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By Mario Mancuso and Lucille Hague
Kirkland & Ellis partner Mario Mancuso, P.C., leads the firm’s International Trade & National Security practice. Mario is a former U.S. Under Secretary of Commerce for Industry and Security and senior Defense Department official. During his time in government, Mario served as a senior CFIUS decision-maker, helped draft and implement regulations for the Foreign Investment and National Security Act of 2007 and reviewed hundreds of CFIUS transactions as a regulator.
Luci Hague is an associate in Kirkland’s International Trade and National Security practice. Luci counsels U.S. and foreign clients on CFIUS matters across investment scenarios, including fundraising, M&A, minority investments, and exit.
It has been a challenging year for the Committee on Foreign Investment in the United States (“CFIUS”). The number of transactions notified to CFIUS is on pace to set a record. Transactions are taking longer to receive clearance, as delays in appointments of senior governmental officials with CFIUS responsibilities have slowed CFIUS’ reviews and investigations. Complex transaction structures and ownership chains have prompted requests for additional disclosure from transaction parties as well as, in some acquisitions involving private equity sponsors, limited partners. And, the scope of CFIUS’ concerns is widening: national security questions are increasingly being raised with regard to industries and sectors that have not historically been considered “sensitive.”
In light of these circumstances, boards, investors, and bankers alike must consider how CFIUS may be relevant to a transaction at the earliest possible opportunity. Whether a transaction may warrant notification to CFIUS will inform not only deal feasibility, but also certainty, timing, and financial and other costs. But, while CFIUS tends to be opaque, it is not a black box, and it is not binary. With careful advance preparation, decisions about whether and when to file with CFIUS can be nested within the deal strategy process, and properly account for both deal-specific considerations as well as enterprise investment goals.
We summarize below the top five things about the CFIUS climate that boards, investors, and bankers need to know now.
Transactions involving Chinese buyers have encountered particularly challenging headwinds in the CFIUS process in the past year—and in particular, within the past three months.
On Sept. 13, President Donald Trump blocked the $1.3 billion acquisition of Lattice Semiconductor Corp., a U.S. manufacturer of programmable logic chips, by Canyon Bridge, a fund headquartered in Silicon Valley and backed by a Chinese state-owned investment manager.
The Lattice transaction ran into trouble well before President Trump’s decision. According to public filings, the parties met with CFIUS officials in advance of signing to socialize the transaction and seek CFIUS’ reaction to Canyon Bridge’s participation. However, shortly after the deal was announced in November 2016, 22 members of Congress signed a letter to the Secretary of the Treasury, Chair of CFIUS, calling for CFIUS to reject the acquisition in light of factors including Canyon Bridge’s financial ties to the Chinese government and the Chinese government’s pursuit of semiconductor technology through sequential acquisitions of U.S. semiconductor businesses. In the intervening months, the parties pulled and refiled their notice to CFIUS twice before deciding to elevate the transaction for President Trump’s final decision.
A press release from the Department of Treasury explained that sources of national security risk in the transaction that could not be mitigated included:
A Presidential decision to block a transaction after CFIUS review is rare, and has occurred on only three other occasions in CFIUS’ history. In each such transaction, the acquiring party has been Chinese. However, a number of other transactions involving prospective Chinese buyers have been abandoned following CFIUS’ notification to the parties that CFIUS would recommend that the President prohibit the transaction.
Recent examples of failed deals include:
According to public information, at least ten other deals involving Chinese acquirers or minority investors are currently pending before CFIUS, many of which have been filed to CFIUS more than once.
Importantly, CFIUS risk may arise not only from direct Chinese acquisitions of U.S. businesses, but also from:
Sen. John Cornyn (R-Texas) has indicated that he intends to propose a bill that would reform and strengthen CFIUS, with a specific focus on imposing more stringent criteria for Chinese acquisitions of U.S. technology companies. The bill would expand CFIUS’ jurisdiction to enhance scrutiny of joint ventures and certain types of minority investments, permit CFIUS to undertake reviews of licensing transactions, and require CFIUS to devote additional scrutiny to transactions involving “countries of concern” ( e.g., China, Russia).
If Sen. Cornyn’s bill or other legislation incorporating these concepts becomes law, boards and management teams of U.S. companies (or foreign companies with U.S. assets) will need to plan for longer transaction review timelines in negotiating sales to foreign buyers whose acquisitions would fall within the scope of the new law. Foreign acquiring parties to such transactions will likewise need to account for any competitive disadvantages posed by higher standards of review.
For reasons similar to those driving U.S. stakeholder interest in strengthening CFIUS, other countries have begun to adopt CFIUS analogues to screen foreign direct investment.
Looking forward to the fourth quarter and beyond, deal professionals should address CFIUS strategy and tactics as early as practicable in the deal process. CFIUS’ decisional metabolism in the Trump administration is continuing to work itself out, and a transaction party’s prior smooth reviews may not predict future clearances. Each case that goes before the Committee for review is unique, and must be carefully evaluated in light of U.S. national security and foreign policy priorities.
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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