When Selling Stock or Assets to Non-U.S. Buyer, Remember Your CFIUS Filing

When a U.S. business sells a company or assets to a non-U.S. buyer and the sale has potential national security implications, companies typically conduct a CFIUS filing in order to clear the transaction with the U.S. government.  The entity responsible for CFIUS filings, the Committee on Foreign Investment in the United States, is an interagency committee chaired by the U.S. Department of Treasury and ultimately under the purview of the President pursuant to the Foreign Investment and National Security Act of 2007, and related statutes.  While technically voluntary in nature, if a CFIUS filing is not made and the transaction is subsequently found to have national security implications, the transaction may be unwound, resulting in a litany of difficult economic and legal issues for the parties to the transaction.

The application of the CFIUS regulations is obvious when the sale involves military technology, but it can potentially apply to the sale of any type of business that might be deemed to implicate national security.  Past examples of sales involving CFIUS review (or its predecessor statute, Exon-Florio) include oil company sales and IBM’s sale of its laptop business to China-based Lenovo.  Other examples include the sale of a port management business to provide stevedoring services (loading and unloading of ships) as well as China-based Huawei’s difficulties with its unwound purchase of 3Leaf’s fiber optic business.

Factors that can come into play for the CFIUS Committee include whether the target U.S. company possesses technology subject to export controls (ITAR), has classified U.S. government contracts, owns technology critical to national defense, or if a case takes on particular political significance.

Specific factors that the CFIUS Committee may consider include whether the transaction involves (i) domestic production needed for projected national defense requirements, (ii) potential effects on United States international technological leadership in areas affecting United States national security, (iii) long-term projections of United States requirements for sources of energy and other critical resources and material; and the final all encompassing factor, (iv) such other factors as the President or the CFIUS Committee may determine to be appropriate, generally or in connection with a specific review or investigation.

The CFIUS process includes a pre-filing notification whereby the buyer and seller have the opportunity to notify CFIUS in advance of a filing.  After the actual filing is made, a 30-day waiting period commences for CFIUS to review the filing and request additional information.  In the event of more detailed review, this waiting period can be extended by an additional 45 days.

The CFIUS process need not be a laborious process in the overall context of a transaction, but it does require the inclusion of the CFIUS waiting period into the transaction timeline and a determination of the likely outcome of the CFIUS review process.  The CFIUS process also involves the handling of sensitive business and personal information for which special precautions are recommended in accordance with the Privacy Act of 1974, as amended.  The utilization of legal counsel versed in the CFIUS regulations can assist with streamlining the process.

Our firm has represented buyers and sellers in connection with CFIUS filings, most recently in 2011-12 when we prepared a joint CFIUS filing for buyer and seller in a transaction involving the purchase of a defense/aerospace business, as well as handling other regulatory matters and the transaction generally.

Another interesting note on CFIUS filings: they serve as an indirect indicator of the health of foreign direct investment in the U.S. economy.  CFIUS filings totaled 155 notices in 2008, followed by a 58% decline to 65 notices in 2009, and a 43% rebound in 2010 to 93 notices reviewed by CFIUS.  Final numbers for 2011 have not yet been released, but are anticipated to show an additional double digit increase from 2010.

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