CFIUS - US Investment Control

With international M&A transactions, the question of whether a transaction is subject to the approval of the US investment control is becoming increasingly relevant. Even German companies that want to buy or sell are faced with constantly expanding responsibility and density of checks.

Background

Since 1950, the US President has been monitoring foreign investments. In order to fulfil this duty, the Committee on Foreign Investments in the United States ("CFIUS") was established in 1975.

The CFIUS is an inter-agency committee of the US government, which is chaired by the Treasury Secretary. The committee monitors the impact of foreign investments on the national security of the USA, using a review procedure that is comprised of multiple stages. If the CFIUS deems the security of the USA as being at risk, the committee may

• suspend the transaction subject to requirements,
• approve the transaction after concluding risk minimisation agreements (mitigation agreements) or
• forward the transaction to the President for prohibition.

The number of applications has increased since 2008. This trend will presumably be strengthened further as a result of President Trump’s “America First” policy. At present, the checks are particularly focused on investments by Chinese companies.

CFIUS

The CFIUS is comprised of nine members of the government, inter alia, the Treasury Secretary, the Homeland Security Secretary, the Defence Secretary and the Foreign Secretary. Furthermore, there are two additional members without voting rights, the Labour Secretary and the Director of National Intelligence. Five other White House observers are also involved in the CFIUS. The CFIUS decides unanimously as a committee.

Significance for transactions

The CFIUS review procedure is not just relevant for a transaction, if a foreign investor intends to acquire a US company. Indirect implications for the US economy may also result from the acquisition of non-US companies, such as if a group company of the target company is domiciled in the USA. Recent prominent transactions have shown the significance of the CFIUS procedure.

 

Procedure

The parties involved are not obligated to file an application for the transaction to be reviewed by the CFIUS. The filing of an application is voluntary.

During the preparation of a transaction, the parties involved must therefore judge for themselves, whether the issue of investment control is relevant for their initiative and whether the CFIUS is responsible (so-called covered transaction).

Should the parties involved at least not rule out the review competence of the CFIUS, they may initiate a CFIUS procedure by filing an application. Bearing in mind that ultimately, an M&A transaction can stand and fall with the assessment of the CFIUS, the review procedure may be unavoidable for the parties involved, under certain circumstances, as a final safeguard. Ultimately, if concerns exist, the CFIUS is free to impose time-consuming and cost-intensive requirements on the parties involved, to demand entering into risk minimisation agreements (mitigation agreements) or to recommend the prohibition of the transaction to the President.

If the CFIUS has declared the release of a transaction, this also applies for the future. Only in very narrowly defined, exceptional cases, can the review procedure be resumed again, for example, if the circumstances of the individual case have changed significantly and a threat situation to national security is now assumed. All transaction risks, which are associated with US investment control, would be completely eliminated with a release declaration.

However, in addition to the filing of an application by the parties involved, the CFIUS may also take independent action and review the facts of the case under its own initiative. Therefore, in the interest of prudent transaction management, the parties involved must check, in any case, whether the CFIUS is responsible for the transaction.

Review competence “covered transactions”

All types of transactions fall within the review responsibility of the CFIUS, in which a foreign person may directly or indirectly, obtain legal or de facto control over a US company and which threaten or have an adverse impact on national security of the USA.

Competence exception - “safe harbour”
The CFIUS refrains from reviewing a very important case. This relates to such transactions, in which a foreign person acquires 10% or fewer of the voting rights in a US company, whilst other indications do not exist for control (e.g. a seat on the board). This scenario is also referred to as “safe harbour” in practice.

Monitoring

The term “monitoring” is not clearly defined. The CFIUS relies on the capability of a person to make decisions, which relate to a company. Control may result from a company shareholding, a contract or other decision-making authorities.

A majority shareholding is not required, if decision-making authorities arise from other circumstances, such as from a right to veto important business decisions. 

Important decisions may relate to:

• The sale of significant assets of the target company
• Restructuring or dissolution of the target company
• Approval of significant expenditures
• Entry into important contracts
• Hiring or dismissal of employees in key positions

It exclusively depends on the de facto opportunity to exercise control. Actual exercising of control is not required.

US company

A US company has a very broad meaning, according to the understanding of the CFIUS, and includes any commercial enterprise in the USA. It does not depend on an individual legal personality. The consequence of this understanding is that exclusively non-US deals also fall into the responsibility of the CFIUS, if the foreign target company has US subsidiaries or operations in the USA.

Foreign person

A foreign person is any non-US natural person, legal entity or any non-US country or enterprise, which is controlled by such a person or country. Consequently, a private equity fund, which is domiciled in the USA, may also be controlled by a foreign person, if a foreign investor is able to make important decisions about the fund.

National security

The term “national security” is neither defined by law nor by the CFIUS.

For the review of risk, the CFIUS uses the following criteria, inter alia:

• Possible implications of the transaction for domestic production, which is required for guaranteeing national security.
• Possible implications of the transaction on the ability of the domestic industry to satisfy the national security requirements. This includes the availability of personnel resources, products, technologies and other services.
• Possible implications of foreign control over domestic industries and trading activities on the requirements for guaranteeing national security.
• Possible security-relevant implications for US technologies.
• Possible implications of the transaction for the sale of military goods, equipment or technologies to countries, which substantiate concerns in relation to terror, the distribution of projectiles or chemical, biological or nuclear weapons.
• Possible security-relevant implications for US critical infrastructure.
• “Critical infrastructure” comprises the following sectors, inter alia: Chemicals, trading institutions, communication, energy, financial services, food and agriculture, healthcare and health services, information technology, nuclear reactors, nuclear substances and waste.
• Any other criterion, which is regarded by the CFIUS as being appropriate for assessing national risks.

