CFIUS Considerations in Cross-Border Deals

Cross-border deal activity has increased in recent years, and the global trend is likely to continue. Such deals have also attracted increased regulatory scrutiny, particularly when the transactions involve foreign direct investments that could raise national security concerns. Advanced planning and consideration of complex regulatory issues is critical prior to undertaking any cross-border acquisition or strategic investment.

Across jurisdictions, there are regulatory regimes for screening foreign investments and transactions involving foreign parties. In the United States, there is heightened political focus on deals involving Chinese counterparties. The Committee on Foreign Investment in the United States (CFIUS) is one of the main authorities responsible for clearing acquisitions by non-U.S. acquirors. CFIUS reviews transactions involving investments in U.S. critical infrastructure and technologies or where non-U.S. entities are attempting to acquire “control” of interests in a U.S. business.

In 2018, the U.S. Department of Treasury adopted the Foreign Investment Risk Review Modernization Act (FIRRMA), which expands the scope of CFIUS review. FIRRMA has enlarged CFIUS’s authority to also cover non-controlling investments by a foreign entity. The passage of FIRRMA also resulted in expanded CFIUS procedures. Under FIRRMA, a CFIUS filing is mandatory for transactions in which a foreign entity would obtain a non-controlling or controlling investment in a U.S. business that develops critical technology or infrastructure. A mandatory CFIUS filing is also required for transactions in which a foreign entity would gain access to the sensitive personal information of U.S. citizens or in which the foreign entity would acquire a substantial interest in a U.S. business that operates critical technology or infrastructure.

Recently, a number of potential deals have been blocked as a result of failure to pass the CFIUS review process. For example, President Trump blocked Broadcom Limited’s unsolicited takeover bid for rival chipmaker Qualcomm in 2018 on national security grounds. CFIUS identified potential risks stemming from Broadcom’s connection with foreign entities, particularly in China, and potential Chinese influence in the deal. As another example, the proposed merger of MoneyGram and Ant Financial, an affiliate of Chinese company Alibaba, was canceled after the deal failed to win CFIUS approval.

The preferences of local regulators and constituencies can also influence transaction structures. For example, local regulators may influence the location of the corporate headquarters of the combined company following a merger transaction. Labor unions and “works councils” may also demand deal concessions and employee protections.

To reduce deal uncertainty, it may be advisable to submit a voluntary filing with CFIUS. This may be especially useful for cross-border transactions that involve a reasonable probability of a CFIUS investigation. The parties can either submit a short-form “declaration” that contains basic information about the transaction or a full-length notice.

After submitting a full-length notice to CFIUS, the initial review process can take 30-45 days. Following the initial review, CFIUS may decide to clear the transaction or they may launch an investigation. The investigation must be concluded within another 45 days.

To mitigate potential risks, it may be strategic to include in the merger agreement a reverse termination fee provision that is specifically related to the CFIUS review process. The amount of the reverse termination fee can be deposited in a U.S.-based escrow account by the acquiror. This is more common in cross-border deals involving a Chinese acquiror and U.S. seller.

Companies seeking to engage in cross-border transactions should be aware of the increased regulatory focus and should design transaction structures to mitigate the risk of not obtaining CFIUS approval. Careful consideration of transaction structure is especially pertinent for companies engaging in deals with Chinese entities. Advanced planning is also critical for cross-border deals involving industries that could implicate national security concerns such as telecommunications, AI, data infrastructure, energy, defense, and computing hardware.