Review by the Committee on Foreign Investment in the United States (CFIUS) continues to be an important consideration for any deal involving a foreign investment in a U.S. business.

Last year and early 2018 saw both a significant amount of Chinese interest in investment in the United States and an apparent uptick in such transactions abandoned due to reactions from CFIUS. Although only one deal was blocked at CFIUS's recommendation by the president, many others, including 100 percent acquisitions and minority investments, were reported to be abandoned as a result of pressure from CFIUS. Last November, bipartisan legislation, the Foreign Investment Risk Review Modernization Act (FIRRMA), was introduced in both houses of Congress that would expand the scope of transactions subject to CFIUS review.

In this context, it is key for in-house and external deal counsel to understand how to plan for the possibility of a CFIUS review. Due diligence into potential national security concerns is a critical component of CFIUS planning. However, other deal considerations related to CFIUS review can be as critical to transaction outcome as the national security concerns.

In-house and corporate counsel should take the following into consideration:

Due diligence. The importance of vetting the national security vulnerability and threat factors associated with the potential deal is clear. However, there are other important considerations regarding foreign buyers that speak to the transactional implications of CFIUS review. First, do they have experience in the U.S. market and with the CFIUS process in particular? If they do not, are they working with experienced counsel who will appropriately set their expectations and ensure the process moves forward as smoothly as possible? If foreign buyers do not understand the demands of the CFIUS process, delays that extend the time to close are likely. Second, are they transparent and honest? Foreign buyers that are secretive or dishonest can lead to the costly abandonment of a proposed deal (as well as lawsuits such as Ness Technologies S.A.R.L. suing HNA in December for allegedly frustrating the CFIUS review process by providing incomplete or misleading information).

Deal timing. Recent CFIUS reviews, even those that are relatively nonproblematic, have frequently required more than three months for completion due to purported staffing shortages and backlog of cases. Given this current norm, the parties must understand that there will likely be a significant period of time between signing and closing of a deal.

During this period, if either the buyer or seller is a publicly traded company, the deal will likely be disclosed in U.S. Securities and Exchange Commission filings. Parties, especially sellers, should consider whether this may impact stock prices or result in adverse reactions by customers or the public. Even where both parties are private, news of a deal may leak out during a protracted waiting period and affect the U.S. business.

Parties with sensitivity to a long post-signing waiting period might consider whether a proposed deal can be submitted to CFIUS for review even before the agreement is signed to shorten this post-signing period. The answer from the CFIUS side has generally been yes, so long as there is sufficient information available for them to understand the critical aspects of the deal, including ownership, voting rights, scope, and estimated value. However, if the goal of an early notification to CFIUS is to avoid a prolonged period of the deal being publicly picked apart while closing is delayed, counsel should consider whether the proposed deal or the CFIUS notice must be disclosed in SEC filings regardless of the lack of a signed agreement.

Foreign financing. Not infrequently, foreign buyers must make special arrangements for the financing of an investment in a U.S. business. Foreign exchange controls make financing arrangements particularly challenging for many Chinese buyers. These constraints add nuance to the extended closing period imposed by CFIUS review. Before signing a deal with CFIUS approval requirements, both the foreign buyer and the seller should understand whether the constraints of foreign financing will impact the ability of the parties to hold off on closing for the several months likely necessary for CFIUS review.

Setting expectations. As with many aspects of a transaction, appropriately setting expectations regarding the CFIUS process is important. Both buyers and sellers should be aware of the timing of a CFIUS review, which has recently taken more time than in the past. Parties should budget a minimum of four months, and that presumes the deal does not run into complications leading to the notice being withdrawn and refiled. In addition, the process of preparing the notice itself can be time-consuming, as a significant amount of information must be provided by both buyer and seller. If parties do not have proper expectations, they may miss opportunities to prepare presigning, delaying submission of the notice and throwing off the closing timetable.

Both parties should also be prepared to respond promptly (typically within three days) to requests for information from CFIUS. Failure to do so could lead to a notice needing to be refiled. Foreign buyers in particular may have difficulties with these timelines if they are not prepared in advance, due to language barriers and differing time zones.

Enforceability of contractual provisions. The past couple of years have seen expanded use of contractual provisions that attempt to allocate CFIUS-approval risk with the buyer. These contractual options include reverse-break fees if a deal fails to receive CFIUS approval required for closing. Another option is a deposit paid before CFIUS review, and retainable by the seller. (The rise in the use of such fees may relate to the fairly new availability of CFIUS risk insurance.) Contractual options also include “hell or high water” provisions requiring the buyer to accept any mitigation measures CFIUS requires in order to clear the transaction.

However, counsel should be mindful that it may be difficult to enforce such provisions against a foreign buyer without significant assets in the United States. Generally, it behooves corporate counsel to understand where the financing for the purchase price is coming from at the early stages of a deal that may take several months to close. If a contract will require reverse-break fees or other payments to the seller in the event of a deal failure, sellers should consider requiring an escrow or other measure to ensure payment of monies owed.

These transactional considerations should supplement the core national security assessment companies do before entering into a deal subject to CFIUS review.

Francesca M.S. Guerrero is of counsel in the Washington, D.C., office of Winston & Strawn. Her practice focuses on international trade, anti-bribery compliance and national security.