David Fagan, Covington &Burling and Chris Griner, Stroock

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

While mergers and acquisitionsin general were declining as the novelcoronavirus spread across the globe, the Committee on ForeignInvestment in the United States (CFIUS) at the U.S. TreasuryDepartment, which reviews transactions for national securityconcerns, is also being affected by the new working conditions. "Itis 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 nationalsecurity practice at Covington &Burling in Washington,D.C.

The pandemic also couldinfluence the panel's thinking about national security with respectto foreign investment in, and acquisition of, U.S. manufacturers ofpharmaceuticals, medical equipment, and devices such as N95respirators and ventilators, according to CFIUS lawyers.

Presently, officials and staffat the various agencies that comprise the committee, as well as thelawyers representing the dealmaking parties and company executivesthemselves, are mostly working remotely, which is delaying thenormal review processes.

Most importantly, in the earlystage of reviews, the threat assessment—which relies on classifiedinformation and coordination within the U.S. intelligencecommunity—can be processed only on secure U.S. government networks.Those networks can't be accessed via the public Internet onunclassified systems. 

Also, its contents can bediscussed only in security-cleared government spaces or bygovernment-secured telecommunications systems because theassessment is classified. This undoubtedly is adding to delays,lawyers say.

The increasingdelays mean parties that proceed to close a transaction onthe basis of a "no action" to a declaration from the committeeduring this period would be doing so at the risk of later CFIUSaction when the committee is back up and running normally incertain cases,  Fagan says.

Transactions that CFIUS alreadyhas accepted for review, however, appear to be minimally affectedby the government's reduced operations, Fagan says. For moreinformation on this, in-house counsel can consultCovington's client alert on the subject.

The Covid-19 pandemic also couldresult in CFIUS scrutinizing transactions involving U.S.-basedcompanies that produce personal protective equipment (PPE) andmedical devices more closely than in the past, as matters ofnational security, some CFIUS and international trade expertssay.

"The current Covid-19 epidemicwill heighten CFIUS interest in transactions and investmentsinvolving manufacturers ofPPE, ventilators, andother items that are essential to a national response to apandemic. Virtually every expert is predicting that this will notbe the last pandemic with which we will need to deal," says ChrisGriner, chair of Stroock & Stroock &Lavan's national security/CFIUS compliancegroup.

"What CFIUS will be watching foris a significant loss in scale and production capacity such thatthe U.S. would not be able to respond to a new crisis. The DefenseProduction Act is not effective if there is no U.S. industrycapable of production," Griner says. "There are no other realpolicing authorities to deal with this other than CFIUS," he says,adding "that these are not especially complicated productstechnologically, so export controls generally won'tapply."

In other CFIUS news, PresidentDonald Trump on Saturday formally established byexecutive order an interagency committee to advise the FederalCommunications Commission on national security and law enforcementconcerns related to license applications for investments in telecomby foreign-owned or -controlled companies. The attorney general isto chair the committee, which includes the secretaries of theDepartments of Homeland Security and Defense.

The order formalizes a processknown as Team Telecom that existed for years, but which CFIUSlawyers say will benefit from a newly transparent and empoweredstructure. Foreign investment in the U.S. telecommunications sectorhas been an increasing strategic and national security concern inrecent years, especially with respect to the race to developsuperfast 5G datanetworks to supportother next-generation technologies such as autonomousvehicles.

"The executive orderpermits the newly established committee to share information withCFIUS, which may help to make the agencies' due diligence more efficient byavoiding duplicative question sets and streamlining theinformation-gathering process," said Mario Mancuso, internationaltrade and national security practice leader at Kirkland & Ellis, in a statement. He saidit also permits the new committee to revisit applications that hadpreviously been approved.

"While this is a strikingnew development, it is responsive to concerns expressed by certainU.S. officials that prior approvals and mitigation agreements wereno longer appropriate in light of new and different nationalsecurity risks that had arisen since the initialreviews."

See also:

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

From: CorporateCounsel