The Committee On Foreign Investment In The United States Sharpens Its Enforcement Edge: Proposed Regulatory Revisions Expand Penalty Authority – Terrorism, Homeland Security & Defence

On 15 April 2024, the Treasury Department’s Office of
Investment Security published a
Proposed Rule to revise the regulations governing the Committee
on Foreign Investment in the United States (CFIUS or the
Committee). The Proposed Rule would introduce three key changes to
the CFIUS process and mark the most significant update to
CFIUS’s authority since the enactment of the Foreign Investment
Risk Review Modernization Act of 2018. CFIUS is an interagency body
with authority to review foreign acquisitions and investments
(including land acquisitions) and to take action to safeguard US
national security, including by requiring parties to adopt
mitigation measures or even recommending to the President to
prohibit transactions.

Written comments on the Proposed Rule are being accepted for
consideration and must be submitted by 15 May 2024.

Tighter Timeline to Analyze and Respond to Mitigation
Terms

The Proposed Rule would mandate that, where CFIUS has proposed
mitigation terms during an investigation, parties must respond
substantively to those terms within three business days or as
extended by CFIUS, similar to the existing three business day
deadline to respond to supplemental questions in reviews of Joint
Voluntary Notices. There is currently no regulatory deadline to
respond to proposed mitigation. CFIUS justifies this change by
noting that delayed responses to mitigation terms may prevent
completion of investigations within the statutorily mandated 45
days, necessitating parties to withdraw and refile a notice in
order to restart the statutory clock. However, mitigation
agreements are often complex documents that merit careful
consideration as they may require costly and extensive compliance
procedures, hiring of additional staff, and may necessitate
restructuring of an acquisition in order to implement—changes
that could negate a transaction’s underlying economic
rationale.

Notably, the Proposed Rule does not have any self-imposed
deadline for CFIUS to propose mitigation nor does it limit
CFIUS’s time to consider parties’ responses. This leaves
open the possibility of CFIUS proposing mitigation very late in an
investigation and putting pressure on the parties to agree quickly
to terms. We have encountered this scenario in filings and have
seen CFIUS attempt to exert pressure on parties to accept
mitigation terms by running out the clock and, in turn, trying to
limit the time available to push back.

The significant risk of this change is that CFIUS would refuse
an extension request, and then the parties cannot provide a
substantive response to mitigation terms. The failure to respond to
proposed mitigation would give CFIUS the basis to reject a notice
outright. CFIUS’s comments to the Proposed Rule suggest this
authority may be used primarily in reviews of non-notified
transactions (i.e., transactions that were not previously reviewed
and have closed) where CFIUS claims that there is a national
security risk that requires mitigation and prompt completion of the
review is critical. Nonetheless, the increased risk of being under
time pressure may incentivize parties to consider possible CFIUS
mitigation demands and proactively propose terms or consider
alternative measures.

Broader Scope of Inquiry

The Proposed Rule’s second change would expand the
Committee’s authority to request information about non-notified
transactions to determine the applicability of mandatory filings
and identify national security concerns. Current regulations only
grant CFIUS authority to request information to determine whether a
transaction constitutes a “covered transaction” or a
“covered real estate transaction.” In our experience
advising clients in non-notified transaction inquiries, CFIUS
already assumes authority to request information to assess
application of the mandatory notice requirement (i.e., whether
technologies produced by a US business target are critical
technologies), so the Proposed Rule’s change seems to codify
existing practice. Nonetheless, transaction parties should take
care to consider whether a given transaction is likely to pique
CFIUS’s interest and conduct additional due diligence to either
preemptively mitigate potential national security concerns or
accurately incorporate CFIUS risk into the transaction
structure.

The Proposed Rule would further amend CFIUS regulations to
require parties to provide information CFIUS requests to monitor
compliance with a mitigation agreement or to determine if a party
made a material misstatement or omission in a prior proceeding.

Increased Penalties and Enforcement Authority

The third Proposed Rule change would dramatically increase
maximum civil penalties for material misstatements and omissions in
declarations or notices from USD$250,000 to USD$5,000,000, a
twenty-fold increase. Similarly, the maximum penalty for failure to
comply with a mandatory notice requirement would increase from
USD$250,000 to USD$5,000,000 (or the value of the transaction,
whichever is greater). The Proposed Rule would also expand the
situations in which CFIUS may impose a penalty to include material
misstatements or omissions outside the context of declarations and
notices, most notably in response to a request for information
relating to non-notified transactions or monitoring and enforcement
compliance.

Takeaway

The Proposed Rule demonstrates the Committee’s intent to
more closely scrutinize non-notified transactions in the United
States and strongly disincentivize transaction parties from
avoiding, or attempting to avoid, CFIUS review. Parties should
actively assess transactions for CFIUS risks, and for transactions
subject to review, parties should consider issues likely to be of
greatest concern to the Committee in order to anticipate and
respond effectively to mitigation demands, should those arise. We
recommend that a CFIUS analysis be a standard component of any
acquisition or investment involving a foreign buyer or investor
where the deal involves a US business, regardless of the nature,
scope, or ultimate beneficial ownership of the foreign party.

Our International Trade team is actively monitoring the
development of these regulatory changes and is available to answer
any questions and assist in navigating the CFIUS process.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.