CFIUS Cross-Border M&A Investigations and the Critical Role of the Acquirer’s PRC Links

The Committee on Foreign Investment in the United States (CFIUS) has since 1975 exercised jurisdiction on the acquisition of US businesses by non-US acquirers. However, its importance in global M&A has increased since its powers were expanded in 2018 and detailed in subsequent implementation regulations.

Charles Wu

The Committee on Foreign Investment in the United States (CFIUS) has since 1975 exercised jurisdiction on the acquisition of US businesses by non-US acquirers. However, its importance in global M&A has increased since its powers were expanded in 2018 and detailed in subsequent implementation regulations. These regulations expanded the scope of CFIUS jurisdiction to include not only “control” transactions (a standard which may be satisfied with a board seat, over 10% shareholder, or veto rights on operational matters for the acquirer), but also minority investments in TID (technology, infrastructure, and data) industries meeting low thresholds of investor involvement (such as access to material non-public information, board or observer seat, or substantive decision-making). As a result of this increased jurisdiction and of CFIUS’s aggressive focus on China (including instances of forced unwindings of previously closed transactions that were not reported to CFIUS, such as the recent Juniper Systems unwinding action[1]), Chinese investment in the US has declined. Any new investments that seek to avoid CFIUS jurisdiction have to effectively be structured so the Chinese investor is “entirely passive”. 

Recently, the focus of CFIUS has expanded not only to direct Chinese investment in US businesses, but also to other cross border transactions where CFIUS has raised concerns about the acquirer’s significant operations in China, even where the acquirer is headquartered in a jurisdiction allied to the United States. Two recent Japanese transactions are particularly noteworthy.

In the case of Softbank’s significant investment in Cruise in 2019, CFIUS cleared the transaction on condition that Softbank not obtain any of Cruise’ technology. The purported concern of CFIUS was the potential for Softbank to share Cruise’s technology with other companies in which Softbank had also invested, including those based in China, such as Didi. In other words, the mere prospect of a diffusion of information was enough for CFIUS to impose a total technology information ban as a condition for approving Softbank’s investment in Cruise.^[2] 

In the case of Nippon Steel’s recently completed acquisition of US Steel, pursuant to an agreed upon national security agreement (NSA) between Nippon Steel and CFIUS[3], Nippon Steel i) committed to US$11 billion in new US investments by 2028, ii) agreed to a “golden share” arrangement that provides the US government with veto rights over key management decisions at US Steel and iii) agreed that key leadership roles at US Steel will be held by US citizens.[4] Originally blocked by President Biden, the transaction was ultimately conditionally approved by President Trump based on the above terms following negotiations at the highest levels.

In light of the above, market practitioners in cross-border M&As should note the potential reach of CFIUS whenever there is a US component to a transaction, and, in particular, where there is a US and China element. Likewise, venture capital and private equity practitioners should also note the expansion of CFIUS jurisdiction to minority investments, including targets that operate mainly outside the US but, critically, have a US subsidiary. All corporate practitioners should now be mindful that CFIUS is no longer just a “China issue”. 

For more information on how we can help you navigate CFIUS risk, please contact Charles Wu at Charles.Wu@clydeco.com