Cfius Reviews Are a Reality for More and More Cross-border Transactions
| Publication year | 2016 |
| Author | By Chris Griner and Christopher R. Brewster |
By Chris Griner and Christopher R. Brewster*
Recent news reports indicate that in-bound foreign investment in the United States is "soaring to new heights" in 2016, with more than 280 cross-border deals by early March, well ahead of the pace in 2014 and 2015.1
Most of these foreign acquisitions will not implicate national security. Nevertheless, cross-border transactions will increasingly fall under the scrutiny of the multi-agency Committee on Foreign Investment in the United States ("CFIUS" or the "Committee"), which is charged with assessing the impact of foreign investment on U.S. national security. Following CFIUS review, the President can block a transaction that the President finds a threat to U.S. national security. CFIUS reports 147 filings for FY2014, continuing a generally upward trend since the financial crisis of 2007-2009.2
Although none of these transactions was blocked by the President (only two have been blocked in history), twelve were withdrawn after filing. Transactions may be withdrawn for many reasons (one of the twelve was refiled in 2015), but it is fair to say that the majority of these transactions were likely withdrawn because they either could not pass CFIUS scrutiny, or because the parties refused to accede to the terms that CFIUS would require to clear the deal.
Ostensibly voluntary, filing for CFIUS review is effectively mandatory for transactions involving U.S. companies that hold security clearances, as well as for transactions that implicate national security, whether the target performs classified work or not. This is because CFIUS has the right to review a transaction, whether filed or not, and can do so in perpetuity if the transaction has not been reviewed and cleared—even after closing. Not only can transactions be blocked by the President, they can be unwound, and the divestment of sensitive assets may be the price of clearing a deal. Accordingly, it is not at all uncommon for lenders to insist that a transaction be filed for CFIUS review to remove the prospect of CFIUS upending it after closing. As former Deputy Secretary of Treasury Robert Kimmitt observed in 2005:
[H]aving sat on boards of directors both home and abroad, I cannot imagine . . . how any director could give the go-ahead on a transaction [that had not completed the CFIUS review], because the President's authority to unwind that transaction is without limit if the person has not received approval of the process.3
Within the last few months alone, several acquirers have abandoned publicly announced transactions because of concerns that CFIUS would either block their deals or require unwelcome restructuring for them to proceed. Go Scale Capital, a Chinese investment fund, failed in its efforts to acquire control of the combined LED components and automotive lighting business of Royal Philips, a Dutch company with a substantial U.S. presence.4 After much back and forth, Fairchild Semiconductor International announced that it was rejecting a deal with Chinese buyers because it presented a "non-negligible risk of a failure to obtain CFIUS approval."5 China's Tsinghua University similarly ended its efforts to buy into Western Digital Corporation when CFIUS decided to investigate the deal.6
Deals that involve sensitive targets may provoke political challenge. In particular, the perception that a foreign buyer is taking a "crown jewel" of U.S. technology can put pressure on CFIUS or the Executive Branch to block or mitigate an acquisition. Recently, members of Congress have been especially vocal in urging CFIUS and the President to block acquisitions or strategic investments by Chinese companies in U.S. high-technology firms, like the proposed Western Digital Corporation transaction.
It would be wrong, however, to conclude that the CFIUS process is "just politics." Political considerations may inform the process, or highlight issues that CFIUS must address if it intends to clear a transaction. Nevertheless, the reality is that CFIUS regularly clears deals that are politically volatile, such as the purchase of Smithfield Foods by...
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