What are the risks that CFIUS will block an acquisition?

Takeaway: Understanding the role of the Committee on Foreign Investment in the United States (CFIUS) and its potential impact on startup acquisitions is crucial, and strategies such as early CFIUS filing, careful deal structuring, thorough CFIUS risk assessment, and possibly mitigation agreements can help navigate this process and mitigate risks.

What is CFIUS?

The Committee on Foreign Investment in the United States (CFIUS) is an interagency committee that reviews the national security implications of foreign investments in U.S. companies. It has the power to review, modify, and even reject transactions that could result in control of a U.S. business by a foreign entity.

In the context of startup acquisitions, CFIUS's primary concern is typically with transactions involving technology or data that could have national security implications if transferred to a foreign control.

Risks of CFIUS Blocking an Acquisition

The risk of CFIUS intervention varies depending on several factors:

  • Sensitive Industries: Startups operating in sensitive industries, such as aerospace, defense, semiconductor, or cybersecurity, are more likely to come under scrutiny. Additionally, companies dealing with sensitive personal data of U.S. citizens, critical technologies, or critical infrastructure may also be of interest to CFIUS.

  • Foreign Investor's Country: The risk is higher if the foreign acquirer is from a country that the U.S. views as a potential national security risk. For example, transactions involving investors from China or Russia may receive more scrutiny.

  • Control of the U.S. business: Even minority investments can be reviewed if they could result in control of a U.S. business by a foreign person.

Should a transaction be reviewed and subsequently blocked by CFIUS, the consequences can be significant. Both parties may face financial losses, and the deal may fall apart, leading to reputational damage and potential legal repercussions.

Mitigating the Risk

There are several ways to mitigate the risk of a CFIUS review:

  • CFIUS Filing: If a transaction could potentially raise national security concerns, the parties can submit a voluntary notice or a short-form declaration to CFIUS before closing. This can lead to clearance and effectively immunize the transaction from subsequent CFIUS intervention.

  • Deal Structuring: The deal can be structured in a way that avoids giving the foreign investor control over the U.S. business, or access to sensitive technology or data. This could include measures like limiting the rights of the investor or implementing “firewalls” to segregate sensitive operations.

  • CFIUS Risk Assessment: It is advisable to conduct a CFIUS risk assessment at an early stage of the transaction. Engage legal counsel experienced in CFIUS matters to understand the potential risks and develop a strategy to address them.

  • Mitigation Agreements: If CFIUS identifies a national security risk, the parties can enter into a mitigation agreement to resolve those concerns. This could involve measures like ensuring that only U.S. citizens handle certain operations or information, or that the foreign person will divest certain assets post-acquisition.

Conclusion

While the risk of CFIUS blocking an acquisition can be significant, with early and careful planning, it is possible to mitigate this risk and navigate the CFIUS review process successfully. Always consider consulting with legal and financial advisors experienced in CFIUS matters to ensure the smooth progression of your startup acquisition.