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February 4, 2021

Stroock Client Alert

By: Chris Griner, Shannon Reaves, Gregory Jaeger, Christopher R. Brewster, Jonathan A. Labib, Erin Bruce Iacobucci

The Wall Street Journal[1] and other publications recently reported that the Committee on Foreign Investment in the United States (CFIUS) will play a key role in the Biden Administration’s efforts to rein in Chinese investments that could threaten U.S. national security.  We agree.  

These news reports are in line with an article we published last December in Bloomberg Law.[2]  At that time, we noted that the Biden Administration will follow certain “norms” that had characterized reviews prior to the last Administration – including the confidential treatment of filings.  We also emphasized that the new Administration “will challenge foreign investment, especially Chinese investment, whenever it is deemed a threat to national security.”  Although we expect the majority of Chinese investments to clear CFIUS review, we noted that they will get close attention, that “Chinese buyers must be prepared to mitigate risks associated with U.S. acquisitions,” and that this scrutiny may require “the divestment of sensitive operations.”

Foreign investments – let alone acquisitions – in certain high tech companies will simply be off limits to investors from non-allied countries, especially Russia and China.  And we might add – not just high tech.  For example, the COVID pandemic has demonstrated the critical importance of “low tech” medical gear – and has highlighted longstanding concerns about the integrity of the supply chain for defense articles.  Legislative reforms have targeted investments that can provide access to personal data – as well as real estate transactions in close proximity to sensitive government installations and infrastructure.   

CFIUS has now staffed up a task force to identify “non-notified” transactions – investments and acquisitions that were not submitted for CFIUS review, including seed investments in sensitive start-ups.  A special concern is investments through intermediaries, where the funding sources are unclear.  Reportedly, at least two dozen firms are now the subject of CFIUS inquiries.  This will continue – and expand.  Transactions that are not cleared through CFIUS are subject to review and potential divestment orders in perpetuity.  In such cases, restructuring is virtually guaranteed to clear CFIUS – and divestment is always possible. 

 Our takeaways:

  • As investments in high tech, national security, and critical infrastructure get tougher for Chinese and other non-allied investors, there will be new opportunities for investors from allied countries.  The United States remains open to foreign investment, and investors from allied countries will clearly have an upper hand in government reviews.  This also means that investors are less likely to encounter competition from Chinese bidders, a factor that sometimes served to drive prices above market in the past.   
  • Investors from allied countries should be on the lookout for potential investment opportunities as Chinese and other investors are forced to divest valuable properties and search for White Knights. 
  • All foreign investors in covered transactions should take advantage of the safe harbor protections provided by CFIUS reviews.  In appropriate cases, investors can even use the short-form declarations process – a procedure designed and intended to facilitate reviews in simple transactions involving trusted investors.  Indeed, as CFIUS starts pursuing more investigations into non-notified transactions, we expect lenders to require CFIUS filings in many cases.
  • Transparency is key.  U.S. firms that are looking for investors need to know the source of funding.  The U.S. Government has many tools available to identify foreign investments.  Post-closing reviews at best are disruptive – at worst, they can be catastrophic for sellers and buyers alike, even in the absence of wrongdoing. 

We will continue to keep you advised of developments. 

For more information, please contact any of the following members of Stroock’s National Security/CFIUS/Compliance Team.

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For More Information:

Chris Griner

Shannon Reaves

Gregory Jaeger

Christopher R. Brewster

Jonathan A. Labib

Erin Bruce Iacobucci

[1] The Wall Street Journal, “Government ‘SWAT Team’ Is Reviewing Past Startup Deals Tied to Chinese Investors,” Jan. 31, 2021, available at: https://www.wsj.com/articles/government-swat-team-is-reviewing-past-startup-deals-tied-to-chinese-investors-11612094401.

[2] Stroock & Stroock & Lavan LLP, “CFIUS Won’t Be ‘Weaponized’ Under the Biden Administration,” as published in Bloomberg Law, Dec. 24, 2020; available at: https://news.bloomberglaw.com/us-law-week/cfius-wont-be-weaponized-under-the-biden-administration.

This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.