USA: An Introduction to International Trade: CFIUS Experts

Managing an Increasingly Challenging CFIUS Landscape

The Committee on Foreign Investment in the United States (CFIUS) has continued to evolve and become a more complex regulatory regime in the years following the enactment of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). FIRRMA overhauled the CFIUS statute and provided CFIUS with significantly expanded authorities and resources to review national security considerations relating to foreign direct investment (FDI) into the United States. In recent years, the CFIUS environment has seen a number of key changes, including:

Senior CFIUS officials have promised more CFIUS activity and additional changes to come, and it is clear that the US government views CFIUS as a key tool for addressing national security risks.

Though most transactions notified to CFIUS continue to be cleared without mitigation, CFIUS considerations and implications for cross-border transactions have become significantly more complex. This is true even for investors from allied nations and ones that have a successful history of prior CFIUS reviews. Related regulatory issues are also presenting further challenges for cross-border transactions, including a broad global focus on CFIUS-like FDI review regimes in other countries as well as a new programme regulating US outbound investment in China in certain technology areas. More than ever, it is critical for transaction parties to consult with highly experienced CFIUS counsel and to consider CFIUS (and ex-US FDI) issues early in the deal process to avoid surprises and minimise risks and costs.

Rise in Mitigation Increases Risks for Investors

In 2022, the most recent year for which data is available, nearly one in four unique transactions notified to CFIUS via a full notice resulted in mitigation measures in order to receive clearance. This also correlated with a jump in short-form declarations resulting in full notice requests. The percentage of notices resulting in mitigation in 2022 nearly doubled the historic rate – and this trend of increased mitigation has continued with no signs of ebbing. Much of this relates to increased resources within CFIUS for compliance oversight – the Committee now has greater ability to address national security risks in more cases and is availing itself accordingly. Notably, notwithstanding the increase in mitigation, there has not been an increase in transactions stopped by CFIUS.

Though mitigation measures are not always particularly onerous and can usually be effectively managed, they can result in increased costs for implementation and compliance and can potentially frustrate transaction goals. Particularly with CFIUS calling in more non-notified transactions, it is essential for transaction parties to assess potential substantive CFIUS risks early in the transaction process and, where appropriate, negotiate deal terms to ensure they are sufficiently protected if CFIUS requires mitigation measures.

Increasingly Aggressive Non-Notified Process Changes the Equation on Voluntary Filings

Despite FIRRMA’s introduction of mandatory filing requirements for certain transactions, the CFIUS process remains a predominantly voluntary process. That said, CFIUS has significantly ramped up its efforts to identify and review non-notified transactions of interest – and senior CFIUS officials announced in 2023 that even more resources will be dedicated to its non-notified process going forward. CFIUS also announced in 2023 that it has largely gotten through its backlog of long-closed non-notified transactions, meaning that CFIUS is primarily focusing on finding new or recent deals of interest that it wants to review. As a result, it is increasingly difficult for transactions with potential sensitivities to “fly under the radar” and avoid CFIUS scrutiny. Moreover, if CFIUS comes knocking post-closing, investors do not have any protections if CFIUS identifies national security concerns and requires mitigation or recommends the investor divest its interest in the US business. As CFIUS becomes increasingly aggressive in reviewing transactions of interest and requiring mitigation measures to address national security concerns, parties may find it more advisable to file voluntarily in order to understand and address any CFIUS concerns as part of pre-closing regulatory processes.

CFIUS is Focused on Monitoring and Enforcement 

In 2022, CFIUS issued its first-ever penalty and enforcement guidelines. Though the guidelines themselves were not surprising, they put parties on notice that CFIUS was starting to shift towards being an enforcement body. Prior to that, CFIUS had only ever announced the issuance of two penalties, one in 2018 and one in 2019. Senior CFIUS officials have been clear that monitoring, compliance, and enforcement are now key CFIUS priorities. This includes increased oversight efforts to ensure parties are complying with mitigation requirements, as well as CFIUS intending to utilise its civil penalty authorities both for mitigation violations and failures to make mandatory filings. Transaction parties should work carefully in mitigation negotiations to ensure the measures they agree to can be effectively implemented, and work to ensure a strong compliance posture post-closing.

Parties Need to Consider CFIUS-like FDI Review Regimes in Other Countries

Countries around the world have been establishing or bolstering their FDI regimes to review foreign investment for national security and/or public interest considerations. Beyond CFIUS, global FDI issues should be assessed routinely in cross-border transactions to determine whether FDI filings are required or advisable in relevant countries and to understand potential substantive risks and timing considerations for the deal. The FDI regimes in a range of jurisdictions, including the United Kingdom, Germany, France, Italy, and Canada, have taken significant actions on certain transactions, and FDI regimes continue to proliferate. The United States has been actively encouraging the development and strengthening of such regimes, including co-ordinating with allied governments. Global FDI has now emerged as a key global regulatory consideration in cross-border M&A, and, like CFIUS, should be considered early in due diligence for all multi-national deals so that issues can be well understood and effectively managed.