According to a recent United Nations report, foreign direct investment around the world fell in 2018 to its lowest level since the global financial crisis. Various factors can be blamed – a slowing global economy, rising trade tensions and changes in US tax policy. Particularly in the USA, countries may hesitate to invest for fear of increased national security scrutiny.
Which isn’t to say that companies who might have their sights set on investing in the USA should give up hope or a process that has already begun. If fact, it’s more like a reminder that, while cross-border deals face increased scrutiny, understanding where regulators are coming from can help prevent trouble.
As strategy + business pointed out in a recent report, for a long time, CFIUS (the Committee on Foreign Investment in the United States) was not a big concern for foreign acquirers of US companies. In fact, filing deals with CFIUS was largely voluntary – and national security considerations were construed more narrowly.
The report indicated, however, as a result of recent legislation called the Foreign Investment Risk Review Modernization Act, and a new agenda from the current US administration, CFIUS has become a significant hurdle for global companies pursuing US acquisitions.
Ultimately, CFIUS reviews the national security implications of foreign investments – a federal committee comprising representatives from 16 US defense, state and commerce departments and agencies.
As it stands, CFIUS can now review a far broader range of deals, involving any company that may hold not just sensitive technology but also personal information. This affects companies across a range of industries. For many such deals it will now be mandatory for companies to file with CFIUS.
The Committee is also looking at deals in which the acquirer isn’t necessarily buying a majority interest. Even a small stake in a sensitive company can be a red flag for CFIUS. With more of a mandate than before, CFIUS is going to review more deals more closely, including those involving venture capital and private equity.
It’s not all bad (or, at least, complicated) news. Deals can still get done. The key is to think like CFIUS.
First, if there is any possible national security implication, especially involving technology or data, however slight, a foreign acquirer would be well advised to make CFIUS approval a condition of closing the deal. The safe harbour protections that accompany successful navigation of the CFIUS review process can provide an important boost to the value of the asset.
Second, prospective foreign buyers and American sellers should proactively think about all of the potential applications of the intellectual property and other assets that would be transferred in a transaction, including those well outside the scope of current product lines. Initially, that may appear to have nothing at all to do with national security. If, however, those technologies can easily be repurposed to efficiently mine data in a military context, then national security concerns could arise in a sale to a foreign buyer.
Finally, companies should not rely on the apparent lack of CFIUS objections in relation to other similar transactions as indicative. If the purchase by a foreign company of a similar US company received CFIUS clearance two years ago, that doesn’t mean you shouldn’t worry about seeking clearance.
Of note, in the USA, while both political parties differ on many issues, there has been little argument over CFIUS’s new approach. All the more reason to accept, and understand, that, within the USA, intensified scrutiny over critical infrastructure and emerging technologies in cross-border deals is probably here to stay. You should prepare accordingly.