Mergers, acquisitions, divestitures, joint ventures and other forms of investment have continued apace in the defense and high-tech industries for the last 20 years. During that time, the concept of national security and its tie to economic security has been confirmed, and that tie has been reflected, in part, through the Exon-Florio Amendments of 1988 ("Exon- Florio") and the updates to that legislation in 2007 through the Foreign Investment and National Security Act ("FINSA"). Exon-Florio and FINSA enhanced the authority of the Committee on Foreign Investment in the United States ("CFIUS" or " the Committee"), an executive branch organization originally formed to opine on the impact of certain economic activity on U.S. national security interests.
CFIUS, chaired by the Department of the Treasury, administers the CFIUS regulations, 31 CFR part 800, and comprises 15 executive agencies, as well as a number of consultative agencies that review transactions when appropriate. The CFIUS regulations describe a voluntary process through which economic or financial activities that are considered "covered transactions" are notified to the Committee for approval and/or clearance with conditions. In addition to the voluntary process, CFIUS may also reach out to transaction participants and "request" a submission in conformity with the regulations. Although a "request," the Committee believes it has subpoena authority and that it may require a filing if a submission is not made. In the alternative, if CFIUS does not exercise its perceived subpoena authority and no filing is made, the Committee could nonetheless review the transaction on the basis of information it collects from whatever sources are available. That review, whether based on the participation of the parties to the transaction or not, may affect the transaction.
As a long-established process, CFIUS has extensive experience in analyzing transactions and in determining, through an interagency review process, the impact of any activity on U.S. national security interests. In 2007, however, Congress b roadened the authority of the Committee and expanded the areas in which "national security" issues may arise. Based on this expansion and the approach CFIUS has taken to reviewing transactions within the last few years, several misconceptions exist that would benefit from clarification. This Commentary outlines some, but not all, of the misconceptions and provides perspective when addressing whether to submit a CFIUS notification or wait for a reaction from the Committee.
Background: CFIUS Advice as Part of M&A Transaction Analysis
Transactional counsel advise clients on a range of financial, regulatory, and compliance requirements as part of any deal. The advice or approach that applies to most aspects of a transaction—e.g., antitrust filings, intellectual property assessments, litigation risks, employment issues, and environmental matters, among others—does not necessarily nor directly translate into how to address the national security aspects of a transaction. To ensure that deals progress smoothly and that little, if any, interruptions occur, it is essential to analyze the benefits of a CFIUS filing at the same time that other legal risk areas of a transaction are assessed. The CFIUS analyses that should be performed include, but are not limited, to:
The structure of the deal;
The assets involved; The contracts—both government (federal, state, and local) and commercial; The products, technology, and services provided; The export compliance posture of both the target and the investor/purchaser; The research and development funding provided—both internal and external; The international operations of both the target and the investor/purchaser, including agent, reseller, and distributor relationships; and The involvement—whether direct or indirect—of any non- U.S. government agency. With this as background, what common misconceptions exist when deciding whether to file a CFIUS notification or not? Among the most common statements, we have heard:
"This deal is too small." The value of the deal is small or inconsequential to the investor or purchaser.
"This is not high-tech stuff that the U.S. government worries about." A determination is made that because the transaction does not involve missiles, military equipment, rockets, or classified information, it is not of interest to the U.S. government.
"If CFIUS cared about this kind of stuff, why have we done [X] other deals and not heard from the Committee?" In other words, since this is a voluntary process and we have not heard from CFIUS on any of the other consummated deals, why should we notify this...