The most recently released annual report (for 2012) by the Committee on Foreign Investment in the United States (CFIUS) highlights a sharp increase in abandoned deals involving foreign acquisitions of U.S. businesses.
Of the 114 notices of transactions filed in 2012 with CFIUS that were determined to be "covered transactions," 45 resulted in 45-day investigations, an increase from the 40 investigations CFIUS conducted in 2011. Notably, 20 notices were withdrawn after the commencement of an investigation. Of those 20, half were not re-filed, a much higher number than in previous years. It can be inferred that those 10 deals failed to close because either CFIUS was unsatisfied with the parties' efforts to mitigate the national security concerns posed by foreign control or CFIUS did not believe those concerns could be mitigated. The data suggests that CFIUS' scrutiny of proposed transactions is intensifying.
The multi-agency Committee's newly aggressive stance warrants the attention of directors. Corporate boards should work to ensure that their companies consider filing with CFIUS if they are involved in a merger, acquisition or takeover that touches on national security that would result in foreign control of a U.S. business.
However, it is not always obvious when a proposed deal may attract the attention of CFIUS, as "national security" is a notoriously broad concept and the notion of "control" is evaluated from a "functional" perspective that focuses on the "ability to exercise certain powers over important matters affecting an entity."
In addition, anecdotal evidence suggests that CFIUS is paying closer attention to deals involving Chinese companies, even if the connection to national security is tenuous. Parties to deals involving Chinese investment, in particular, have become increasingly cautious and are now erring on the side of filing a voluntary notice. Sellers to a Chinese buyer ought now to expect the buyer to insist on making a CFIUS filing, even in transactions where no discernible national security is at issue.
The incentives to file a voluntary notice are especially strong in the wake of the unwinding of the purchase of wind farm projects by Ralls Corporation, a Delaware company owned by two Chinese nationals, in the vicinity of restricted airspace at Naval Weapons Systems Training Facility Boardman. Ralls challenged the President's order prohibiting the transaction and requiring divestment as a violation of due process, but its claim was dismissed by the D.C. District Court in October. Ralls is appealing the decision to the D.C. Circuit Court of Appeals.
To avoid unnecessary complications and post-deal scrutiny from CFIUS, it is increasingly apparent that it is better to ask for permission first rather than beg forgiveness later.
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