The global marketplace is a dynamic and sometimes unpredictable arena, especially when it comes to international business transactions. For companies involved in cross-border investments or exports, it’s vital to keep up with the ever-evolving legal landscape to ensure compliance and avoid potential risks.
The Committee on Foreign Investment in the United States (CFIUS), a key player in safeguarding national security, has become increasingly active in recent years. Its scrutiny of transactions involving foreign investment in the U.S. has gone beyond inbound investments to include outbound investments and export controls.
In this helpful guide, the knowledgeable CFIUS attorneys at Sequoia Legal have provided the essential information you need to navigate these changes. We’ll explore recent updates, discuss key considerations for outbound investment, and highlight some best practices for minimizing potential risks.
What Is CFIUS?
The Committee on Foreign Investment in the United States (CFIUS) is an interagency committee responsible for reviewing foreign investments in the U.S. to protect national security. It acts as a gatekeeper, ensuring that foreign investment doesn’t pose a threat to the United States, its commerce, or its citizens.
How CFIUS Works
Committee members review transactions to assess whether a foreign investor's control of a U.S. business could compromise national security. To do so, they examine several factors, including the following:
The Identity of the Investor
One of the main duties of CFIUS officials is to scrutinize the background of foreign investors, including their connections to foreign governments, their business activities, and their perceived threat to national security.
The Nature of the Target Company
The committee looks at target companies’ operations, technology, and assets, paying particular attention to companies involved with critical technologies, infrastructure, or sensitive personal data. It focuses on industries that could have a strategic impact on national security.
Potential National Security Risks
CFIUS officials analyze the potential for foreign investors to influence or control target companies in ways that could harm national security. This includes evaluating the potential for a foreign investor to gain access to sensitive technologies or information, control critical infrastructure, and influence the target company's decisions or operations.
CFIUS and Outbound Investments
In recent years, CFIUS has expanded its focus to include outbound investments. It reviews transactions where a U.S. company is investing in or exporting technology or sensitive information to a foreign country.
The government’s focus on outbound investments is motivated by concerns regarding:
- Technology transfer: The transfer of sensitive technology to foreign countries could pose a national security risk.
- National security concerns: Foreign investments in certain sectors, like those involving critical infrastructure, could threaten national security if foreign entities gain control.
- Foreign government influence: The government seeks to prevent foreign governments from influencing or controlling U.S. businesses through investment.
These elements overlap in many cases, making careful review and oversight critical.
Navigating CFIUS Review
Understanding how CFIUS reviews transactions is imperative for companies involved in international investments. Here’s a broad overview of the committee’s basic procedures:
Due Diligence
For CFIUS, performing due diligence is a critical aspect of reviewing any transaction involving foreign investment. This typically involves:
- A review of the foreign investor's identity and background.
- An analysis of the target company’s operations, technology, and critical infrastructure.
- A careful assessment of possible threats to national security.
- An examination of the foreign investor's connections to foreign governments or other entities.
In short, due diligence is a thorough process that aims to assess potential national security vulnerabilities associated with the investment.
Mandatory Declarations
A mandatory declaration is a specific form that must be filed with CFIUS in certain circumstances. The filing process requires a detailed analysis of the transaction to assess prospective threats.
If a transaction involves a TID U.S. business (a company involved with critical technologies, critical infrastructure, or sensitive personal data), a declaration is usually mandatory. This means that the target company must file a declaration even if the deal is considered a typical commercial transaction.
Failing to file a mandatory declaration can have serious consequences. CFIUS could prohibit the transaction, issue significant financial penalties, or impose mitigation measures, such as requiring the company to divest certain assets.
Voluntary Review
While a mandatory declaration may be required in certain situations, companies can also choose to voluntarily submit a transaction for CFIUS review. This can be a strategic move to proactively address potential concerns and obtain early clearance.
On the plus side, voluntary review can decrease the chances of CFIUS intervening later on in the process, which could potentially lead to delays and disruptions. It can also establish a clear path forward by providing certainty about the transaction’s approval.
That said, voluntarily seeking a CFIUS review can extend the transaction timeline and increase its total costs. It could also entail additional paperwork, time spent gathering information, and delays in closing the deal.
