Executive Summaries Sep 14, 2018
CFIUS – Recent Additional Protectionist Measures Making Investments in the United States More Difficult
Are you in the technology sector or infrastructure sector? Do you plan to make any acquisitions in the United States? Do you plan to do business with the US government? If you’ve answered yes to any of these questions, you need to be aware of the changing obligations imposed on new investors by the US government through modifications to CFIUS.
WHAT IS CFIUS?
CFIUS (pronounced "cifius") is the Committee on Foreign Investment in the United States, established initially in 1975 by executive order of President Gerald Ford to review acquisitions having major implication for US national interests. Made up of a multi-departmental/agency cross section of the US government (16 have standing), the Committee is chaired by the Treasury Department (Office of Investment Security). While the Committee review process is currently voluntary, the Committee does have the power to investigate transactions on its own initiative and recommend that the President either block a transaction or order a disinvestment.
The Committee review process is two steps: first, a 45-day review in which the Committee will determine if an investigation is necessary or not – in 2016 there were 172 matters reviewed by the Committee; second, if the Committee has determined that an investigation is necessary, it will investigate for a further 60 days, at the end of which it will make recommendations to the President that may include mitigation actions, blocking the transaction, or ordering a disinvestment – in 2016 there were 79 investigations, one of which required presidential action.
SOME NOTABLE CASES
While this may appear quite formalistic, it is important to note that the US government has used the authority delegated to CFIUS to block certain transactions and order the disinvestment in other circumstances:
- in 2008, Congress blocked the acquisition of US port facilities by a Dubai-based business;
- in 2012, President Obama ordered the disinvestment by a China-based business of three minor wind farms that were located near a US Navy weapons training centre;
- in 2017, President Trump blocked the acquisition by a China-based business of a US-based semi-conductor business; and
- in 2018, President Trump blocked the acquisition by a Singapore-based business of a US-based semi-conductor and telecommunications supplier.
On August 13, 2018, President Trump enacted modifications to CFIUS, both in terms of process and in terms of scope of review, including:
- purchase or lease by a non-US person or a foreign government backed entity of real estate close to ports, airports, military bases or US government installations;
- acquisition by a non-US person or a foreign government backed entity of critical infrastructure, critical technology and sensitive personal data on US citizens;
- acquisition of US businesses that have access to non-public technical information by a non-US person or a foreign government backed entity;
- membership or observer rights by a non-US person on a US business’s board of directors;
- any investment that grants a non-US person or foreign government backed entity substantive decision-making capacity;
- critical technology to more than likely include: artificial intelligence, encryption and nanoscale technology and quantum computing;
- mandatory review process in those issue areas – a major change from the current voluntary process;
- filing fee equal to 1% of the transaction value with a maximum filing fee of US$300,000.
The details of all these modifications will be provided in regulations that are to be enacted within 18 months (outside date: February 2020).
WHAT DOES THIS MEAN TO YOU?
While it would be easy to imagine that such measures would seek to protect the US economy from investments from countries such as North Korea, Iran, Syria, China or Russia, as being contrary to US national security, we have come to learn that the current US administration has an expanded definition of national security that now includes economic security for US industries. Traditional US allies are now being treated as contrary to US national security resulting in countervailing duties on aluminum and steel. As such, these protectionist measures should be considered as an issue for investors from anywhere outside the US. In fact, in 2005, CFIUS investigated the acquisition by UK based BAE Systems of US based United Defense.
Another issue that is increasingly being scrutinized is the foreign government backed entities. As such, if you are in the technology or real estate/infrastructure sectors and have an acquisition in the US or doing work for the US government on your roadmap to success, you need to consider long before you are making a CFIUS reviewable transaction, the role that sovereign investment funds have in the ownership of your business with a particular concern regarding the control that such fund exercises on your business. CFIUS will be reviewing your share-capital structure, shareholder agreements and voting trust agreements to determine the role that these funds play. If you have a sovereign investment fund as a shareholder, you need to carefully consider issues such as board representation, observer rights, shareholder veto, default share forfeiture clauses or right of first refusal clauses altering the control of the business – any clause giving de jures or de facto control of the business.
Keep in mind that you will need to factor in more time to close those transactions that are subject to CFIUS review as the initial 45-day review period will only start to run from the time that your application is complete with all supporting documents attached thereto.
At BCF, we are uniquely positioned to assist you in developing your plans regarding your acquisitions in the technology or real estate/infrastructure sectors in the United States and navigating through a CFIUS process.