The ongoing federal government shutdown—now the longest in U.S. history—is delaying national security reviews by the Committee on Foreign Investment in the United States at the U.S. Treasury Department just as their scope has increased under recent legislation, prominent CFIUS practitioners said.
Law firms and their clients are not only experiencing delays in the reviews currently filed, but they can expect a severe backlog once the government resumes operations, the practitioners said.
In November, a pilot program was launched under the Foreign Investment Risk Review Modernization Act of 2018, which expanded the scope of transactions subject to CFIUS review to include certain real-estate transactions, sensitive personal data and non-controlling investments in U.S. businesses involved in “critical technologies” related to industries deemed strategic or important to national security. It also made reviews of many foreign transactions mandatory instead of voluntary and altered filing and review timelines, but didn’t expand the committee’s limited staff. Substantial backlogs at the committee were already common before the legislation was enacted last fall.
According to a data analysis by Pillsbury Winthrop Shaw Pittman, CFIUS’s clearance rate for Chinese deals in the United States during the Trump administration has dropped to less than 60 percent from more than 90 percent under the Obama administration.
Nicole Lamb-Hale, managing director in the business intelligence and investigations practice of Kroll, a division of Duff & Phelps, based in Washington, D.C., said Jan. 11 that “CFIUS activities are suspended except for ‘caretaker functions’ in cases initiated prior to enactment of FIRRMA and exigencies of a national security nature that have to be attended to during the shutdown.” Kroll provides compliance consulting, investigative due diligence, auditing and monitoring services for parties in transactions requiring CFIUS review.
Alan Enslen, leader of Baker Donelson’s international trade practice group and a member of the firm’s global business team, said effects of the shutdown on CFIUS reviews are already being felt. “Most regulators live in a continual backlog today, but because CFIUS has statutorily mandated review deadlines, there is usually quite a bit of consultation required,” he said. “When their staff is reduced and they are only able to look at existing reviews, they are hampered in their ability to have pre-filing consultations, and that is particularly a problem now because the pilot program being new, it has generated a greater volume of questions for them.”
Among the transactions requiring CFIUS approval that are in limbo because of the government shutdown is the merger agreement between Americas Silver Corp. and Pershing Gold Corp., for example. The companies jointly filed required notice with CFIUS on Nov. 21, 2018, with the 45-day review period starting Nov. 29, according to a company news release. But on Dec. 22, they received notification from CFIUS that all deadlines were tolled because of the appropriations lapse due to the partial government shutdown. The company said the closing that had been expected on or about Jan. 14 would likely be extended.
Enslen said, “The agencies are keeping the lights on and prioritizing to the national security threat, but their ability to pick up the phone and talk to you about a potential filing, the informal advisory situation has come to a halt pretty much across the board.”
The lawyers are advising clients in deals that may require CFIUS review to be even more patient than usual.
Enslen said, “Practitioners need to prepare clients for a longer duration once the lights are back on and people are back to work. If they anticipated 30 to 40 days licensing I am expecting 45 to 60 [days] when they come back. There is going to be a huge backlog. Pragmatically that is most important, managing expectations of our clients, and 100 percent staffing won’t resurrect the usual licensing time,” he said. “And when it comes back, we are all going to be blowing up the lines of the regulators so we are all going to have to be patient, me included, as things get back on track,” he said.
Lamb-Hale said she is advising clients to “review their deal documents proactively and seek necessary amendments to conditions precedent concerning CFIUS clearance that may be impacted by the shutdown.”
Both lawyers acknowledged that a prolonged government shutdown could be damaging.
”It is clearly a concern and a risk that the longer the shutdown goes that some of these deals will not go forward,” Lamb-Hale said. “There are many unintended consequences of the government shutdown and I believe the shutdown may have a chilling effect on foreign direct investment.”
Chinese direct investment in the U.S. and Europe already is at a six-year low, according to a report by Baker McKenzie and Rhodium Group.
Enslen also acknowledged that delays at government agencies such as CFIUS and the Office of Foreign Assets Control, which enforces economic and trade sanctions, could eventually affect law firms’ bottom lines if frustrated parties walk away from potential deals because of it, as the shutdown already has affected some other practices.