Chinese and European companies have been snapping up US firms in recent years, raising the hackles of the Trump Administration and wariness among US companies about their acquirers, who may be subject to review by the Committee on Foreign Investment in the United States (CFIUS). Less understood, is that even minority investments by foreign investors can result in the US company itself being classified as a “foreign person,” subjecting it to CFIUS review as if it were a foreign firm.
“That means that future investments or acquisitions by the American company of US businesses will be subject to CFIUS review, just as if the American company were a Chinese, or German or Canadian firm,” according to a report recently published by Pillsbury Winthrop Shaw Pittman LLP.
The report notes that the US company may be considered a foreign person for CFIUS purposes if a foreign national, government or entity exercises some degree of control over it, although how much control is not well defined. The report notes that Congress left the definition of control to CFIUS, which has taken a “functional” if hazy approach. That approach boils down to the ability to direct or decide “important matters” affecting the company, such as “ownership of voting interests, board representation, proxy voting, special shares, contractual arrangements, formal or informal arrangements to act in concert or other means.”
Given the global nature of business today, analyzing whether there’s control by a foreign entity can be complex, the report notes. The US company can voluntarily file with CFIUS. However, if it determines there are no national security concerns and foregoes a filing, CFIUS “retains jurisdiction indefinitely.” If the agency subsequently finds national security concerns it can’t resolve, it can request mitigation steps and even divestiture by the foreign investor, Pillsbury says.
If the parties don’t comply, according to Pillbury, CFIUS can refer the case to the White House, which can then suspend or prohibit the transaction, essentially requiring divestiture after the acquisition has closed.
Pillsbury concludes that the broad approach essentially subjects every “non-trivial investment” to a facts-and-circumstances test, and that includes considering the impact of factors singly as well as in concert.
Sometimes, the report notes, it can be “surprisingly” unclear whether the target of an acquisition is a “US business” and therefore subject to CFIUS rules. For example, the acquisition of a foreign company that has some US business can involve CFIUS. Such a situation arose in late 2016, when a Chinese fund sought to acquire Germany’s Aixtron, which had US subsidiaries, and CFIUS blocked the deal with respect to the US assets.
A variety of situations will require case-by-case analysis, such as a non-US company purchasing assets rather than an operating company, and whether those assets are sufficient to constitute a “business.” Similarly, joint ventures and licensing arrangements must be analyzed to determine whether the deals are “substantively equivalent” to an acquisition, and therefore subject to CFIUS.
Based on CFIUS guidance and observations of actual cases, the Pillsbury report lists 13 major areas where the acquisition of a US target by a foreign person—perhaps inadvertently a US company—would likely trigger CFIUS review. Some are fairly obvious, such as whether the transaction could impact critical infrastructure or involves a sensitive sector or technology, such as energy or the financial system, and others less so, such as the track record and reputation of the foreign acquirer and its home country.
“If the American company is feeling like Damocles, sitting at a banquet with a sword hanging over him by a single thread, it would not be far wrong,” the report says. “This may be an unintended consequence of the current hostility toward investments from certain countries, but that does not make it less real.”
The report adds that the US Congress is now considering expanding the scope of CFIUS reviews, broadening the types of transactions that could be covered by regulation.