The Pitfalls of Foreign Transactions During COVID-19

By Brett W.Johnson, Michael Calvanico and Tracy A. Olson

The COVID-19 pandemic continues to have drastic effects on the U.S. economy, along with business operations and the ability to obtain sustainable financing. With unexpected work stoppages and revenue loss, many businesses are seeking additional financing methods from domestic or foreign sources. While foreign financing may be critical for continued operations, especially based on economies of scale, market share, or other synergies, companies should be aware of the government’s ability to block or modify a certain category of foreign transaction through the Committee on Foreign Investment in the United States (“CFIUS”).  With the ongoing rush to seek corporate security and sustainability, companies should be cognizant that there are governmental restrictions related to foreign investment (and joint ventures) with U.S. companies.

As way of background, CFIUS is an inter-agency committee with authorization to review the national security implications of investments made by foreign companies and persons in U.S. business and to block transactions or impose conditions to mitigate any threats to U.S. national security. CFIUS reviews certain transactions pursuant to a voluntary notice made by the parties to that transaction. Other covered transactions require a mandatory declaration to be filed that initiates CFIUS review. CFIUS review will usually preclude subsequent investigation of a transaction, but CFIUS does retain the authority to initiate an investigation of any transaction that was not previously reviewed by the committee.

While CFIUS previously limited review of foreign investments to those that could result in foreign control of a U.S. business, 2018 Congressional amendments to CFIUS’ power greatly expanded jurisdiction to include non-controlling investments that afford a foreign person certain access, rights, or involvement in certain U.S. businesses.  As such, CFIUS has become one of the most important agencies of the United States government and will likely ensure oversight during this crisis.

As an example of CFIUS’ increased authority, the law now requires parties to submit a mandatory declaration (essentially a request for review) for certain investments by foreign individuals in any U.S. business that (1) owns, operates, manufactures, supplies, or services critical infrastructure; (2) produces, designs, tests, manufactures, fabricates, or develops one or more critical technologies; or (3) maintains or collects sensitive personal data of U.S. citizens that may be exploited in a manner that threatens national security.

The definition of “critical technologies” is defined through cross-reference to various export control regimes and is in constant flux. “Critical infrastructure” includes a range of energy, communication, and transportation infrastructure."

Sensitive personal data is defined by both the sensitivity and scope of the data as well as the type, including business that either tailors operations to national security agencies, or meets a threshold number of individuals it collects data on.

A mandatory declaration is similarly required for any investment in certain U.S. business that will result in 1) access by the foreign individual to material nonpublic technical information related to a critical technology that is in the possession of the U.S. business; 2) a foreign individual receiving membership or observer rights on a board of directors or equivalent body; 3) any involvement by a foreign individual in substantive decision-making of the U.S. business regarding the use, development, acquisition, or release of a critical technology.

CFIUS has always had the voluntary disclosure mandate. However, in addition to the expansion discussed above, CFIUS’ mandate has further expanded in regard to foreign ownership of real property near U.S. government property.  It has also extended to investments that relate to access to protected personal information. This risk is only amplified for companies that work with critical infrastructure; critical technologies; or sensitive personal data who might be subject to mandatory disclosures. Simply, there are specific nuances related to CFIUS’ jurisdiction that may impact a potential investment, sale, or joint venture opportunity. 

Of note, mandatory declarations must be made 30 days before any covered transaction occurs and disclosing organizations must pay a filing fee capped at one percent of the transaction value or $300,000, whichever is less. On March 4, 2020, the Department of Treasury proposed a rule setting forth a tiered fee structure with fees ranging from $0 for transactions valued less than $500,000 to $300,000 for transactions equal to or greater than $750 million.

The penalty for failing to make a mandatory declaration is a civil penalty not to exceed $250,000 or the value of the transaction, whichever is greater. These penalties exist in addition to CFIUS’ authority to void or modify or entirely unwind the transaction.

If a company seeks foreign investment to continue operations, it should take into account the CFIUS and other international trade control implications surrounding each transaction. These considerations can assist companies, avoid significant fines and even the potential reversal of critical financing transactions.