Over the last four years, businesses have experienced a revolution in U.S. trade and investment policy, with few industries unaffected. The Committee on Foreign Investment in the U.S. (CFIUS) has loomed particularly large over cross-border deals, especially those involving investors from China or other non-allied countries.
Some predicted the Biden administration would take a different approach. But all signs indicate that it will maintain a robust CFIUS review process. Investors should expect adjustments in tone and tactics, but not a sea change in the committee’s approach.
How Is Biden Administration Approaching CFIUS?
First, the concept of “national security” will remain broad. Industries not traditionally considered “national security”-sensitive—such as pharmaceuticals and medical devices, personal finance, education, entertainment, and social media—are now firmly within CFIUS’ sights.
Covid-19 brought supply chain issues to the fore, as many critical industries struggled to obtain personal protective equipment during the pandemic. CFIUS can be expected to evaluate how transactions may affect supply chains of U.S. industries critical to the economy and public health, which may involve complex scenario planning and assessment of “what if” events.
CFIUS also will likely continue its emphasis on “third-country threats”—instances where a foreign entity in one country (even an allied country) has ties to a country identified by the U.S. government as a strategic competitor. This could arise where an EU company, for example, aims to buy a sensitive U.S. business, and has Chinese or Russian nationals on its board of directors or as significant investors.
Second, CFIUS will continue to exercise scrutiny of so-called “non-notified” transactions (i.e., transactions not affirmatively disclosed by the transaction parties). Where deals subject to CFIUS jurisdiction are not filed, agency personnel are authorized to seek out those posing national security concerns and conduct unilateral outreach. Companies that do not consider CFIUS factors in advance may be surprised by a “cold call” from the government.
Third, CFIUS is likely to maintain its heightened emphasis on monitoring and enforcing compliance with mitigation agreements. This is in line with CFIUS’ new authority to impose significant penalties on transaction parties for failure to comply with CFIUS obligations, including fines up to the value of the transaction in addition to potential forced divestiture or unwinding of a transaction.
Fourth, CFIUS notification remains mandatory for certain categories of transactions, including some below the “control” threshold—focused on so-called technology, infrastructure, and data (TID) U.S. businesses. This raises the stakes of pre-transaction CFIUS diligence for both sides—as both can be subject to substantial penalties for failure to submit a mandatory filing at least 30 days before closing.
Is Administration Open to Chinese Investment in the U.S.?
The Biden administration has announced a comprehensive review of China policy and shown a readiness to rethink or recalibrate contested Trump administration actions on China, as demonstrated by the “pause” on the forced sale of TikTok.
However, the Biden administration also has endorsed the broad outlines of the prior administration’s strategy on international trade, manufacturing, supply chain security, and foreign investment review matters, including with respect to China. Additionally, many aspects of the new approach to China found adherents among the career government workforce, including some involved in the CFIUS process.
Where parties contemplate a deal involving a Chinese investor or a China nexus, they should assume that CFIUS may be a factor, and engage in careful pre-transaction review and dialogue. Parties should review whether a filing may be mandatory. Even if it is not, they should endeavor to anticipate and address potential CFIUS concerns during the deal design phase.
Is It a Good Time for Foreign Direct Investment in the U.S.?
Absolutely. Most transactions submitted for CFIUS review will continue to be approved without conditions, and many transactions will not warrant a filing. The key for investors is to understand the evolving national security framework and to anticipate when a transaction may attract scrutiny.
How Can Parties Best Protect Their Interests?
First, consider CFIUS early in the deal design process. A few hours of CFIUS work early in a transaction can clarify which aspects of a deal, if any, may raise concerns, and allow parties to address them and discuss the pros, cons, and timing of a potential filing.
Second, consider use of the streamlined declaration process. While the Foreign Investment Risk Review Modernization Act of 2018 made notification of certain transactions mandatory, it also created the declaration process as a quicker way for a company to inform CFIUS of a transaction. Unlike full CFIUS notices, declarations do not require a filing fee.
In its 2019 Annual Report, CFIUS noted that more than 70% of cases involving a declaration were either cleared on the basis of the declaration or the parties were informed that CFIUS was not requesting a formal notice, leaving the parties free to proceed with the transaction.
Third, utilize existing safe harbors and exceptions from CFIUS’s review authority. For example, where a foreign investor is purchasing a minority interest, parties may negotiate to minimize or eliminate any access that the investor will have to sensitive U.S. information or technology, thereby reducing the risk of CFIUS review. Given the evolving threat landscape and outreach regarding non-notified transactions, eligibility for a CFIUS safe harbor can help insulate a foreign investor and the transaction from potential CFIUS considerations and deal uncertainty.
A muscular and newly empowered CFIUS is here to stay, which makes CFIUS considerations paramount for transactions involving foreign direct investment. Parties should make CFIUS and national security considerations a routine part of due diligence and deal design. If not, an otherwise promising and lucrative transaction could suffer significant delays, hurdles, or roadblocks.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Donald F. McGahn II leads the government regulation practice at Jones Day in Washington, D.C. Before rejoining Jones Day in 2019, he served as counsel to President Trump.
Schuyler J. Schouten is a partner in Jones Day’s government regulation practice in Washington, D.C. Before joining the firm in 2019, he was senior associate counsel to the U.S. president and deputy legal advisor to the National Security Council.
Chad R. Mizelle is of counsel in the government regulation practice at Jones Day in Miami. Before joining the firm this year, he was acting general counsel at the Department of Homeland Security.
This article represents the personal views and opinions of the authors and not necessarily those of the law firm with which they are associated.