On April 15, 2024, the Office of Investment Security of the Department of the Treasury published a proposed rule to revise the regulations governing the Committee on Foreign Investment in the United States (CFIUS or the Committee). The proposed rule would introduce three key changes to the CFIUS process and mark the most significant update to CFIUS’ authority since the enactment of the Foreign Investment Risk Review Modernization Act of 2018. CFIUS is an interagency body with the authority to review foreign acquisitions and investments (including land acquisitions) and to take action to protect US national security, including by requiring parties to adopt measures to mitigate or even prohibit transactions.
Written comments on the proposed rule are being accepted for consideration and must be submitted by May 15, 2024.
SHORTER TIMES TO ANALYZE AND RESPOND TO MITIGATION CONDITIONS
The proposed rule would require that when CFIUS offers mitigating conditions during an investigation, the parties must respond to the substance of those conditions within three business days or after an extension by CFIUS, similar to the existing three-business-day deadline for responding to additional questions in the reviews of Joint Voluntary Notifications. There is currently no regulatory deadline for responding to the proposed mitigation. CFIUS justified this change, noting that delayed responses to mitigating circumstances could prevent investigations from being completed within the statutory 45 days, requiring parties to withdraw and resubmit notice to restart the statutory clock. However, mitigation agreements are often complex documents that deserve careful consideration, as they may require expensive and extensive compliance procedures, hiring additional staff, and may require acquisition restructuring to implement—changes may override the underlying economic rationale of the transaction.
It should be noted that the proposed rule does not contain a self-imposed deadline for CFIUS to propose mitigation, nor does it limit CFIUS’s time to consider the parties’ responses. That leaves open the possibility that CFIUS could offer mitigation very late in the investigation and put pressure on the parties to quickly agree on terms. We have encountered this scenario in filings and seen how CFIUS tries to pressure parties to accept mitigation terms by running out of time and in turn trying to limit the time available to withdraw.
The significant risk of this change is that CFIUS will deny a request for an extension and then the parties cannot provide a substantive response to the mitigating circumstances. Failure to respond to the proposed mitigation will give CFIUS grounds to reject a definitive notice. CFIUS’s comments to the proposed rule suggested that this authority could be used primarily in reviews of non-notified transactions (i.e., transactions that have not been previously reviewed and are closed) when CFIUS asserts a risk to national security , which requires mitigation and rapid completion of the review is critical. Nonetheless, the increased risk of time pressure may incentivize parties to consider possible mitigating CFIUS requirements and proactively offer conditions or consider alternative measures.
WIDER SCOPE OF INQUIRY
The second change to the proposed rule would expand the Committee’s authority to request information about unreported transactions to determine the applicability of mandatory filings and to identify national security concerns. These regulations give CFIUS authority only to request information to determine whether a transaction constitutes a “covered transaction” or a “covered real estate transaction.” In our experience advising clients on non-notified transaction inquiries, CFIUS already assumes authority to request information to assess the application of the mandatory notification requirement (ie, whether technologies produced by a US business purpose are critical technologies), so the proposed rule change appears to codify existing practice. Nonetheless, transacting parties should take care to consider whether a transaction is likely to raise CFIUS interest and conduct additional due diligence to preemptively mitigate potential national security concerns or accurately incorporate CFIUS risk into the structure of the transaction.
The proposed rule would further amend CFIUS regulations to require parties to provide information that CFIUS requests to monitor compliance with a mitigation agreement or to determine whether a party has made a material misstatement or omission in a prior proceeding.
ENHANCED PENALTIES AND ENFORCEMENT POWERS
The third proposed rule change would dramatically increase the maximum civil penalties for material misstatements and omissions in statements or notices from $250,000 to $5,000,000, a twentyfold increase. Similarly, the maximum penalty for failure to comply with the mandatory notice requirement will increase from USD 250,000 to USD 5,000,000 (or the value of the transaction, whichever is greater). The proposed rule would also expand the situations in which CFIUS may impose a sanction to include material inaccuracies or omissions outside the context of declarations and notices, most notably in response to a request for information related to unreported transactions or monitoring and compliance. .
TAKE-OUT
The proposed rule demonstrates the Committee’s intent to more closely scrutinize non-notified transactions in the United States and strongly disincentivize parties to a transaction to avoid or attempt to avoid CFIUS review. Parties should actively evaluate transactions for CFIUS risks, and for transactions subject to review, parties should consider matters likely to be of greatest importance to the Committee in order to anticipate and effectively respond to requests for mitigation if they arise such. We recommend that CFIUS review be a standard component of any acquisition or investment involving a foreign buyer or investor when the transaction involves a U.S. business, regardless of the nature, scope, or ultimate beneficial ownership of the U.S. business.
