Navigating U.S. Foreign Investment Controls: Updated CFIUS Flow Chart and Critical Infrastructure Matrix
Regulations that became final in February 2020, and were further revised in October 2020, dramatically expanded the situations in which foreign persons acquiring, or making new investments into, or changing existing rights in, U.S. businesses, or purchasing or leasing real estate in the United States, need to obtain prior approval from the Committee on Foreign Investment in the United States (CFIUS). In particular, where CFIUS was once concerned only with transactions that would result in foreign control of a U.S. business, the Committee’s authority now extends to non-controlling investments that provide investors with certain rights in a broad range of U.S. businesses, as well as certain real estate transactions.
The new rules significantly affect foreign investment in hi-tech, biotech, health care, aerospace, advanced manufacturing, finance, and insurance, and energy, among other sectors. Importantly, because the rules apply to both direct and indirect foreign investment, parties need to be alert to possible CFIUS issues not only with respect to direct investment into U.S. companies, but also with respect to investments via fu nds with foreign partners, or via U.S. companies that are controlled by foreign persons, or investments into a foreign company that has a U.S. subsidiary.
Parties who fail to seek CFIUS approval where applicable do so at their peril: the Committee can recommend blocking of proposed transactions and unwinding of completed transactions, even years after the fact. More commonly, the Committee will propose mitigation conditions restricting a foreign investor/acquiror’s rights, such as rights to participate in substantive decision-making or to access the target’s intellectual property. While prior notification to CFIUS is at the parties’ discretion in many cases (subject to the risk of unwinding/forced mitigation if notification is not made), it is mandatory for investments in a broad range of businesses that deal with export-controlled and other sensitive technology, as well as for transactions involving a significant foreign government interest. Where filing is mandatory, failure to comply can lead not only to unwinding or imposition of mitigation conditions, but also penalties of $250,000 or the value of the transaction, whichever is greater. Parties should be aware that CFIUS filings require detailed information about the transaction, the parties (including intermediate and ultimate owners), the target’s business, and more. After a submission is made, CFIUS review may take months, so advance planning is essential.
The CFIUS rules are highly complex and impossible to summarize in just a couple of pages. However, to orient investors and their counsel to the basic contours of the CFIUS landscape, we offer the flow chart (see attached PDF below), which has been updated from our prior advisory, to make it simpler and to reflect the October 2020 regulatory changes, and accompanying critical infrastructure matrix.