Now that the Committee on Foreign Investment in the United States has expanded the scope of transactions subject to mandatory declaration, some companies and their attorneys may believe that there's no need for a traditional analysis of the need for a voluntary CFIUS review.

But that would be a mistake, CFIUS lawyers said.

“Just because you don't have to submit a mandatory declaration doesn't mean you don't have CFIUS issues,” said Kenneth J. Nunnenkamp, an international trade and national security partner at Morgan, Lewis & Bockius' Washington, D.C., office.

The U.S. Department of the Treasury, which oversees the interagency committee, published interim rules in October under the Foreign Investment Risk Review Modernization Act enacted last August. The rules established a pilot program for implementing several FIRRMA provisions, effective Nov. 10, 2018.

Under the program, any U.S. business involved in “critical technologies related to specific industries” and accepting direct or indirect foreign investments, including non-controlling investments, must file a declaration providing detailed information about the transaction to the committee. The 27 specific industries include airplane and parts manufacturing, space vehicles, computers and computer storage, semiconductors, chemical manufacturing, telecommunications equipment, nuclear power generation, TV and radio broadcasting, nanotechnology and aluminum manufacturing, among others.

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Nunnenkamp wrote in his blog on the firm's website that the new rule “has had an unintended consequence of focusing transacting parties on the mandatory declaration requirements, at the expense of the traditional risk analysis needed to determine whether a voluntary notice should be submitted.”

He said in an interview, “parties that have to do a mandatory declaration analysis may breathe a sigh of relief when they conclude they are not required to submit a declaration, only to find out later that they missed an essential part of the analysis when CFIUS reaches out and asks for a voluntary filing.”

Before President Donald Trump signed FIRRMA into law last August, companies engaged in proposed transactions that might trigger national security concerns went through a process of analyzing whether or not to voluntarily submit a filing to CFIUS for review. Not filing ran the risk of having the committee make inquiries late in the deal, potentially delaying or even blocking it if the government felt the deal posed a national security or strategic risk. Blocked deals had happened rarely until recently. Deciding whether or not to seek a review was part of the strategic process engaged in by the parties to the transaction and their attorneys.

But now clients may be so focused on whether they are required to file under new regulation that they may overlook whether they still need to consider a voluntary filing, “because a lot of the things that CFIUS would review are not pilot program industries focusing on emerging technologies. They obviously still care about traditional [risk factors],” Nunnenkamp said.

Some traditional concerns included proximity to military installations, for example.

Mark Herlach, partner at Eversheds Sutherland whose practices focuses on energy, international trade and defense, said the pilot program “does not in any way eliminate the need to do the traditional analysis. That is not a substitute for the traditional analysis. It is an add-on.” 

Additionally, certain types of transactions that may have received approval from CFIUS at one time might not today given the changing geopolitical climate, and that doesn't apply only to Chinese companies, Nunnenkamp said. In his blog, he said a three-pronged analysis is now required:

  • Determine whether a mandatory filing is necessary under the pilot program.
  • If a mandatory filing is required, determine whether it would be preferable to file a joint voluntary notice instead.
  • Even if a mandatory declaration isn't required, determine whether a voluntary notice should nevertheless be submitted.

Herlach said, “Even if you are not covered by the pilot program provisions that require a mandatory declaration you still need to do the traditional analysis to see if it is appropriate to do the voluntary filing. And you are not off the hook simply because you are not within the pilot program.”

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