Review process - multi-stage procedure

 

1. Informal consultation procedure (pre-filing)

Before the official review procedure is opened by filing an application, the parties involved in a transaction may contact the CFIUS informally. Within the scope of such an informal consultation, a draft of the application may already be submitted for review. The CFIUS checks the completeness and states whether additional information needs to be provided.

The informal consultation procedure is very advantageous for the parties involved. In this way, the strict decision-making deadlines for the review procedure can be circumvented and the possible rejection of an application due to incompleteness may be avoided. If the CFIUS suggests the provision of additional information, this can be compiled without time pressure.

2. Application (filing)

At the initiative of the parties involved in a transaction, the CFIUS procedure begins with the submission of the application for review.

The following information, inter alia, must be compiled in the application documents:

• Overview of the target company and the transaction, including the goal and scope of the transaction, the type of transaction (for example, asset purchase, share purchase etc.)
• Estimation of the transaction duration
• Estimation of the market value of the acquisition object
• Names of the consultants involved, sources of financing
• Purchase contract
• Detailed list of the purchase objects with an asset purchase and a corresponding estimated value• Comprehensive information about the US company involved, e.g. corporate structure, market shares for the relevant sectors, list of direct competitors for each sector, contractual relationships with the US government, transactions, which are subject to US export control; whether the US company has already been involved in a CFIUS procedure
• Comprehensive information about the foreign buyer, such as the share structure, information about a possible parent company and managing directors, management positions, shareholders with an equity interest of more than 5%, annual report
• Declaration by the applicant, as to whether he is a foreign person, or whether he is controlled by a foreign government, whether the transaction can lead to a foreign person controlling a US company
• Disclosure of the plans in relation to the US company, such as reduction of the business, change to the product quality, closure of US operations, sale of products exclusively abroad
• Comprehensive information about an involved foreign government
• Declaration by the applicant about the correctness and legal conformity of the application and the application documents (executed certification).

It is particularly noteworthy that the CFIUS has access to the company and transaction information, which has not been provided by the parties involved in the transaction. The nature and scope of this information is not known and will also not be disclosed by the CFIUS. This even applies to applications, which are withdrawn. On its website, the CFIUS states that the committee continues to track withdrawn transactions.

3. Decision about the acceptance of an application

The CFIUS decides on the application with a formal acceptance or with a rejection. The duration until a decision is made depends on the individual case and varies between a few days, right up to over one month.

An application is rejected, if the required documents have not been provided or declarations have not been submitted within the prescribed time period. Furthermore, the CFIUS may reject an application due to material inaccuracy of the information or a significant change to the circumstances.

After the acceptance of the application, it is handed over to the members of the CFIUS for review.

4. 30-day review phase (review)

The 30-say review phase begins with the acceptance. If the CFIUS has taken action independently and not upon application by the parties, the phase begins with the initiation of the investigations.

In practice, the CFIUS contacts the parties involved on a regular basis within the review, in order to request additional information.

If the CFIUS regards the national security as being threatened, the committee may impose measures on the parties involved, in order to eliminate the threat situation. Alternatively, the parties involved may enter into a type of public-law contract at the suggestion of the CFIUS, by means of which they undertake to perform measures, which eliminate the threat situation (mitigation agreements).

The procedure will usually be that the CFIUS suggests contractual terms and conditions for negotiation. In practice, suggestions are often only made briefly prior to the end of the review phase, so that the parties involved are not left with much time for consideration and scope for negotiation. In around 5% - 10% of the cases, mitigation agreements are concluded.

So far, the following risk minimisation measures have been arranged, for example:

• Restriction of access to sensitive data;
• Set-up of security mechanisms;
• Assurance that only US persons are responsible for specific products and services;
• Assurance that specific transactions and products are only found in the USA;
• The US government is granted the right to review specific business decisions and to object if national security concerns exist;
• Specific items are removed from the transaction.

The review phase is either concluded with the release declaration of the transaction (clearance) or with the transition into the 45-day investigation phase. In each phase, an application for review may be withdrawn by the parties and re-filed, with the consequence that the procedure starts over again. 

The reasons for the decision within the scope of the CFIUS procedure are not disclosed.

5. 45-day investigation phase

The CFIUS usually moves into the 45-day investigation phase, if

• a threat to national security is assumed and has not been dispelled.
• the committee assumes that a further investigation is required.
• a foreign country is involved. Then, the 30-day review phase is automatically followed by the 45-day investigation, provided that the Treasury Department does not waive it. The CFIUS is particularly attentive when it comes to government involvement.

The investigation phase is concluded with the release declaration (clearance), possibly after entering into a mitigation agreement or fulfilling the requirements, or by forwarding the procedure to the President.

6. Investigation by the President

Once the procedure has been transferred, the US President has 15 days to decide whether he will prohibit the transaction, suspend the transaction subject to a requirement or conclude a mitigation agreement with the parties. In the history of the CFIUS procedure, the President has only prohibited a transaction in three cases.

Alternative courses of action after a prohibition

New application

If the President has handed down a prohibition, the parties involved are free at any time to restart the review procedure by filing an application. The prospects for success are particularly based on whether the threat situation for national security, which is assumed by the President, no longer exists, due to a change to the circumstances.

Legal protection

It is not possible to take legal action against the substantive decision of the CFIUS or the President. If need be, claims regarding procedural errors may be enforced judicially.

Flouting a prohibition

It is unclear, what the implications are of executing a transaction in spite of a prohibition by the President. The President is free to instruct the Attorney General to obtain a judicial decision against the parties involved. It is not known, how such a decision can then be enforced.

In view of the far-reaching powers of the US President, it is conceivable that stiff fines and disposal restrictions will be imposed in respect of the US operations and assets.