Companies Seeing Increased Scrutiny, Delays From CFIUS, Lawyers Say

Companies that operate in industries that don’t seem to impact national security are finding that their transactions are attracting CFIUS attention, said Mark Thierfelder, a corporate trade lawyer with Dechert, speaking during a May 28 webinar hosted by the law firm. “Deals that we might have thought about as being simple from an approval process in prior years seem to be getting an increasingly harder look than previously,” Thierfelder said.

This includes transactions and investments involving basic medical supplies, such as gloves and masks, said Jeremy Zucker, a Dechert trade lawyer. Because of the COVID-19 pandemic, Zucker said, companies should expect to see “heightened scrutiny” in areas that “wouldn't traditionally have been thought of as posing national security risks,” such as pharmaceutical products, healthcare products and personal protective equipment.

And in areas that may pose national security risks, companies should expect to see even more CFIUS scrutiny, especially on transactions involving critical technologies, said Neal Wolin, CEO of Brunswick Group and a former acting Treasury secretary and CFIUS chair. This is partly due to the administration’s increased focus on technology competition with China and a heightened involvement by the White House in foreign direct investment matters, Wolin said. “The willingness of the White House to be engaged in and involved in these kinds of conversations … has increased,” he said. “There's a lot of focus and a lot of politics around these kinds of deals, so inevitably the work of the committee gets shaped by that broader political context.” The Treasury Department and the White House did not comment.

While the U.S. has long been focused on screening foreign investment, including by passing the Foreign Investment Risk Review Modernization Act (see 2001140060), the COVID-19 pandemic is intensifying “trend lines that were already present,” Wolin said. “There will be a higher level of scrutiny, whether it's on [medical supplies] or even things like semiconductors or other kinds of critical technology that are important to the [U.S.] industrial base.”

As countries have more strictly reviewed transactions involving foreign direct investment during the COVID-19 pandemic (see 2003250033), CFIUS has taken longer than usual to review investments, the lawyers said. “Consistent with what we’re seeing elsewhere in the world, deals are taking longer to get through,” Thierfelder said. The delays are partly due to telework requirements by the CFIUS committee and other officials, said Francesca Guerrero, a trade lawyer with Thompson Hine, speaking during a May 27 webinar hosted by the law firm. “A good part of the process involves reviewing classified assessments of foreign investors,” she said. “They have to figure out how to get that material and make it accessible for the committee members as needed.”

The increased scrutiny and delays may dissuade certain U.S. investments, Wolin said. “Getting caught in between the U.S. and China is a complicated proposition,” he said. As CFIUS continues to put out new rules, including a May 21 proposal to modify mandatory declaration requirements for certain transactions involving critical technologies (see 2005200032), companies should make sure they are receiving the right advice before proceeding with a deal. “It used to be the case that we would see lots of deals almost completely baked, and then someone at the end would say, ‘what do we do now about CFIUS?’” Wolin said. “I think it’s increasingly clear that having this as an element of the consideration with a full suite of advisers at the very beginning of the contemplation of the transaction is hugely important.”