Cfius filing fee a hindrance but unlikely to curb deal flow
The US agency's new charge, which coincides with the introduction of coronavirus-linked digital filings, will increase the cost of inbound M&A
The Committee on Foreign Investment in the United States (Cfius) will soon require all parties to transactions to pay filing fees in connection with filings. However, sources suggest it will not cause inbound investment to drop.
Cfius, the inter-agency committee that has the authority to review transactions that may result in foreign persons or businesses controlling certain types of business in the US to ascertain their impact on US national security, has not previously charged application fees for its reviews.
In direct response to the Covid-19 virus, the agency has also taken steps to protect itself from contamination this week. By introducing an e-filing system in place of the existing hard copy and DVD submission system, it will no longer accept any form of physical filings.
This move is perhaps a sign of things to come as the pandemic continues to expose unnecessary practice across the entire global workforce. "Perhaps this is the future for US Treasury and Cfius filings?" said Harry Broadman, emerging markets practice chair at Berkeley Research Group and a former member of Cfius.
Under the proposed rule published on March 9 2020, Cfius is set to implement section 1723 of the Foreign Investment Risk Review Modernization Act (FIRRMA) of 2018 to allow the agency to collect fees in connection with filings.
While the fees are set to be costly, it is not expected that they will prevent deal flow into the US from country's currently subject to Cfius review.
According to Samson Lo, head of Asia M&A at UBS in Hong Kong SAR, because over the last 18-24 months there have basically been no deals into the US from China anyway, this change will have little impact on deal flow.
"Significant contributors to the decline are the trade war and what Donald Trump says and does," he said. "There isn't all that much anyway, and won't be any more until at least after the US election. I don't think that the filing fee will change much substantially."
However, there is always collateral damage. UBS advises Korean and Japanese companies looking at the US. Both are currently active in US acquisitions, largely because China is not. "The problem now is that there is a considerably higher price," he continued.
"It is not something that will discourage deal flow from Japan and Korea"
"I do feel sorry for them but the fee itself is not that high. It is not something that will discourage deal flow from Japan and Korea," added Lo.
Cfius will establish staggered payment, depending on the size of the acquisition, to take into account the additional burden of fees on small businesses, the expenses of the committee, and the adverse effects of fees on levels of foreign investment in the US.
The fees will be free for all transactions under $500,000, and will range in price from $750 to $300,000 for acquisitions between $500,000 and $750 million upwards.
"A filing fee is a filing fee. Firms will have to look at it as part of the overall deal expenses. It is unfortunate but you have to do it," said Lo.
See also: US/China trade war part three, Cfius
Broadman too believes that the move is unlikely to inhibit investment.
“Cfius’ proposed rule regarding the collection of filing fees, as authorised in FIRRMA, mirrors what other US regulatory agencies have done for some time, most notably the fees charged for pre-merger notification under Hart-Scott Rodino," he said, referring to the federal antitrust statute enacted in 1976 that established the US' pre-merger notification programme.
"In my view, it’s yet another example of how US national security regulation of inbound foreign investment has become more systematic, like the country’s antitrust regulatory regime,” added Broadman.
"It's yet another example of how US national security regulation of inbound foreign investment has become more systematic"
Cfius is not yet requiring fee payment, and public comments may prompt meaningful changes in the eventual final rule. The new proposed rule on filing fees evinces efforts by Cfius to minimise the impacts on businesses that make filings, with proposed fees amounting to 0.15% or less of transaction values.
"It is important to remember that this is only a proposal and will not constitute the final wording of the rule," said Mario Mancuso, partner at Kirkland & Ellis.
"It’s not clear from the proposed rule when Cfius would grant a waiver for the payment of a filing fee based on ‘extraordinary circumstances relating to national security', but this could be clarified in the final rule."
The final rule will add an additional important Cfius consideration for transactions. In addition to deciding how substantive Cfius risks are allocated in a purchase agreement (for example, relating to potential mitigation measures), transaction parties will need to decide how to allocate the payment of fees.