The amount of transactions under scrutiny by the Committee on Foreign Investment in the United States (Cfius) has seen a marked uptick in the last few years, activity that has been further increased by the Trump administration protectionist policies.
It has become increasingly rare for some transactions to gain a smooth passage through the process, and while there has been reassurance that the integrity of the agency remains intact, IFLR recently reported that the definition of national security is slowly evolving.
With this in mind, IFLR has spoken to two of the US’s most prominent Cfius experts in private practice to determine what they believe is the best way to get a transaction approved.
Companies should not think of Cfius as an after the fact perfunctory work stream. It is very different in most cases from a competition type consideration, one of the most important recommendations that can be given to clients, whether on the buy side or the sell side, is to first think about their own profile and how Cfius might view them, said Mario Mancuso, partner at Kirkland & Ellis and author of the recently released book, A Dealmaker’s Guide to CFIUS.
“It will shape the M&A targets they pursue, and how they pursue those targets,” he said. “There is an essential strategic analysis of the national security profile of a prospective transaction that should happen at the earliest stages of a deal. Frankly, the clients that we see to be most consistently successful over time are those clients that undertake this strategic analysis as a matter of course,” he said.
“It is literally sitting down with the chief executive, corporate development person, general counsel and banker and thinking about the universe of M&A targets- or buyers- and, in addition to assessing the commercial attributes of a deal with each of them, thinking through the Cfius layer, in terms of feasibility, certainty, timing and cost,” he added.
The key point is to keep the Cfius process in mind as early as possible, and to think about it strategically – not tactically. If you get that right everything else will fall into place, it is like pole-vaulting. The first three steps are what really matter and then everything else is momentum.
On the sell side it is different: if the company that is up for sale has multiple potential buyers - you want to figure out how difficult Cfius - as well as any other regulatory approvals that need to be accrued - might impact who you agree to decide to sell the company to.
- Companies should not think of Cfius as an after-though: they should keep the process in ind from the start of the deal: companies need to first think about a their profile and how Cfius might view them;
- All levels of the company need to be engaged in the discussion including corporate development, chief executives and bankers;
- Another crucial aspect of gaining Cfius approval is to do an honest review of the target and the company, including aspects such as defence agreements and shareholder composition.
Know your target
Another crucial aspect of gaining Cfius approval is to do an honest review of the target and the company, including aspects such as defence agreements and shareholder composition. When it was initially legislated, Cfius wasn’t designed to deal with an economic system like there is in China today where the government estate is so deeply intertwined with the economy.
"If you've got a client who has been ignoring sanctions or is looking to get deep into personally identifiable information...I will say to clients - this is going to be very difficult"
“In China, Cfius can have a very difficult time distinguishing between private companies and state-owned companies, and there is a view that even private companies can be subject to manipulation by the government,” said Gibson Dunn partner Jose Fernandez, who was at one point a voting member of the Cfius committee.
Consider sports referees: the only time one even hears about them is when they make a bad call, otherwise they just blend into the picture. The same goes for Cfius, they are not being paid to make deals go forward, they are being paid to assess the risk. Take stock, and answer the questions that Cfius will before they are even asked, think like a regulator, advised Fernandez.
“It is important to look at the buyer and the target and put yourself in the shoes of someone who is looking for security risks,” he said. “Often there is a tendency of clients who know things on the inside to assume that things can be explained away, but that is not the way that Cfius works.”
It is very important to consider the technology in question, the current US administration is very reluctant to sell technology to the Chinese market. The sell side should consider if it will threaten US dominance in that field.
Know who you are dealing with
Advocacy is another important fact, if you are going to make a Cfius filing it is important to remember that the people who are processing the notices are mostly not lawyers, they are national security officials. It is not sufficient to have a technically superlative filing, you must also have to have an advocacy document that is mindful to the specific concerns of the Cfius committee.
"Weaving together national security policy and law in your Cfius advocacy is critical, not just important. It cannot be a sterile legal argument based on the regulatory text alone,” said Mancuso. “When I was in government, I read many filings that were technically superlative on the law, but tone deaf on the (national security) policy.”
He added: “It is important to realise that, very often, there are going to be multiple agency perspectives on any given deal, and your advocacy should take into account how arguments may have more traction with some agencies versus others,” he continued.
“Or, how you can frame your narrative and your advocacy to avoid unnecessarily triggering an allergic -and possibly fatal- reaction from an agency?”
In the current political climate the Defense and Homeland Security Departments are very important members of the committee, and it is important to keep on side these agencies that don’t take their chances.
“Address this as part of the structuring of a transaction, don’t just assume that you will be able to deal with it,” said Fernandez. “I often see situations where there is a silo between the corporate side of a deal and the Cfius side: you have got to look at it holistically, because you could be gaining a lot of shareholder rights in an agreement, but it could hurt you in a Cfius review.”
Don’t rush in
There are many other things that can be done in terms of logistics, managing how disclosure is collected, how it is communicated, helping clients think through what should be disclosed versus what should not be disclosed and when.
"I often see situations where there is a silo between the corporate side of a deal and the Cfius side"
“Those are prudential judgements. The rules are fairly prescriptive but not entirely so, and there is a lot of room for the craft of lawyering,” said Mancuso.
On occasion it is simply not worth the time and resources that would be required to gain approval through the Cfius process. There may be cases - for example a Chinese investor that wants to acquire a US defence contractor – where advancing a transaction is just a waste of time. Most of the time legal representation will try to find a way, or reconfigure the transaction to fit, perhaps by removing some of the assets in accordance with their risk appetite.
Fernandez said that he has made this recommendation on several occasions. “If you've got a client who has been ignoring sanctions or is looking to get deep into personally identifiable information, or defence, it is probably not good business practice, but often times I will say to clients - this is going to be very difficult," he said.
“If I feel i am not getting a straight answer [from a potential client] I just won’t take the matter. At the end of the day your credibility with Cfius is your currency.”
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