CFIUS concerns in 2024

July 2024  |  FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

July 2024 Issue

2024 could be a pivotal year for the US. In November, citizens will head to the polls at the culmination of a fiercely contested presidential election campaign. Many policy areas may be affected by the outcome, including antitrust, foreign investment review and merger approval.

National security concerns have been climbing the political agenda. Regulators are moving beyond their typical playbooks to more effectively address perceived national security risks in a variety of domains, including data management, communications and antitrust.

A number of jurisdictions, including the US, UK and European Union, have updated foreign investment review regimes to bolster national security-related frameworks in response to cross-border transactions. There has also been more talk around screening outbound investments.

In the US, the Biden administration and Congress took action to expand and strengthen national security regulations, particularly with respect to Sino-US relations. According to Pew Research, Americans perceive China as the US’s greatest national security threat. Eighty-three percent of US adults have a negative view of China, and the number who hold ‘very unfavourable’ views increased to 44 percent, a rise of 4 percentage points over the previous year. Around four in 10 Americans describe China as an enemy of the US, rather than a competitor or a partner.

In recent years, the Committee on Foreign Investment in the United States (CFIUS), the Federal Trade Commission (FTC) and the Department of Justice (DOJ) have scrutinised M&A transactions with renewed vigour.

In April, the US Treasury Department issued a Notice of Proposed Rulemaking (NPRM) that would amend current regulations to enable CFIUS to: (i) identify more efficiently potential national security risks of foreign investment into the US, by expanding the information that CFIUS can request from deal parties as well as third parties to a transaction, which includes an expansion of CFIUS subpoena authority; (ii) impose a three-business day deadline for parties to respond to proposed terms for a mitigation agreement; and (iii) bolster CFIUS enforcement authorities by significantly increasing civil monetary penalties and the circumstances when such penalties may be imposed.

The NPRM generally signals a more aggressive approach to CFIUS enforcement. The proposed rule would impose significant changes to the maximum penalty amount for certain violations of the CFIUS regulations, the scope of questions that CFIUS may pose to the parties at various points of engagement, and the time allowed to respond to CFIUS information requests and mitigation agreement proposals.

Parties are encouraged to dedicate time and diligence to the CFIUS process to avoid being penalised for errors and omissions. At present, the maximum penalty is either $250,000 or the value of the transaction in question, whichever is greater. CFIUS believes this figure is insufficient to deter violations given that the median value for declarations filed between 2018 and 2022 is over $38m.

As such, the NPRM points to increasing the maximum penalty to either $5m, the value of the violating party’s interest in the US business at the time of the transaction, the value of the violating party’s interest in the US business at the time of the violation, or the value of the transaction, whichever is greater.

The NPRM would also expand the list of circumstances under which a penalty may be imposed due to material misstatements or omissions in response to CFIUS’s requests for information. The minimum threshold for each violation or material misstatement or omission would be set at $5m and a chain of poorly drafted responses may quickly aggregate to a significant penalty cap and the ultimate penalty amount.

“As CFIUS has refined its focus on compliance and enforcement, we’ve identified important enhancements to our regulations to more effectively deter violations, promote compliance, and swiftly address national security risks in connection with CFIUS reviews,” said Paul Rosen, assistant secretary for investment security. “These updates reflect lessons learned in the course of our monitoring, compliance, and enforcement work and build on the 2022 CFIUS Enforcement and Penalty Guidelines.”

Going forward, there will be a number of areas to watch in the US. These include potential legislation expanding the jurisdiction and membership of CFIUS, an executive order addressing transfers of sensitive personal data, and possible new legislative measures or executive action targeting perceived risks in the biotechnology sector.

Acquirers prefer to anticipate regulatory concerns and enforcement patterns to the extent possible, but this is made difficult by political uncertainty in an election year. How much further the future president of the US may go regarding inbound investment and M&A regulation remains unknown.

Though the pending presidential election hangs in the balance, the direction of travel for US foreign investment review appears to be heading toward greater scrutiny. For non-US acquirers and investors, assessing and evaluating potential CFIUS risks has never been more important.

© Financier Worldwide

BY

Richard Summerfield