For those of us who have been paying attention to large-scale M&A activity with China, we have seen CFIUS (the Committee on Foreign Investment in the U.S.) appearing and acting with more regularity in the past 18 months. CFIUS has been in the news lately for several reasons:
- Beijing Kunlun Tech, the Chinese company that purchased Grindr in 2016 was forced to divest its ownership due to privacy concerns because the company, as a dating social network app for gay, bisexual, transgender, and queer people, collects a lot of sensitive data about its over 4.5 million daily users;
- Beijing Shiji Information Technology Co., Ltd., the Beijing-based company that purchased StayNTouch in 2018 was notified (the presidential order can be found here) that it would also need to divest its interest due the sensitive nature of the data it collects in its software for the hotel, food service, retail, and entertainment industries; and
- The U.S. Treasury Department’s recently issued proposed regulations regarding filing fees for CFIUS review applications of voluntary written notices went into effect on May 1.
The CFIUS board is comprised of representatives from: Department of the Treasury, Department of Justice, Department of Homeland Security, Department of Commerce, Department of Defense, Department of State, Department of Energy, Office of the U.S. Trade Representative, Office of Science & Technology Policy, along with occasional observers and participants from the following White House offices: Office of Management & Budget, Council of Economic Advisors, National Security Council, National Economic Council, Homeland Security Council, as well as the Director of National Intelligence and the Secretary of Labor. This is the who’s who of the Executive Branch.
Because CFIUS requires advance disclosure and any deal can be unwound post-closing, it is important to think critically about which deals need to be disclosed and which may be at risk for being stopped or unwound post-closing.
Who should care about CFIUS? Its oversight is potentially relevant to the following:
- Any size deal
- Buyers and sellers
- Investors and lenders
- Later acquirer of assets or ownership interests (If you are buying or investing in a company that took Chinese investment dollars, CFIUS should be on your due diligence list to discuss with the target company)
- Deals involving any country except the three safe harbor countries: Canada, UK, and Australia (not just deals with China can be scrutinized, even though the CFIUS track record is primarily China-focused)
The U.S.-China trade war and its precursors contributed to a precipitous drop in FDI from China in 2018 compared to 2016. Currently no data from 2019 is available. We have seen that 2020 will be rough for every economy. The U.S. is no exception, and companies in distress and companies with a financial reserve and an eye for a good deal will be looking for deal partners.
With China reportedly recovering from Covid-19 before most other countries, we have been getting more calls regarding deals with Chinese parties, including FDI into the U.S. and joint ventures. With capital extremely cheap right now, U.S. companies with Chinese partners can still qualify for SBA loans if the Chinese party owns less than 50% of the borrowing entity.
CFIUS should always be in the back of your mind when considering a deal with any foreign party, but CFIUS is only part of your analysis. Depending on many factors, you may still be able to comply with CFIUS and complete your deal. You need to know where the legal boundaries are so that if you need to engage in CFIUS reporting you can, and if you realize that your deal is at risk, you can stop everything prior to the closing. You also need to ensure your closing obligations are contingent on receiving government approval and your indemnification obligations do not burden your company if the deal gets unwound post-closing by CFIUS.
For more information, see our prior webinar on CFIUS.