CFIUS Updates 2024: A Closer Look
CFIUS is constantly evolving its review process. Here’s an overview of some recent updates companies need to be aware of:
Increased Scrutiny of Declaration Filings
The committee is devoting closer attention to short-form declarations, leading to a considerable increase in requests for companies to file long-form notices. As such, the review process can be more extensive, adding time and complexity to the transaction. Company leaders should be prepared to provide detailed information to CFIUS upon request.
Expansion of Jurisdiction
CFIUS has also expanded its jurisdiction to cover a wider range of transactions. This means that more transactions involving foreign investment, including outbound investments, are subject to review. The government’s focus on national security accounts for the enlarged scope of the CFIUS review.
Changes to Voluntary Disclosure Programs
CFIUS has made substantial changes to its voluntary disclosure program, aiming to encourage more companies to self-report potential violations. The program now includes stiffer consequences for failing to disclose, underscoring the importance of proactively addressing compliance concerns.
New Focus on Corporate National Security Matters
Beyond CFIUS, the Department of Justice is also placing more emphasis on corporate national security issues. The government is now actively pursuing cases involving potential breaches of export controls and national security.
Scrutiny of Private Equity
Lastly, CFIUS is paying closer attention to private equity transactions, especially those involving investments by sovereign wealth funds. It aims to better understand ownership structures and the potential for foreign government influence.
This area of review is likely to become more prominent in the future as the government works to monitor and minimize national security concerns.
Reverse CFIUS: A New Consideration
CFIUS has expanded its review process to include “reverse CFIUS,” which involves examining outbound investments by U.S. companies in foreign countries.
The government is focusing on the potential for outbound investments to harm national security. This might involve scenarios where a U.S. company invests in a foreign company with the potential to develop or acquire critical technologies that could ultimately endanger U.S. security.
Officials are also concerned about U.S. companies unknowingly providing foreign entities with access to sensitive technologies or resources that could be used to advance their interests.
CFIUS Export Controls and Regulations
In addition to overseeing investments, CFIUS also reviews exports of sensitive technology and information. This is a critical area of compliance for businesses involved in international trade.
Two key sets of regulations govern these sorts of transactions:
- Export Administration Regulations (EAR): EAR regulates exports of goods, software, and technology from the U.S.
- International Traffic in Arms Regulations (ITAR): ITAR deals with the export of defense-related articles and services.
Companies must understand and comply with these export control regulations to avoid potential penalties and legal challenges.
CFIUS Annual Report
CFIUS publishes an annual report that provides information about its activities, including the number of transactions it’s reviewed, the outcomes of these reviews, and the types of transactions that have been subject to increased scrutiny. The report offers valuable insights into CFIUS’s priorities and its enforcement activities.
Best Practices for Navigating CFIUS
Here are some basic guidelines for ensuring the success of your business endeavors if there’s a chance that they could be subject to CFIUS review:
Understand Your Risks
Thoroughly assess the potential CFIUS risks you face, taking into account factors like the identity of your investors, the nature of your business, and the technologies you’re involved with.
Seek Legal Guidance
Consult experienced CFIUS attorneys early on in the process. They can help you understand your obligations, reduce your overall risk, and adhere to evolving regulations.
Prioritize Proactive Compliance
Take steps to ensure that your business practices are compliant with CFIUS regulations. Your legal team can help identify suitable measures and formulate a plan for implementing them.
Develop a Mitigation Strategy
If CFIUS raises concerns about a transaction, work with your legal team to develop a mitigation strategy that addresses them satisfactorily. By doing so, you can avoid hefty fines and other penalties.
Don’t Get Tied Up by CFIUS Regulations
The federal government has made it clear that national security through the enforcement of CFIUS and outbound investment is among its top priorities. Successfully conducting business in light of the newfound complexities requires dependable legal guidance and a proactive approach to compliance.
The experienced CFIUS lawyers at Sequoia Legal can offer further insight into these regulations, safeguarding your business interests and ensuring that your transactions are lawful. Contact us today to schedule a free consultation.
