The CFIUS Proposed Filing Rule—What Dealmakers Need to Know
In this column for Bloomberg Law, Kirkland attorneys Mario Mancuso, Shawn Cooley, Lucille Hague and Anthony Rapa boil down the top five things dealmakers need to know about the recent Committee on Foreign Investment in the U.S. proposed rule changing when transaction parties must make a mandatory, pre-closing filing to CFIUS. They say it reflects, and responds to, broad U.S. government concerns about the use of complex ownership structures to conceal the true sources of funds for transactions and bipartisan efforts to scrutinize foreign investment to protect U.S. national security.
On May 21, the U.S. Treasury Department, as chair of the Committee on Foreign Investment in the U.S., published a proposed rule that would make significant changes regarding when transaction parties must make a mandatory, pre-closing filing to CFIUS. Failure to comply with the rule, when enacted, will expose non-U.S. buyers and sellers of U.S. businesses to potential significant financial penalties (up to the deal value, for each transaction party).
The proposed rule would tether the mandatory CFIUS “trigger” more closely to U.S. export controls, and would apply to a broad variety of controlling and non-controlling investments. Treasury noted in the proposed rule that it “leverages the national security foundations of the established export control regimes” in order to determine when a CFIUS filing is required.
Importantly, the requirement will apply regardless of whether the target actually exports such goods or technology in practice, or makes any international sales. The proposed rule reflects, and responds to, broad U.S. government concerns about the use of complex ownership structures to conceal the true sources of funds for transactions and bipartisan efforts to scrutinize foreign investment more closely to protect U.S. national security.
Here are five key things to know about the proposed rule and its potential impacts.
- The proposed rule would impose a mandatory CFIUS filing requirement on certain foreign investments in U.S. “critical technology” businesses. It sets forth a three-step test to assess whether a CFIUS filing would be required for a transaction, as follows:
- The proposed rule would remove the current requirement that a U.S. business have a nexus to one or more of the 27 specifically identified industries in order for a CFIUS filing to be required in advance of closing. Following the 2018 implementation of the CFIUS Pilot Program, a pre-closing filing has been required for control and non-controlling foreign investments in target companies that produce, design, test, manufacture, fabricate, or develop one or more “critical technologies,” but only if the target company operated or had activities in one or more identified industries, largely connected to the U.S. defense industrial base (e.g., aircraft manufacturing). This will expand the scope and impact of the mandatory filing requirements.
- The U.S. business must be a “critical technology” business, i.e., it must produce, test, design, manufacture, fabricate, or develop one or more goods or technologies that are subject to certain U.S. export controls;
- A foreign person: (i) could directly control the U.S. business as a result of the transaction; (ii) is acquiring a non-passive, non-controlling interest in the U.S. business; (iii) has a direct investment in the U.S. business but, as a result of the transaction, will obtain new or different rights that would either give the foreign investor “control” of the business or result in the foreign investor becoming non-passive with respect to the business; (iv) has structured the transaction for evasion of CFIUS’ jurisdiction; or (v) individually holds, or is part of a group of foreign persons that in the aggregate, directly or indirectly, holds a 25% or greater voting interest in the foreign person described in (i)-(iv) above.
- The foreign person in the above bullet would require a U.S. export authorization to receive “critical technology” items from the U.S. business. In this regard, the proposed rule specifies that the determination shall be made without giving effect to relevant license exemptions (with a few specified exceptions for certain software assets), and shall be made as if the foreign person were an “end-user” of the goods or technology. Therefore, this requires an assessment of both destination-based and end-user-based export controls applicable to the critical technology at issue.
- The proposed rule would remove the current requirement that a U.S. business have a nexus to one or more of the 27 specifically identified industries in order for a CFIUS filing to be required in advance of closing. Following the 2018 implementation of the CFIUS Pilot Program, a pre-closing filing has been required for control and non-controlling foreign investments in target companies that produce, design, test, manufacture, fabricate, or develop one or more “critical technologies,” but only if the target company operated or had activities in one or more identified industries, largely connected to the U.S. defense industrial base (e.g., aircraft manufacturing). This will expand the scope and impact of the mandatory filing requirements.
- Sellers considering foreign investors will need to build new CFIUS considerations into their due diligence process. Sellers will need to understand the export control profile of their U.S. businesses well in advance of execution of definitive deal documents. Moreover, sellers should undertake due diligence on prospective buyers to verify whether their direct and/or indirect owners could trigger a requirement to make a CFIUS filing.
- Foreign buyers of U.S. businesses will increasingly seek assurances that the target company is not involved with critical technologies. This will be particularly challenging for companies that have not conducted a comprehensive export control classification for their products (e.g., companies that have never exported any items). Such assurances may require companies to conduct such a classification exercise or the submission of a commodity jurisdiction (CJ) request. A CJ request is used to determine definitively whether an item or service is subject to the export licensing authority of the Department of Commerce or the Department of State.
- Foreign buyers of U.S. businesses (which can include, for CFIUS purposes, U.S.-based subsidiaries of non-U.S. companies) will need to evaluate whether their ownership and control structures would trigger a CFIUS filing requirement. This assessment should incorporate an evaluation of both the direct party to an investment transaction as well as the party’s upstream owners, individually and in the aggregate.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Author Information
Mario Mancuso is a partner at Kirkland & Ellis and leads the firm’s International Trade and National Security practice. A former senior member of the president’s national security team, he specializes in guiding private equity sponsors and companies through the CFIUS process and resolving crises involving economic sanctions and export control-related investigations by the U.S. government.
Shawn Cooley, a partner in the Washington, D.C., office of Kirkland & Ellis, focuses on managing national security reviews and all foreign investment regulatory aspects of clients’ cross-border transactions.
Lucille Hague, an associate in Kirkland’s Washington, D.C., office, advises private equity sponsors and companies on CFIUS matters across transactional and investment scenarios, including fund formation, M&A, syndication, co-investments, and exit.
Anthony Rapa, a partner in Kirkland’s Washington, D.C., office, counsels companies, financial institutions, and private equity sponsors worldwide regarding U.S., UK, and EU economic sanctions and export control issues.
