The Evolving Oversight of Foreign Investing: CFIUS
At RFG’s Fall 2019 Meeting in Boston, several members expressed a desire to know more about CFIUS. Some investment offices are concerned that CFIUS may change the rules of the road and chill potential acquisitions (whether in technology, life sciences or other areas), especially for those who have investment capital from China. RFG is beginning to dig in on these issues. Doing so is particularly timely, as recent regulations have expanded CFIUS jurisdiction.
CFIUS Basics. The U.S. tempers its “open policy” towards foreign investment with regulatory oversight through CFIUS, the interagency Committee on Foreign Investment in the United States. CFIUS’ authority derives from the U.S. president, who has statutory authority under 50 U.S.C. 4565, and broad discretion, to block or unwind any transaction that “threatens to impair the national security.” This authority, which is not reviewable by any court, has been delegated to CFIUS, with the implementing regulations to be found at 31 CFR Part 800 and 801. (Of note, CIFUS is not the only agency with jurisdiction over foreign investors, as noted in RFG Pathfinder®).
CFIUS can review any investment or acquisition that could result in “control” by a foreign person. Control is viewed broadly to mean the power to affirm or negate important decisions, and according to Cleary Gottlieb, “in practice, CFIUS views any non-passive transaction of greater than 10 percent as potentially reviewable.” There is a safe harbor for passive investments of less than 10 percent of the voting interests, provided there is no intent to exercise control.
CFIUS and Investment Funds. For reasons described in materials provided to RFG consortium clients, many “true” commingled investment funds (unlike joint ventures or co-investment vehicles with few members, or “funds-of-one” backed by a single foreign investor making direct investments) will not have to deal with CFIUS limitations regarding their investors, except in unusual circumstances. However, CFIUS may still have implications for their acquisition diligence.
Still, Seyfarth Shaw notes: “From an investor diligence perspective, US institutional investors should consider if they need to review, prior to investment in a commingled fund or joint venture, that fund’s internal procedures for: (a) on the fund capital-raising side, reviewing aggressive foreign investor side letter requests with CFIUS in mind; and (b) on the fund investment allocation side, conducting diligence on acquisition targets with existing foreign ownership to evaluate whether past CFIUS issues were properly addressed.”
Context. CFIUS originated in a 1975 Presidential Executive Order following an attempted acquisition by a Japanese company of a U.S. business with sensitive submarine-related technology, and the realization at that time that there was no legislative or regulatory structure in place to address foreign investment that might threaten U.S. national security. In the course of the ensuing 45 years of continuing globalization of investment activity, CFIUS has evolved and expanded through the Exon-Florio provisions in 1988 and 1992, the adoption the Foreign Investment and National Security Act of 2007 (“FINSA”), the adoption of FIRRMA in 2018, and the latest implementing regulations under FIRRMA in late 2019. Seyfarth Shaw believes that CFIUS issues are now co-equal in significance with the tax, securities and corporate law issues “when structuring and executing many investment and acquisition transactions.” The firm adds, “And there is often a political element, which can make them even more complex and challenging.”
To stay up to date on RFG’s work surrounding CFIUS and other areas of interest for endowments and foundations, email Information@RegFG.com.