Takeaways
- CFIUS practitioners believe the shutdown may delay CFIUS’ review of certain deals by one or even a few months, but they acknowledge that it is uncertain just how much reviews will be delayed. “We are pretty much in uncharted territory,” noted Farhad Jalinous, a partner at White & Case and CFIUS practitioner. “There are a lot of open questions.”
- Jeremy Zucker, co-chair of Dechert’s International Trade and Government Regulation practice, told Reorg M&A that in order to “kick the can down the road” after the government reopens, CFIUS may ask companies that filed under the new pilot program to make a full filing without concluding the initial review.
- Both partners added that the uncertainty surrounding the outcome of the shutdown and FIRRMA has also impacted negotiations between companies who are considering a transaction.
- According to a CFIUS practitioner with cases currently before the panel, new deals filed after the shutdown ends will likely fall victim to longer timelines as a result of the backlog facing CFIUS. “The new ones coming in after the shutdown are definitely going to take longer.”
The compounded impact of the U.S. government shutdown and the new Foreign Investment Risk Review Modernization Act, or FIRRMA, will likely result in extended timelines for deals awaiting CFIUS clearance - forcing some companies to extend their termination dates in order to comply with the review, according to CFIUS practitioners who spoke to Reorg M&A.
As Reorg M&A previously
reported, all deadlines for declarations and transactions under CFIUS review have been tolled while the government remains closed. Additionally, under FIRRMA, a pilot program
making it mandatory for parties to file notices for transactions in critical industries, took effect on Nov. 10. The pilot program allows for mandatory declarations to receive an answer within 30 days.
As the shutdown enters its second month, practitioners said they believe the shutdown may delay CFIUS’ review of certain deals by one or even a few months, but acknowledge that it is uncertain just how much reviews will be delayed. “We are pretty much in uncharted territory,” Farhad Jalinous, a partner at White & Case and CFIUS practitioner, told Reorg M&A. “There are a lot of open questions.” Jalinous said that these new variables, including the nascent pilot program with little to no precedent, adds to the uncertainty. “So it’s hard to predict because during the last major shutdown - which was under Clinton - both the volume of filings was less and there wasn't this new law,” Jalinous said.
Jeremy Zucker, co-chair of Dechert’s International Trade and Government Regulation practice, called CFIUS’ backlog “tremendous” and said it will be worse than it could have been a year ago because of the new pilot program that took effect on Nov. 10. “There is very little, if any, track record thus far regarding how CFIUS handles mandatory declarations,” Zucker explained. “CFIUS does not disclose the existence of mandatory filings or their resolution, just as CFIUS does not publicize the existence of ‘regular’ CFIUS filings and resolutions."
When the government reopens and is forced to adhere to the tighter deadline in mandatory declarations outlined under FIRRMA, CFIUS could buy additional time by asking those companies to come in and submit a full filing, Zucker suggested. Requesting the parties to submit a full filing would give CFIUS a few weeks to slog through the backlog before companies comply with the panel’s request. “It will not reduce their workload but it will kick the can down the road, extending the total time in which CFIUS will review and resolve these matters because the parties will have to do additional work to turn a mandatory declaratory short form into a full filing, and then there will be additional review periods associated with CFIUS’ review of the full filing,” Zucker said.
Both practitioners noted that the uncertainty surrounding the outcome of the shutdown and FIRRMA has also impacted negotiations between companies that are considering a deal. “It’s definitely a source of frustration to our clients, especially if CFIUS clearance is – or normally would be – a condition to close,” Zucker said. “Many clients are in the middle of negotiating deals; uncertainty regarding the shutdown impacts negotiations.” Zucker noted that during negotiations, companies consider whether a seller should accept an offer from a foreign bidder or take less from a domestic bidder who does not bring CFIUS risk to the table.
According to a CFIUS practitioner who currently has cases before the panel, some companies with deals currently before CFIUS may have some idea of potential issues with their deal and could be using time during the shutdown to put together proposals to resolve those issues. “They should get some information regarding the issue during the shutdown,” the CFIUS practitioner said. “During the shutdown, companies could be working on mitigation agreements.”
While the government shutdown and FIRRMA’s broader scope create a “perfect storm” for the panel that is “definitely going to have an impact just in terms of volume,” the CFIUS practitioner noted that many of these deals’ reviews, once resumed, will likely be completed within their 45-day timeline. “For a few months, it’s going to be catch-up city,” said the CFIUS practitioner, who previously worked for the Department of Defense. “But they’re going to use triage to categorize by priority the easy cases and the not-easy cases.”
In addition, the CFIUS practitioner noted that new deals filed after the shutdown ends will likely fall victim to the backlog facing the panel. “The shutdown and the backlog at CFIUS is going to have a significant impact on deals,” the CFIUS practitioner said. “The new ones coming in after the shutdown are definitely going to take longer.”
--Kathryn Haake and Matt Tracy