An Overview of CFIUS and Its Increasing Influence on Cross-Border Transactions under the Trump Administration

The Committee on Foreign Investments in the United States (“CFIUS”), a government inter-agency body that is responsible for vetting cross-border transactions for national security interests, is taking on an increasingly influential role in the Trump administration.

The Committee on Foreign Investments in the United States (“CFIUS”), a government inter-agency body that is responsible for vetting cross-border transactions for national security interests, is taking on an increasingly influential role in the Trump administration.

In 2016, CFIUS reviewed somewhere between 100 to 150 transactions. According to a Treasury Department official, this number is expected to reach close to 200 in 2017.

To give you a better understanding of CFIUS and answer what its increased activity may mean for you, we provide the Who, What, When, Why, Where, and How of the Committee on Foreign Investments.

What is CFIUS?

CFIUS is an inter-agency committee of the United States government that reviews foreign investments in U.S. companies to assess its implications on national security. CFIUS is led by the United States Secretary of the Treasury and the Committee members include representatives from 16 U.S. departments and agencies, including the Defense, State and Commerce, and the Department of Homeland Security.

Why does it exist?

CFIUS was established by President Gerald Ford in 1975 to monitor the impact of foreign investment in the United States with the purpose of implementing United States policy on such investments. In 1988, Congress enacted the Exon–Florio Amendment that empowered the President to review and block proposed foreign mergers, acquisitions, and takeovers if such transactions were deemed to pose a threat to national security. President Ronald Reagan thereafter delegated the review process to CFIUS while retaining presidential power to block foreign investments forwarded by CFIUS.

Who does CFIUS concern?

Transactions involving foreign control of agricultural, mining, manufacturing, construction, financial services and utilities are especially likely to come under CFIUS review. Deals involving the transfer of intellectual property relating to biopharmaceutical, telecommunication, and energy are also likely candidates for CFIUS review.

In recent years, CFIUS has expanded the types of transactions it examines. For example, under the Obama administrative, CFIUS began reviewing transactions involving “large data sets that could involve personal data” of U.S. citizens; these types of transactions are now receiving heightened scrutiny under the Trump administration as well as transactions affecting cybersecurity and new technologies with military and civilian applications, such as artificial intelligence. Furthermore, under the Trump administration, CFIUS’s analysis has expanded to assess the transaction’s implications on economic security in addition to national security concerns. In the past, a CFIUS analysis did not address concerns about jobs and trade reciprocity, but that may be changing under the Trump administration.

How does CFIUS conduct its process?

All companies involved in an acquisition by a foreign entity must voluntarily notify CFIUS, but CFIUS can review transactions that are not voluntarily submitted.

Once CFIUS receives the notice or elects to review a proposed transaction, the company must provide extensive information regarding the transaction for CFIUS’s review. Once CFIUS receives all of the requested information, it has 30 days to review the transaction. If deemed necessary, CFIUS can order another 45-day investigation. If CFIUS concludes that a transaction does not present any problems, the parties receive a “safe harbor” and the transaction can proceed.

Most transactions reviewed by CFIUS are approved. However, if CFIUS finds that a transaction presents certain risks that can be mitigated, it can recommend a mitigation. CFIUS can also recommend the deal be abandoned if it doesn’t see a way to mitigate the risks.  The parties may follow CFIUS’s recommendation to mitigate or voluntarily abandon the transaction. If, however, the parties choose not to follow CFIUS’s recommendation to mitigate or abandon the transaction, CFIUS will send the case to the President, who can order the parties to mitigate or abandon the deal.

Where is there more risk of heightened CFIUS scrutiny?

Transactions involving Chinese (and to a lesser extent, Russian) acquirers have faced heightened CFIUS scrutiny.  According to a CFIUS report, 29 out of 143, which represents 20% of transactions it reviewed in 2015 were deals involving Chinese companies.  

Since the inception of CFIUS, U.S. presidents have blocked only four foreign investments over national security concerns, all of which involved Chinese entities. Most recently on September 13, 2017, President Donald Trump issued an Executive Order to block the proposed sale of Lattice Semiconductor Corp., an Oregon company that manufactures programmable logic devices, to Canyon Bridge Capital Partners, a Chinese consortium.  The U.S. government cited to national security risks for blocking the transaction.

As tensions escalate between North Korea and China, some legislators have proposed even more heightened scrutiny when reviewing Chinese deals.

When should I be concerned?

Now. Due to the increase in the number of CFIUS filings and the number of transactions being reviewed, the processing time for CFIUS pre-review and review is getting longer than before.  For example, the average time for CFIUS to accept a draft for review has increased from two weeks to six weeks. 

Foreign companies and individuals looking to buy U.S. companies or assets should prepare for the possibility of a lengthy CFIUS review, especially if such companies and assets implicate national security concerns.