CFIUS Mitigation 'Clearly' Rising, Growing More Complicated, Former Official Says
The Committee on Foreign Investment in the U.S. is increasingly requiring companies to enter into mitigation agreements before approving a deal, and those agreements are getting more complex, said a former senior government official who worked on CFIUS cases. And although some companies fear the ongoing CFIUS review of Japan’s Nippon Steel signals that the committee could be veering away from its traditional national security focus, the former official said he’s not expecting the Nippon Steel case to spark a trend of politically motivated reviews.
Although CFIUS is still clearing most deals sent before the committee, “increasingly they are requiring a mitigation agreement as a condition of clearance,” said David Plotinsky, a lawyer with Morgan Lewis and former acting chief of DOJ’s Foreign Investment Review Section. Plotinsky, speaking during a webinar hosted by the law firm last week, also said those mitigation agreements “are getting a little more complicated,” which is translating into more compliance risks for investors.
“The more complex the mitigation agreement is, the tougher it is to comply and avoid even inadvertent compliance issues,” he said.
Plotinsky stressed that CFIUS is still only requiring mitigation -- which are agreements that impose certain requirements on parties involved in a transaction as a condition of CFIUS approving a deal -- in a “minority” of cases. But for deals where the U.S. business is operating in a particularly sensitive industry -- such as sectors involving advanced semiconductors or sensitive personal data -- “there's probably an increased chance of mitigation, and it's something that investors need to be aware of going in,” he said. “Mitigation is going up clearly.”
He also suggested that some companies may choose to avoid certain bidders if there’s a higher risk those bidders could be subject to a strict mitigation agreement. “If you’ve got one bidder that has to go through CFIUS and another that doesn't, it's certainly not a favorable factor if you need to go through CFIUS,” Plotinsky said. “But it may not be a deal-breaker for the seller if the deal will ultimately get through and will not require mitigation that's hugely burdensome.”
Companies are balancing the rise in mitigation with increased enforcement, he said. CFIUS has levied nearly $70 million in penalties so far this year, including a $60 million fine against T-Mobile after the telecommunications company was accused of violating its national security agreement (see 2408150015) The committee had announced only two penalties in its nearly 50-year history before 2023.
Plotinsky noted that CFIUS hasn’t yet announced a penalty against a company for a failure to make a mandatory filing with the committee, although that could change soon. In its penalty announcement for T-Mobile, CFIUS said it recently issued a warning letter to a company, but decided against a penalty, for not submitting a “timely” mandatory declaration.
“That's an area where companies need to be careful,” Plotinsky said.
Although CFIUS enforcement is rising and the Treasury Department proposed expanding the committee’s enforcement powers in April (see 2404110037), Plotinsky said he doesn’t necessarily expect the committee to use its growing tools to launch more cases into companies, similar to Nippon Steel, that don’t present an obvious national security threat.
CFIUS has traditionally been used to solely address deals that could harm U.S. national security, but some policy observers believe the ongoing review of Nippon Steel’s acquisition of Pennsylvania-based U.S. Steel is being used as a tool by the Biden administration to possibly sway more Pennsylvania voters to vote Democrat in a close presidential race (see 2409060040).
Plotinsky said he’s gotten questions from clients who are concerned CFIUS could increasingly be used as a political tool. “CFIUS is pretty laser focused on national security. They tend to not really be politicized,” he said. “So I think that's what's surprising, and to some extent, spooking investors a little bit.”
He said they’re asking: “If this could happen to Nippon Steel, could it happen in another circumstance?”
Although Plotinsky said the deal “could certainly get blocked for political reasons,” he also said “I'm not convinced it will.” And if it does ultimately get blocked, he said he would view that as “very much an outlier.”
“It really is a unique circumstance and a unique combination of political and labor and national security issues,” he said. The U.S. “will welcome investment from Japan, from other Asian countries that are not China,” but “it certainly is interesting, and it’s certainly making CFIUS even more at the front of people's minds than it usually is.”
Other lawyers during the webinar discussed investment-related due diligence challenges companies are facing as they prepare for a new set of U.S. outbound investment rules geared toward sensitive technology industries in China (see 2406210034). Todd Liao, a Morgan Lewis lawyer based in Shanghai, said part of what makes investment diligence and broader trade compliance difficult is the fact that U.S. sanctions lists are constantly changing.
”Today, a portfolio asset at a target Chinese company may not yet be sanctioned by the U.S. government, but it could be tomorrow, or it could be six months later,” he said.
Not only should investors be screening against sanctions lists to minimize risks, but they may also need to analyze a company’s ownership structure and examine the “background” of the company’s executives, Liao said.
Liao said he’s seen cases where the founder of a Chinese startup, for example, was accused of posing a risk to U.S. national security because they were once an officer in the Chinese military, or because they were once “cited as collaborating” with the Chinese government on civil-military fusion projects.
“This is not necessarily readily available information that's apparent through ownership verification,” he said. “You have to do a lot more deeper digging to find out this information.”
The Biden administration has said it wants to issue its final outbound investment rules before the end of the year, and Plotinsky said that could happen before November. He said he’s “hearing some murmurings here in Washington, D.C., that they could come out soon,” citing the upcoming election.
“After an election is over, there's often a reluctance on the part of the executive branch to do major new rulemakings during” a lame duck period, Plotinsky said. “So there's certainly a likelihood that, before November, we could see these regulations come out.” He added they likely wouldn’t take effect until some time in 2025.