CFIUS Review: An Increasing Risk (Part I of II)
Washington, D.C. is more than just the nation’s capital. Companies have to pay attention and develop contacts and relationships in Washington, D.C. given the importance of federal agencies, Congress and of course, the White House. I often inform clients that Washington, D.C. provides a second round of due process for disputes that may occur in domestic or foreign markets.
One of the more important institutions in Washington, D.C. is the Committee on Foreign Investment in the United States (“CFIUS”), which is an inter-agency committee of the US Government that reviews foreign investments for national security implications. CFIUS is a part of the US Department of Treasury. It is chaired by the Treasury Department and includes 16 members, including representatives from the Defense, State, Homeland Security and Commerce departments. CFIUS was established in 1988 by an executive order.
CFIUS’ role was recently expanded by bi-partisan legislation passed by Congress and approved by the president as part of the National Defense Authorization Act. I will examine these changes in tomorrow’s posting.
CFIUS scrutiny has been increasing, and with the current administration’s focus on global trade and promoting US interests to the detriment of foreign trade partners, CFIUS is expected to play a great role.
CFIUS has taken on greater importance with increased foreign investment in the United States. CFIUS has considerable power and has exercised it in several high-profile situations. It is authorized to block deals or insist on modifications to mitigate national security risks.
In January 2018, CFIUS blocked the acquisition of Moneygram, a US money-transfer firm, by Ant Financial, an online payments company, affiliated with Alibaba, the Chinese e-commerce giant. In 2017, CFIUS blocked the takeover of Lattice Semiconductor by a group of Chinese investors.
CFIUS also intervened in the attempted takeover of Qualcomm by Broadcom based on concerns that Broadcom would obtain control of Qualcomm’s 5G technology. Broadcom is not a Chinese company but CFIUS was concerned that its relationship with third-party entities, including Huawei, the Chinese telecom giant could raise national security issues. Additionally, CFIUS was concerned that Broadcom is a private-equity owned company and may cut-back on investment in Qualcomm’s 5G technology and associated research and development. Interestingly, CFIUS intervened in the Qualcomm-Broadcom deal before a final deal occurred.
Qualcomm sought CFIUS intervention as a way to derail Broadcom’s attempted takeover. In the end, Qualcomm was able to block Broadcom’s attempted takeover.
In many situations, CFIUS negotiates mitigating conditions to perceived national security risks. Mitigation measures can include assurance letters between CFIUS and the parties, complex agreements with operational restrictions or even restructuring parts of the transaction itself. These restrictions are usually designed to limit access to facilities or information to US citizens; ensure that US citizens handle certain functions; create governance mechanisms to require US citizens to make certain decisions; impose auditing requirements and guidelines for handling future government contracts, customer information and other sensitive information; and providing government access to review business decisions and object to such decisions because of national security concerns.
[…] Volkov takes a look at CIFUS and what it means for compliance. Part 1 on the increasing risk in cross border M&A and Part 2 on CIFUS expanding […]