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COVID-19 Impact on CFIUS Review of Foreign Investment Transactions

Jun 2, 2020

The COVID-19 pandemic has impacted the Committee on Foreign Investment in the United States’ (CFIUS’) ability to review transactions as quickly as they had in the past. CFIUS is the government body responsible for reviewing such deals for their potential impact on national security.  Therefore, although transactions have slowed overall during this crisis, dealmakers must take into account numerous considerations if a transaction is completed and may require review by CFIUS.  

Mike Rose, the partner-in-charge of EisnerAmper’s CFIUS Practice, shared that CFIUS has reduced its in-office operations during COVID-19.   “If the parties to a transaction experience delays in the review process, they should evaluate if there is a possible perceived national security risk that may exist due to the transaction,” he said.  “If such a risk does exist, the company must evaluate their own risk tolerance for closing a transaction without receiving a formal CFIUS approval.  If CFIUS is likely to perceive a transaction with little or no national security risk and if the CFIUS filing is permissive rather than mandatory, they may consider closing a transaction even if they would have waited for CFIUS approval under normal circumstances.” 

However, Rose said companies need to be aware that if a transaction does present a national security concern and CFIUS identifies the transaction at a later date and looks to review, CFIUS could decide to mitigate or even unwind the transaction in addition to seeking monetary penalties up to the value of the transaction.  “It is imperative that transaction parties evaluate carefully whether their transaction is subject to the CFIUS review requirement,” he said  “It is important to discuss and strategize internally and with outside advisors as there could be some tactical options to consider.”

During the COVID-19 pandemic, companies in the health care sectors have been in the spotlight by CFIUS due to the lack of production in the U.S. and its dependency on foreign producers and supply chains.

“Foreign investors as well as U.S. businesses in the health care sector seeking foreign investment must take into account the attention and consideration of additional scrutiny and intense focus under the Defense Production Act (DPA) authorities, including the Department of Health and Human Services (HHS) and CFIUS,” Rose said. “Due to this situation, the dependency of U.S. companies on foreign supply chains to meet the nation’s COVID-19 demands, and the potential demands of future health care crises, will become an area of intense focus by the various DPA authorities, including HHS and CFIUS.”

In 2018, the Foreign Investment Risk Review Modernization Act (FIRRMA) upgraded CFIUS provisions not initially part of the legislation to protect American technology and intellectual property from potentially harmful foreign acquisitions. The goal was to proactively identify and mitigate foreign efforts to acquire critical U.S. technology and other information through controlling or non-controlling interests/investment from any foreign person, entity or country.

Given how health care companies have been at the center of CFIUS review during the pandemic, Rose said there has been a growing concern that the U.S. will depend on China and other non-allied countries for personal protective equipment (PPE), medical equipment and pharmaceuticals, and how sources of supply could be compromised by foreign acquisitions.

“All types of acquisitions and significant investments, even by investors organized in allied countries, can be expected to receive heightened attention to determine how such investments could affect the nation’s ability to respond to a health crisis,” Rose said. “The crisis will be expected to support efforts by relevant government agencies, including the Department of Defense, to identify U.S. businesses that are critical, not only to a U.S. COVID-19 pandemic response, but also to the nation’s ability to respond to future health care crises.”

For years, CFIUS has been expanding its reviews beyond the traditional defense sector to other sectors deemed “critical infrastructure,” investments which receive high scrutiny. During this COVID-19 pandemic, the governing body classified health care as critical infrastructure.

“There is little question in the current crisis that the nation’s supply of ventilators, PPE, respirators and other devices, as well as pharmaceuticals, not to mention the domestic supply chains required to produce those items, would be viewed by CFIUS as critical infrastructure,” Rose said. “Covered transactions involving health care companies can be expected to face increased attention by CFIUS for the foreseeable future.”

Rose emphasized that in addition, the technology of biotech research facilities also falls under critical infrastructure for scrutiny for possible breaches to steal research on potential vaccines.  He said foreign investors considering acquisitions in these or related sectors will need to consider CFIUS requirements.

“If a company operates in an industry that would be potentially affected by the use of the DPA and its related regulations, the DPA could create potential procurement/compliance issues affecting your business and the DPA can affect their ability to seek foreign investment in the future and may require potential CFIUS review.”

Rose also elaborated that U.S. bulk power equipment has fallen under critical infrastructure and said an executive order on securing the United States Bulk-Power System was recently signed and prohibits certain transactions involving the equipment developed, manufactured or supplied by a foreign adversary if the transaction raises a significant national security concern.

“This executive order is aimed at addressing the threat that foreign adversaries could exploit vulnerabilities in the U.S. electrical grid and has implications on both renewable and conventional power industries,” he said. “This executive order applies to the acquisition, importation, transfer or installation of any bulk-power system electric equipment supplied by persons owned by, controlled by, or subject to a jurisdiction or directed by a foreign adversary that threatens national security.  CFIUS could be part of their existing focus on U.S. national security interests affected by certain state investments in U.S. businesses.”

Despite the current challenges caused by COVID-19, CFIUS enforcement will be continue to be monitored to determine if there is an uptick in foreign transactions and how enforcement will potentially impact future transactions. Looking ahead, it is expected that once the COVID-19 pandemic subsides, the number of CFIUS filings will increase and be contingent upon stricter enforcement. 

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Elana Margulies-Snyderman

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.

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