Unfortunately, the United States might look less welcoming to foreign investment these days. Thanks to the Tea Party, the government repeatedly has flirted with default, and the executive branch largely has shut down. As part of that shutdown, the Committee on Foreign Investment in the United States (CFIUS) has ceased operations temporarily. Foreign investors seeking the “safe harbor” that CFIUS approval confers will have to wait until CFIUS resumes operations in order to close acquisitions of U.S. companies. And last week, a federal district court highlighted the tenuousness of foreign acquisitions absent CFIUS approval.
CFIUS reviews foreign investments for national security implications. If a foreign acquirer receives CFIUS approval, that deal is insulated from U.S. government interference on national security grounds. But the Committee can extract security commitments from foreign acquirers before granting approval. As I’ve noted previously, CFIUS recently has assumed national security regulatory authority that had not been well recognized. And in rare cases, when national security risks cannot be mitigated by security commitments from the foreign acquirer, the Committee acts to block foreign investments. But in the vast majority of cases, CFIUS approves the deal, thereby conferring a type of safe harbor on the transacting parties. For as long as the government remains closed, however, that safe harbor will not be available. Last week’s court decision in Ralls Corporation v. CFIUS underscored the critical importance of that safe harbor to foreign investors.
The decision followed the President’s issuance of an Executive Order, at CFIUS’ recommendation, mandating the unwinding of a foreign acquisition of a U.S. business. A lawsuit by the foreign buyer challenged the President and CFIUS on a variety of grounds. Before last week, the court had dismissed all elements of the suit except for a constitutional due process challenge, and last week’s decision dismissed that one remaining element. The court determined that the foreign acquirer had not acquired a constitutionally protected property interest because the foreign acquirer had not obtained CFIUS approval prior to closing the deal. This is a broad and striking conclusion.
The foreign buyer had argued that the mere absence of CFIUS approval cannot mean that the buyer lacks a constitutionally protected property interest. Were that so, the buyer explained, “this would lead to the conclusion that any ‘covered transaction’ [i.e., an investment that results in foreign control of a U.S. business] that closes without the submission of a voluntary notice to CFIUS would be subject to an indefinite risk of being unwound by the President at any time without any process.”
But the court embraced the buyer’s reductio ad absurdum. The court said that this conclusion “is just what the statute provides, and the parties to a transaction can avoid this uncertainty by filing the voluntary notice before consummating the deal.”
So, when the government re-opens, foreign buyers should beware – don’t forget to lock in your property rights by getting CFIUS approval.