CFIUS: BACKGROUND & PROCESS
The Committee on Foreign Investment in the United States (CFIUS) was created over four decades ago to manage the conflicting public policies of encouraging foreign investment and safeguarding U.S. national security. To this end, CFIUS is empowered to review—and recommend blocking, if necessary—any transaction that could result in the control of a U.S. business by a foreign person or entity in order to ensure the national security of the United States.
CFIUS was established by executive order in 1975 to monitor the impact of foreign investment in the United States and coordinate the implementation of U.S. foreign policy on such investment. For more than a decade, CFIUS had no enforcement capabilities. In 1988, in response to rising concerns over the effects of foreign direct investment on U.S. national security, Congress enacted Section 721 of the Defense Production Act of 1950. This “Exon-Florio Amendment” authorized the President of the United States to examine and block acquisitions, mergers, and takeovers resulting in foreign control of a U.S. business that threaten national security. The power granted to the President under Exon-Florio applies to both proposed and consummated transactions.
In 2007, the Foreign Investment and National Security Act (FINSA) increased congressional oversight of CFIUS. FINSA requires CFIUS to provide Congress with confidential briefings and annual reports covering the national security reviews completed by the committee each year. FINSA also requires parties to submit more robust notices to CFIUS and empowers the committee to increase its scrutiny of foreign-government-related investments.
Composition of the Committee
CFIUS is composed of nine executive branch departments: the Department of the Treasury, the Department of Defense, the Department of Justice, the Department of Commerce, the Department of State, the Department of Energy, the Department of Homeland Security, the United States Trade Representative (USTR), and the White House Office of Science and Technology Policy (OSTP). Additionally, there are two non-voting members of CFIUS, the Office of the Director of National Intelligence and the Department of Labor. The committee also includes five observer White House Offices: the Office of Management and Budget, the Council of Economic Advisors, the National Security Council, the National Economic Council, and the Homeland Security Council.
Why File with CFIUS?
There is no law that compels companies to notify CFIUS of a transaction involving foreign direct investment. Parties may voluntarily notify the committee of a covered transaction, or CFIUS may initiate its own review before or after a transaction has been consummated. Parties generally choose to notify CFIUS voluntarily in order to qualify for a protective “safe harbor.” This safe harbor protects against the government later unwinding the transaction or requiring a divestiture after the committee approves (i.e., clears) the transaction. Parties may also choose to proactively engage with CFIUS before consummating a transaction to obtain CFIUS’s informal position on whether a proposed transaction raises national security concerns.
Covered Transactions and Scope of Review
CFIUS has the authority to review "covered transactions," defined as "any transaction . . . by or with a foreign person, which could result in control of a U.S. business by a foreign person." The regulations governing CFIUS provide guidelines for determining qualifying "transactions," "foreign persons," "control," and "U.S. businesses." It is important to note that, under the CFIUS regulations, "control" does not require majority ownership—it simply includes any form of power over a company that gives the holder the ability to determine important matters affecting the entity, such as seats on the board of directors or special voting rights.
CFIUS review is solely for the purpose of assessing the national security implications of a given transaction and does not contemplate other potential national interests. While the applicable statutes and regulations do not define "national security," they do contain a list of factors to be considered, such as the need for domestic production to meet national defense priorities, as well as the impact the transaction would have on critical technologies, resources, or infrastructure, including major energy assets. Typical transactions reviewed by CFIUS involve classified or unclassified homeland security or defense contracts, sole-source government contracts and contracts involving work performed on-site at U.S. government agencies, export-controlled products and technology, and foreign-government-controlled investments. However, the jurisdiction of the committee is not limited to any specific industry (e.g., defense), and the committee also regularly reviews transactions involving the energy, finance, information technology, aerospace, chemical, pharmaceuticals, and telecommunications industries.
A CFIUS review may be initiated in several ways. The most common is a voluntary notice to CFIUS made by the parties to the transaction. Alternatively, parties may choose to forgo a voluntary notice to CFIUS. If that occurs and the committee learns of the transaction and determines that it has an interest in conducting a review, it has the power to initiate a review. The filing of a notice is often preceded by pre-filing consultations with the committee. These consultations can take various forms and range in time from several days to several weeks, depending on the matter and the committee's workload.
Once CFIUS accepts a notice, the committee is bound by set timelines for each stage of the process. The regulations state that once a notice is filed and accepted, a formal 30-day review commences. During the review period, the committee may pose questions to the parties and the parties must respond to these questions within three business days. During the review period, the committee will also assign one or more lead agencies to the investigation. The committee will further analyze reports from member agencies on the parties and products involved in the transaction. At the close of the 30-day review period, CFIUS must determine whether the transaction can be cleared as it does not raise any unresolved national security concerns or warrants an additional investigation. If the committee determines that an additional investigation is warranted, then the matter will proceed to a 45-day investigation. Any single CFIUS agency may force this extended investigation. Notably, the regulations stipulate a higher level of scrutiny for transactions resulting in foreign-government control, and as a result, a 45-day investigation is presumed for all such transactions.
At the close of the 45-day investigation period, CFIUS must clear the transaction or escalate it to the president. If the committee determines that the transaction should not proceed or cannot reach a decision on whether to suspend or prohibit the transaction, the committee sends a report to the president, who will have an additional 15 days to decide whether to approve, block, or unwind the transaction. Actual presidential decisions to block, suspend, or unwind transactions are very rare, as the vast majority of transactions are approved, adapted to mitigate the committee's concerns, or withdrawn by the parties once it becomes clear that CFIUS will not approve the transaction. CFIUS is not allowed to publicly disclose its review of a transaction. However, if a transaction is escalated to the president for review, then that part of the review is a matter of public record.
Once CFIUS approves a transaction, the U.S. government cannot exercise its ability to divest or unwind the transaction.