19 October 2020

No deal is safe: CFIUS ramps up investigations of "non-notified" transactions

CFIUS is stepping up its investigations into deals that were closed without a CFIUS filing. Chinese investors should self-assess their existing investments and make a judgment as to the risk of a post-closing CFIUS investigation.

Over the last two decades there have been thousands of acquisitions and minority investments in US businesses. In the vast majority of those cases, the parties made a decision not to file with CFIUS. This was perfectly legal, because until recently, all CFIUS filings were voluntary.

As a technical matter, almost all these transactions were within the jurisdiction of CFIUS, and that jurisdiction never goes away. The Committee has the authority to review any investment by any foreign person in any US business, wherever located, no matter how small, in any industry—unless the investor acquires less than 10% by vote in a purely passive investment. And non-notified transactions remain open to investigation by CFIUS forever.

CFIUS is only interested in transactions that touch on national security, but unfortunately, what constitutes national security changes over time. For example, five years ago, an investment in a company making devices that track users’ exercise routines and fitness data might not have raised concerns. The parties might not have filed with CFIUS, and it would have been a rational decision. But because no filing was made then, CFIUS has the right to look at it now, and the staff will view the transaction through the lens of the current US-China relationship. Today, apps that collect geolocation and health-related data are high on the list of national security concerns for CFIUS.

In the past two years, the Trump Administration has poured resources into the investigation of past transactions, using a vastly expanded idea of what constitutes a threat to US national security. CFIUS review of already-completed, but non-notified transactions used to be relatively rare. In the past eighteen months, at least four post-closing investigations have led to divestiture orders: investors in Grinder, PatientsLikeMe, StayNTouch and even an office building near Trump Tower, have been forced to divest themselves from their US businesses. The post-closing investigation of TikTok is only the most recent.

It is possible this trend will reverse itself if a new Administration takes office next year. However, concern over competition with China’s rising economy is a bipartisan affair, and it seems likely that the pace of CFIUS’s investigations into non-notified transactions is likely to increase.

The 60-second takeaway for Chinese investors is: no deal is safe unless it was cleared by CFIUS. Investors should do a self-assessment of their prior transactions in the harsh light of today’s hostile US-China environment, and make a judgment as whether they are likely to attract the attention of CFIUS’s new cadre of backward-looking investigators.

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