The Committee on Foreign Investment in the United States (CFIUS) has opaque jurisdiction. CFIUS is an increasingly robust regulator of foreign investments in U.S. businesses, policing these investments for possible harm to national security. But which investments? CFIUS reviews (i) “covered transactions” that (ii) might adversely affect national security. If that’s unclear to you, you’re not alone – but you might be at risk.
Importance of CFIUS clearance
The importance of obtaining advance CFIUS clearance has been underscored by several recent foreign acquisitions of U.S. companies where the parties had failed to obtain clearance and the government subsequently unwound the deals. Further underscoring the importance of CFIUS is a recent federal court decision that absent CFIUS clearance, a foreign investor has no constitutionally protected property interest in its new business.
Through this lens, the opacity of CFIUS’s jurisdiction looms large. If you are a U.S. business considering an investment from a foreign party, or a foreign party considering an investment in a U.S. business, you better know which deals are subject to CFIUS review. Which deals are those? In the holiday spirit of seeking good for humankind, let’s hope CFIUS will clarify what constitutes a “covered transaction” subject to CFIUS review. It can do that by publishing (in redacted form) jurisdictional decisions from previous years. It is just the sort of action that would warm the soul.
Guidance For “National Security” Analysis Is Not Practical
This is a modest hope. Again, CFIUS reviews “covered transactions” that might adversely affect national security. The hope here is only that the Committee will provide new guidance on the first issue, not the second. This is not a request to clarify the term “national security.” Whether a transaction adversely affects national security likely always will be, and should be, opaque. It is not practical for CFIUS to develop a national security definition more specific than the current, open-ended “statutory factors test” applicable today – a test that essentially says “in deciding whether the transaction affects national security, consider the following (numerous) factors plus any others that might be appropriate.”
A more precise definition would invite creative lawyering that could leave CFIUS unable to address transactions that might have significant national security implications. If CFIUS defines national security to exclude category X, parties to a deal that could affect national security will structure a transaction so that it seems to be in category X.
The usual lawyer’s solution to this “too hard to define” problem is to create a system that works from precedent. A government body can commit to consistent decision-making and publish decisions providing guidance to the regulated community. Suppose CFIUS were to decide that a foreign acquisition of a chemical facility 50 miles from downtown Chicago does not implicate national security. Then sellers and buyers could have some comfort that an acquisition by the same buyer of a similar chemical facility 50 miles away from downtown St. Louis similarly does not implicate national security. One would have to demonstrate that other facts are similar, of course, but that’s what lawyers do. At the same time, this precedential system does not tie the decision-maker’s hands, as would a precise “national security” definition, because the decision-maker can always decide that “while there are many similarities to the case in which we found no national security implications, this case is different.”
But precedential analyses of what constitutes “national security” won’t work. For a precedential system, relevant facts and circumstances have to be publicly available. The CFIUS process, however, is (and should be) completely confidential. Even if company names were redacted, it would be impossible for CFIUS to publish decisions that include relevant facts and circumstances without running a risk of revealing which companies were at issue in the decision. It would not take much sleuthing to find the name of the chemical facility 50 miles from downtown Chicago, or downtown St. Louis.
Guidance For “Covered Transaction” Analysis Is Easy To Provide
This same confidentiality problem, however, does not apply to determining whether a foreign investment constitutes a “covered transaction.” That part of CFIUS’s jurisdiction can be clarified with relative ease.
Under CFIUS’ regulations, a covered transaction is one that results in foreign control of a U.S. business. The term “control” is often the lynchpin of the jurisdictional analysis. The CFIUS regulations define “control” as:
“The power, direct or indirect, whether or not exercised, through the ownership of a majority or dominant minority of the total outstanding voting interest in an entity, board representation, proxy voting, a special share, contractual arrangements, formal or informal arrangements to act in concert, or other means, to determine, direct, or decide important matters affecting an entity…”
That’s a broad and fuzzy definition, but CFIUS regulations provide some additional guidance, particularly by way of concrete examples, such as the following:
“Corporation A, a foreign person, is a private equity fund that routinely acquires substantial interests in companies and manages them for a period of time. Corporation B is a U.S. business. In addition to its acquisition of seven percent of Corporation B’s voting shares, Corporation A acquires the right to terminate significant contracts of Corporation B. Corporation A controls Corporation B.”
These and other examples are instructive not only for private sector CFIUS lawyers, who have to advise deal parties on whether to submit a transaction for CFIUS review, but also for the government lawyers who provide counsel to CFIUS. So helpful are the examples that the government lawyers use many more than those appearing in the regulations. The government lawyers rely on a database of prior jurisdictional decisions – particularly those elucidating the meaning of “control” – to help decide, in a consistent manner, whether a foreign investment is a “covered transaction” subject to CFIUS review.
Many of these prior decisions could be published in redacted form without risk of revealing the companies at issue. While confidentiality obligations preclude publication of information pertaining to the acquisition of a chemical facility 50 miles from downtown Chicago, CFIUS would give away no confidential information by saying that a foreign acquisition of 12 percent equity stake, plus the right to control 2 of 7 board seats, did (or did not) result in foreign “control.” Publication of redacted jurisdictional decisions would be tantamount to publishing additional examples like those already in the regulations. Further, publication of these prior jurisdictional decisions would not preclude CFIUS from exercising jurisdiction on grounds that “while there are many similarities to the case in which we found no jurisdiction, this case is different.”
Benefits Of Guidance
The benefit of publishing the jurisdictional precedent is that it would enable private sector lawyers to provide better advice to their clients about whether a transaction needs to be reviewed by CFIUS, which is likely the most common question that parties have about the CFIUS review process.
Moreover, publishing precedent would benefit not only the investing public but CFIUS as well. CFIUS undertakes frequent and careful jurisdictional analyses and sometimes does find that it lacks jurisdiction. But it takes resources for CFIUS to do these jurisdictional analyses. CFIUS can save resources by enabling lawyers for transacting parties to conduct the jurisdictional analyses and decide whether a case needs to be submitted for CFIUS review. Publishing CFIUS’s jurisdictional analyses would facilitate these efforts.
Hope springs eternal in the holiday season– CFIUS surely will bestow a gift of jurisdictional transparency in 2014.