U.S. Treasury Proposes Rules Governing National Security Reviews of Foreign Deals

The U.S. Treasury Department on Tuesday issued proposed regulations that would implement a congressionally mandated overhaul of the national security reviews conducted on certain acquisitions of U.S. companies by foreign firms.

The proposed regulations would give the Committee on Foreign Investment in the United States (CFIUS) new jurisdiction over certain non-controlling investments into U.S. businesses involved in critical technology, critical infrastructure or sensitive personal data, the Treasury said. It would also give CFIUS new jurisdiction to review certain real estate transactions involving foreign nationals.

The public has until Oct. 17 to comment on the proposed rules. If approved, the final version would take effect in February 2020, the Treasury said. 

CFIUS, an interagency U.S. government committee led by the Treasury, assesses the national security risks involved in the purchase of U.S. assets by foreign investors. The committee has received outsize attention in recent years, as CFIUS heightened its scrutiny of deals involving Chinese companies buying American firms. The overhaul of CFIUS authorities came as part of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), signed into law in August of that year. 

“The United States welcomes and encourages investment in our country and our workforce,” said Treasury Secretary Steven T. Mnuchin. “Today’s proposed regulations will provide clarity and certainty to investors regarding CFIUS’s enhanced authorities to address national security risks that arise from certain foreign investments, and continue modernizing the CFIUS process.”

CFIUS can require certain conditions for a deal to receive U.S. approval or recommend for the president to block a transaction entirely. Transactions under CFIUS review rose 55 percent between 2011 and 2016, according to an August 2018 blog post by the U.S. Government Accountability Office (GAO). China has become the largest single source of CFIUS reviews in the last few years, a Justice Department official told a U.S. Senate panel in December 2018.

Last month, CFIUS approved the transfer of a stake in cybersecurity company Cofense Inc. from a Russia-linked private equity firm to funds managed by BlackRock Inc., according to a report in The Wall Street Journal citing people familiar with the matter.

Reviews by CFIUS of foreign investments into U.S. companies can emerge in unexpected places. The Chinese company that owns Grindr, a popular gay dating app, approved a plan in August to publicly list the unit on a foreign exchange; CFIUS had halted an earlier attempt to do so, according to a report in the Financial Times. The company had sought to sell Grindr due in part to the CFIUS difficulties, according to reports by Reuters in March and BuzzFeed in July. 

CFIUS imposed a $1 million civil penalty in 2018 on an unnamed company for repeatedly breaching a 2016 mitigation agreement with the committee; the penalty was described in a media report at the time as unprecedented. 

FIRRMA authorized additional funding for CFIUS enforcement, according to a client note from the law firm Linklaters LLP issued Aug. 22, prior to the publication of the proposed rules.Clients should approach a CFIUS review as a collaborative process, engage early and ensure deals are properly documented, the law firm suggested.

“The circumstances in which CFIUS may be interested in a transaction have widened significantly,” said Jonathan Gafni, a senior counsel at Linklaters who represents clients before CFIUS. “Now more than ever it is imperative for dealmakers to think ahead, from the earliest stages of strategic planning. They must consider commercial ties to red flag countries such as China and work out whether the nature of the transaction is likely to spark CFIUS’ interest.”


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