A U.S. national security panel is expected to be flooded with additional notifications of cross-border deals as a new law requires more disclosures regarding transactions between U.S. businesses and foreign investors.
Companies also will be required to pay new filing fees, which are aimed at helping the panel with its growing workload. The fees aren’t expected to hurt M&A activity because they’re capped at $300,000, a sliver of the value of most deals.
The changes are part of an annual defense policy measure that President Donald Trump is scheduled to sign Aug. 13. It updates the rules governing the Committee on Foreign Investment in the U.S. (CFIUS), an interagency panel that reviews cross-border business transactions for national security risks.
The law calls for “mandatory declarations” notifying CFIUS of deals in which a foreign government or certain foreign persons have a “substantial interest” in a U.S. business. The new law also will likely result in more voluntarily notifications, according to practitioners.
“If a filing is voluntary and you decide not to file, the main risk is that the government can come in after the fact and force you to unwind the transaction” if it poses national security concerns, Thad McBride, a member at Bass, Berry & Sims PLC, told Bloomberg Law. “The consequences can be very significant.”
The changes were largely fueled by concerns in Congress and the Trump administration about Chinese deals involving critical technologies. Trump has said he plans to direct his administration to “rigorously” enforce the new law.
Rulemaking Is Next
The Treasury Department will have to write rules to clarify exactly which deals give a foreign government, or a foreign person under direction of his or her government, “substantial interest” in a U.S. firm. The agency will also determine the amount in penalties that could be imposed on violators that don’t file in those situations.
The law also gives CFIUS the authority to look at transactions in which a “foreign person” could gain access to critical U.S. technologies or infrastructure or the personal data of U.S. persons.
“The issue of personal information opens up a whole new category of transactions that CFIUS could be more interested in, especially with U.S. companies involved in the financial and healthcare sectors,” McBride said.
Transactions in which the foreign acquirer is a state-owned enterprise in a country such as China will get scrutiny, according to Matthew Rabinowitz, a senior associate at Pillsbury Winthrop Shaw Pittman LLP.
“That is a pretty significant change in that CFIUS will no longer be solely voluntary,” he told Bloomberg Law.
Companies are now encouraged, rather than required, to consult with CFIUS about deals that might come under the committee’s purview. But the risk of having a transaction unwound has been a major incentive for companies to file voluntarily, according to practitioners.
Voluntary filings have dramatically increased in recent years as CFIUS has expanded its focus. The trend is only expected to accelerate under the new law.