regulators worldwide, Treasury and CFIUS are having to adjust to remote work situations. The nature of CFIUS’s classified work, and the need for interagency deliberations, is an additional hurdle.
As other important Treasury agencies like the Financial Crimes Enforcement Network and the Office of Foreign Assets Control have done, CFIUS may take into account personnel-related challenges among companies when assessing compliance efforts with pre-existing mitigation agreements.
5. Private-Sector Companies Need to Proactively Prepare Mitigation Strategies
These factors highlight the complexities of CFIUS, and how important it is that individuals and firms plan in advance how they will deal with potential concerns. They must respond to specific concerns with mitigation steps, or conditions attached to transactions. This requires a varied financial crimes compliance skillset: knowledge of beneficial ownership; enhanced due diligence of counterparties; creation of policies and procedures to handle risks; and comprehensive oversight and monitoring.
Covid-19 has altered the way many processes and industries operate. The economic recovery will take a significant amount of time and engage a wider array of public and private sector actors than the 2008 global financial crisis. Planning for additional scrutiny can help support preparations for closing on important transactions.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Himamauli Das is a senior vice president at K2 Intelligence FIN. He previously served as a senior policy official and an international lawyer with the White House, the National Security Council and National Economic Council, and the Departments of State and Treasury. He has more than 15 years of experience in spearheading policy development and negotiations on topics in international economic policy such as sanctions, export control, financial regulation, national security, trade, foreign investment and inward investment regimes such as CFIUS, export promotion, climate, and international institutions.