David Fagan, Covington & Burling and Chris Griner, Stroock

The Covid-19 pandemic is slowing down national security reviews of foreign investment deals in the United States, lawyers say.

While mergers and acquisitions in general were declining as the novel coronavirus spread across the globe, the Committee on Foreign Investment in the United States (CFIUS) at the U.S. Treasury Department, which reviews transactions for national security concerns, is also being affected by the new working conditions. "It is not that CFIUS is closed, but there is an impact on CFIUS too, and you have to factor that into your planning," says David Fagan, co-chair of the firm's cross-border investment and national security practice at Covington & Burling in Washington, D.C.

The pandemic also could influence the panel's thinking about national security with respect to foreign investment in, and acquisition of, U.S. manufacturers of pharmaceuticals, medical equipment, and devices such as N95 respirators and ventilators, according to CFIUS lawyers.

Presently, officials and staff at the various agencies that comprise the committee, as well as the lawyers representing the dealmaking parties and company executives themselves, are mostly working remotely, which is delaying the normal review processes.

Most importantly, in the early stage of reviews, the threat assessment—which relies on classified information and coordination within the U.S. intelligence community—can be processed only on secure U.S. government networks. Those networks can't be accessed via the public Internet on unclassified systems. 

Also, its contents can be discussed only in security-cleared government spaces or by government-secured telecommunications systems because the assessment is classified. This undoubtedly is adding to delays, lawyers say.

The increasing delays mean parties that proceed to close a transaction on the basis of a "no action" to a declaration from the committee during this period would be doing so at the risk of later CFIUS action when the committee is back up and running normally in certain cases,  Fagan says.

Transactions that CFIUS already has accepted for review, however, appear to be minimally affected by the government's reduced operations, Fagan says. For more information on this, in-house counsel can consult Covington's client alert on the subject.

The Covid-19 pandemic also could result in CFIUS scrutinizing transactions involving U.S.-based companies that produce personal protective equipment (PPE) and medical devices more closely than in the past, as matters of national security, some CFIUS and international trade experts say.

"The current Covid-19 epidemic will heighten CFIUS interest in transactions and investments involving manufacturers of PPE, ventilators, and other items that are essential to a national response to a pandemic. Virtually every expert is predicting that this will not be the last pandemic with which we will need to deal," says Chris Griner, chair of Stroock & Stroock & Lavan's national security/CFIUS compliance group.

"What CFIUS will be watching for is a significant loss in scale and production capacity such that the U.S. would not be able to respond to a new crisis. The Defense Production Act is not effective if there is no U.S. industry capable of production," Griner says. "There are no other real policing authorities to deal with this other than CFIUS," he says, adding "that these are not especially complicated products technologically, so export controls generally won't apply."

In other CFIUS news, President Donald Trump on Saturday formally established by executive order an interagency committee to advise the Federal Communications Commission on national security and law enforcement concerns related to license applications for investments in telecom by foreign-owned or -controlled companies. The attorney general is to chair the committee, which includes the secretaries of the Departments of Homeland Security and Defense.

The order formalizes a process known as Team Telecom that existed for years, but which CFIUS lawyers say will benefit from a newly transparent and empowered structure. Foreign investment in the U.S. telecommunications sector has been an increasing strategic and national security concern in recent years, especially with respect to the race to develop superfast 5G data networks to support other next-generation technologies such as autonomous vehicles.

"The executive order permits the newly established committee to share information with CFIUS, which may help to make the agencies' due diligence more efficient by avoiding duplicative question sets and streamlining the information-gathering process," said Mario Mancuso, international trade and national security practice leader at Kirkland & Ellis, in a statement. He said it also permits the new committee to revisit applications that had previously been approved.

"While this is a striking new development, it is responsive to concerns expressed by certain U.S. officials that prior approvals and mitigation agreements were no longer appropriate in light of new and different national security risks that had arisen since the initial reviews."

See also:

• Final CFIUS Rules for Real Estate Transactions: 5 Things to Know
• Treasury Department Enacts Final Rules on Foreign Investment

From: CorporateCounsel