Guest Author: “CFIUS: A Primer” (Everyone needs to be aware of the growing importance of this major national security tool!)
Do you understand how national security issues can be intertwined with major business deals, even when the companies involved are not necessarily defense contractors of any kind? Were you aware of the recent expansion of the reach of a government program that conducts national security reviews of foreign investments in the U.S.? That the outcome of such reviews could thwart business deals on national security grounds? When a major law firm identifies “national security” as one of its main practice areas, do you know what that really means?
If you are unsure of your answers, today’s post is for you.
Our guest essayist is one of Duke Law’s most popular professors, Elisabeth de Fontenay. Professor de Fontenay is among the nation’s leading experts on corporate law and corporate finance, and she’s agreed to give us a kind of a primer on the Committee on Foreign Investment in the United States or, as it is commonly known, CFIUS.
You need to be familiar with CFIUS because it is a major national security tool, and is used – increasingly – to mitigate risks associated with foreign investment in firms involved with critical technologies and infrastructure. It can be a showstopper in certain merger & acquisition cases, and – yes – it is the kind of issue that the growing number of major law firms who list “national security” as a practice area address.
Let’s hear from Professor de Fontenay on this vitally important topic!
CFIUS: A Primer
by Elisabeth de Fontenay
Amid a global pandemic, social unrest, and the most fraught U.S. presidential election in recent memory, the year 2020 was unquestionably an eventful one. But for Generation Z, the summer of 2020 came with an additional scare, in the form of President Trump’s threat to ban TikTok, the wildly popular video-sharing app, in the United States.
The challenge to TikTok came from the Committee on Foreign Investment in the United States (“CFIUS”), a panel of high-ranking federal government officials that has the power to block foreign investments in U.S. businesses that raise national security concerns.
At the time of the TikTok skirmish, the Trump Administration expressed concern that U.S. citizens’ personal data collected through the app could end up in the hands of the Chinese government, because TikTok’s parent company, ByteDance, is Chinese.
What is CFIUS?
CFIUS’s role and responsibilities were first codified in 1988, through an amendment to Section 721 of Title VII of the Defense Production Act of 1950 (50 U.S.C. App. § 2170 et seq.) (referred to as the “Exon-Florio Amendment”). The Exon-Florio Amendment granted the President of the United States the authority to suspend, prohibit, or even unwind any merger, acquisition, or takeover that could result in foreign control of a U.S. business, if the transaction threatened to impair national security.
Many of the President’s responsibilities under the Act were in turn delegated to CFIUS, including in particular the task of reviewing such transactions and recommending a course of action to the President.
CFIUS is a committee composed of some of the highest-ranking Cabinet officials, including (among others) the U.S. Treasury Secretary (who chairs the committee), the Attorney General, and the Secretaries of the Departments of Defense, Homeland Security, State, Commerce, and Energy. The Committee is often described as “secretive” or “shadowy,” because it does not publish its deliberations or decisions.
CFIUS Review Process
CFIUS has the authority to review transactions involving a U.S. business for potential national security concerns. Until the recent expansion of the Committee’s authority (discussed below), CFIUS reviews focused primarily on (1) whether the transaction resulted in foreign control and (2) whether there was indeed a threat to national security.
Because CFIUS can in principle unwind a transaction long after it has been completed, however, it creates substantial uncertainty for parties to M&A transactions and other foreign investments. Therefore, parties seeking certainty before the transaction is consummated are permitted to file a voluntary notice with CFIUS, which starts the clock on a fixed timeline for CFIUS to complete its review.
Once CFIUS has completed its review, it will recommend that the President either approve or block the transaction. Alternatively, it may recommend that the transaction be allowed only if the parties take specific measures to mitigate the threat to national security, such as changing the company’s board of directors, limiting access to information within the company, or limiting whom the company may deal with.
When it proposed to ban TikTok in August 2020, for example, the Trump Administration clarified that the ban would not apply if TikTok’s Chinese parent company sold the business to a U.S. owner. After an unfavorable judicial review, however, the ban was never implemented, and the Biden Administration has not attempted thus far to revive it.
CFIUS has gained considerably more attention in recent years, receiving regular mentions in the financial press and becoming a “hot” practice area for lawyers working on M&A, private equity, and venture capital transactions. This is because the Trump Administration both significantly expanded CFIUS’ legal authority to review foreign investments in the U.S. and employed CFIUS far more frequently to review and potentially block transactions.
First, under the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”) and its implementing regulations, CFIUS now has the authority to review and block non-controlling investments in businesses engaged in critical technologies, critical infrastructure, or sensitive personal data (so-called “TID” businesses), as well as real estate implicating national security.
This major expansion of CFIUS’s reach was justified by its proponents as necessary to close loopholes under the prior regime, which could allow foreign governments to access critical U.S. technology and information through joint ventures or minority investments that did not amount to “control” of the business.
In addition, for the first time, FIRRMA made filing notice with CFIUS mandatory for certain transactions involving TIDS businesses.
Second, CFIUS investigations increased sharply under the Trump Administration, most notably jumping nearly 120% from 79 to 172 from 2016 to 2017.
The key takeaway is that CFIUS is now a potential hurdle to any foreign investment in a U.S. business or U.S. assets having a plausible link to national security or to consumer data. The likelihood of review will be greatest where a foreign government gains a controlling interest in a U.S. business of national security concern, but the scope of CFIUS’s authority is no longer limited to those cases. Any transaction involving active foreign investment in technology, infrastructure, real estate, or consumer data should be examined and structured with CFIUS in mind.
More broadly, the extraordinary powers given to the President under CFIUS to block foreign investments warrant continuous reexamination, to gauge whether they achieve the right balance between protecting national security interests and preserving the free flow of capital.
Because CFIUS operates to block, alter, or delay foreign investment in the U.S., especially in sectors such as cutting-edge technology, there is always the risk that CFIUS reviews could reflect mere trade protectionism under the guise of national security or tit-for-tat political disputes among countries. Neither would be a good outcome for consumers or investors.
As a result, it is important for U.S. citizens to be aware of CFIUS, and to continue to monitor how it is deployed across administrations.
We have become accustomed to the idea that capital flows freely across borders in our modern age, and that companies regularly change ownership without governmental intervention. CFIUS is a useful reminder that this is not always the case, and that the exceptions can prove dramatic.
For now, at least, Gen. Z can rest easy—TikTok is alive and well.
 Additional refinements were subsequently adopted in an executive order (Executive Order 11858, as amended) and federal regulations (chapter VIII of title 31 of the Code of Federal Regulations).
About the author:
Elisabeth de Fontenay is a Professor of Law at Duke University. Her research interests are in corporate law and corporate finance. Prior to becoming an academic, she practiced law at Ropes & Gray LLP, focusing on mergers and acquisitions, debt financing, and private equity.
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