CFIUS’s Proposed Regulatory Enhancements Would Increase Transactional Risks

Japanese: CFIUSによる規制強化案で取引リスクは増加する 

The Committee on Foreign Investment in the United States (CFIUS) has taken another significant step in transforming from a limited jurisdiction interagency committee that primarily reviewed voluntary filings into a body with vigorous monitoring, investigation and enforcement roles and capabilities.

In a Notice of Proposed Rulemaking published on April 15, 2024, CFIUS proposed regulatory amendments that would strengthen its investigation, penalty and enforcement authorities.  The revisions build on CFIUS’s Enforcement and Penalty Guidelines and an Executive Order President Biden issued in September 2022.

For U.S. companies and prospective foreign investors, the proposed amendments set the stage for the most expansive role for CFIUS since its creation in 1975.  The proposal signals increased enforcement and broader use of dramatically increased penalties. Comments on the proposed regulatory amendments are due by May 15, 2024.

Expanded Requests for Information With Authority to Compel Responses

Currently, CFIUS may request that parties to a non-notified transaction provide information necessary for CFIUS to determine whether the transaction is a “covered transaction” subject to its jurisdiction. The proposed revisions would also authorize CFIUS to request information relevant to whether a non-notified transaction raises national security considerations or meets the legal criteria for a mandatory notification to CFIUS.

In addition, the proposed revisions would authorize CFIUS to request information deemed necessary to:

• Monitor compliance with or enforce the terms of a National Security Agreement entered into by transaction parties or
• Determine whether transaction parties made a material misstatement or omitted material information as part of a CFIUS review or investigation.

CFIUS currently receives such information through informal correspondence with transaction parties.  The proposed amendments would require transaction parties to respond to CFIUS information requests, allow CFIUS to compel responses by issuing subpoenas and, as discussed below, enable CFIUS to impose substantial penalties for material misstatements or factual omissions.

Tightened Time Frame for Mitigation Agreements Negotiation

For the first time, the proposed amendments would impose on transaction parties a deadline of three business days to respond to CFIUS-proposed mitigation terms unless CFIUS extends the deadline at the parties’ written request.  By the deadline, transaction parties would be required to provide a substantive response to CFIUS-proposed mitigation terms consisting of:

• Acceptance of the terms,
• A counterproposal and/or
• A detailed statement of reasons the party or parties cannot comply with the proposed mitigation terms.

If implemented, the deadline would compel transaction parties to become even more proactive in anticipating and preparing reactions and fallback positions in advance of potential mitigation terms that CFIUS may propose.

Notably, the proposed regulatory amendments would not impose a deadline on CFIUS to respond to transaction parties’ responses to CFIUS-proposed mitigation terms. Nor would they impose a deadline by which CFIUS must propose mitigation terms during a review or investigation period.  As is the case now, CFIUS could propose mitigation terms very close to the end of an investigation period, with the private parties “jammed” into accepting government-proposed terms or abandoning the transaction.

Dramatic Increase in Penalties

CFIUS is preparing to follow through on its commitment to respond to violations of its regulations with civil monetary penalties. While the details are not yet publicly available, CFIUS reportedly issued several monetary penalties in 2023 and is poised to issue additional penalties in 2024. To date, CFIUS has publicly announced only two penalty actions: a $1 million penalty in 2018 for breaches of a mitigation agreement and a $750,000 penalty in 2019 for violation of an interim mitigation order.

The proposed revisions would dramatically increase the maximum civil penalties that CFIUS could impose:

• The maximum penalty for submitting a declaration or notice with a material misstatement or omission or making of a false certification would increase from $250,000 to $5 million per violation, a twentyfold increase.
• A maximum penalty of $5 million per violation would apply for material misstatements or omissions in response to CFIUS’s requests for information regarding non-notified transactions, monitoring compliance with or enforcing the terms of a National Security Agreement or determining whether transaction parties made a material misstatement or omitted material information as part of a prior CFIUS review or investigation.
• The maximum penalty for submitting a report under a mitigation agreement or an accompanying certification that contains a material misstatement or omission would be $5 million per violation.
• The maximum penalty per violation for failure to file a mandatory declaration would increase from the greater of $250,000 or the value of the transaction to the greater of $5 million or the value of the transaction.
• The maximum penalty for each violation of a material provision of a mitigation agreement entered into on or after the effective date of the final rule would be the greatest of:
  • $5 million,
  • The value of the violating party’s interest in the U.S. business (or covered real estate) at the time of the transaction,
  • The value of the violating party’s interest in the U.S. business (or covered real estate) at the time of the violation in question (or the most proximate time to the violation for which assessing such value is practicable) or
  • The value of the transaction filed with the Committee.

Why it Matters

CFIUS officials have consistently telegraphed their intention to strengthen CFIUS’s enforcement capabilities.  We expect CFIUS is heading towards a new era of more frequent enforcement, highlighting the stakes of CFIUS compliance for U.S. companies and foreign investors. 

The proposed regulatory revisions would give CFIUS new tools to make those intentions a reality, featuring more robust penalties as well as the authority to require responses to requests for additional categories of information. The steep increase in maximum civil penalties and additional bases for penalties would heighten the importance of foreign investors’ and U.S. businesses’ assessment of CFIUS risks and requirements before commencing and completing a transaction.

In addition, higher potential penalties for failure to make mandatory filings even for low-value transactions would further highlight the importance of a U.S. business determining whether it designs, develops, produces, manufactures, fabricates or tests any “critical technologies” in advance of agreeing to accept foreign investment.

Creating a three-business-day deadline for transaction parties to respond to CFIUS mitigation proposals would increase the pressure on parties to accept mitigation terms or walk away from a transaction.  At the same time, the increased maximum penalties for violations of mitigation agreements would make it even more critical for parties negotiating a mitigation agreement with CFIUS monitoring agencies to understand the terms in a proposed agreement and agree only to conditions with which they can comply.