More Voluntary CFIUS Filings Expected This Year, Experts Say
Companies are increasingly choosing to voluntarily file with the Committee on Foreign Investment in the U.S. to avoid being caught up in CFIUS’s non-notified transaction process, CFIUS lawyers and experts said. That trend, combined with faster CFIUS clearances, could mean an increase in CFIUS filings this year, they said.
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But that doesn’t necessarily mean CFIUS will reject a greater percentage of those investments, said John Lash, founder of security strategy firm Darkhorse Global. He said “optimism” is growing about clearing deals through CFIUS, pointing to a concerted effort by the Biden administration to move deals forward. “I think we're seeing a significant shift in terms of getting deals done in this administration,” Lash said during a March 17 conference call hosted by The Capitol Forum, “and getting deals done in a very intelligent way.”
Lash said deals have moved more quickly through CFIUS in late 2021 and through the first few months of 2022 than in previous years, partly because questions are being asked “much earlier in the review cycle” and “cases running into investigation are being minimized.” He said “there's a lot of very intelligent movement in terms of what's happening in the government to address potential national security risks, identify threats and vulnerabilities, and then seek to clarify what those are, mitigate them if appropriate, and move cases forward.”
After the regulations for the Foreign Investment Risk Review Modernization Act took effect in 2020 (see 2001140060), many businesses adopted a “wait-and-see” approach before moving forward with deals that may have been reviewed by CFIUS (see 2104200056), said Antonia Tzinova, a CFIUS lawyer with Holland & Knight. But now that investors have gained more clarity about what types of investments CFIUS is looking for, Tzinova said more companies are comfortable pursuing deals and submitting voluntary declarations.
“I think we're now back to business,” Tzinova said during the call, adding that companies are “better educated” about the CFIUS process. “This is now a de facto question on your due-diligence list,” she said. “We are educating our M&A partners that this is a question that needs to be asked early on, just to ensure you don't have a mandatory filing, but also to consider whether strategically it makes sense to go in with a voluntary filing.”
More companies will likely to choose to submit voluntary filings, partly due to CFIUS’s recent campaign of reviewing years-old transactions, said Joshua Gruenspecht, a CFIUS lawyer with Wilson Sonsini. The committee has reviewed deals that closed as many as 10 years ago to examine whether certain investors were able to slip under a less strict CFIUS regime to access sensitive export-controlled U.S. technologies (see 2101220034).
“More people are going to voluntarily enter the CFIUS process so as to avoid the possibility of having CFIUS knock on the door after a deal gets done,” Gruenspecht said. “That's already what we've seen this year, and we're going to see even more of it as the Biden administration moves forward.”
In addition to CFIUS, investors may soon have to deal with a separate U.S. screening regime for outbound deals. The House's China competition bill, passed last month, includes a provision that would create a Committee on National Critical Capabilities, which would screen outgoing investments that may shift certain "national critical capabilities" to a foreign country (see 2202030062).
In practice, an outbound investment screening tool could damage the U.S. economy and lead to drops in investment, Tzinova said. If the U.S. operates the tool as a unilateral restriction that isn’t coordinated with allies, she said U.S. investors abroad could simply be replaced by foreign investors.
“Unless this is a coordinated effort by the world, European companies will go in there, Asian companies will go in there,” Tzinova said. She also said countries blocked from receiving certain U.S. outbound investment could retaliate against the U.S. by imposing reciprocal measures. “It's just going to be to the detriment of the U.S. economy,” Tzinova said.
Lash said the outbound screening regime’s concept of “critical capabilities” may prove even broader and unclear than CFIUS’s national security remit, which has faced criticism for being too opaque as a concept. “I don't think it works in the present form,” Lash said. “I think it’s too broad, and I also think it does ignore a lot of the negative externalities from an economic standpoint.”