October 23, 2020

The biggest mistake you can make before filing with CFIUS is…

As part of our ongoing coverage at the intersection of national security and foreign investment, we regularly speak to experts for their insights and perspectives on a variety of topics. This week, we sit down (virtually, of course) with Anne Salladin, partner at Hogan Lovells. Anne served for nearly two decades in the Office of the Assistant General Counsel for International Affairs of the Treasury Department, which provides legal advice to the Chair of CFIUS. As senior counsel, she was responsible for providing legal advice on CFIUS matters, working closely with other CFIUS agencies, and even played a role in developing laws and regulations related to CFIUS. Anne was featured in the Foreign Investment Watch “Top Advisors 2020” list this year.

Anne, before we start, we always like to ask how you and your family have been faring during the pandemic. Everyone okay?

Thanks so much for asking, Scott. We are doing fine though, like most, going a bit stir crazy. I have a daughter in college in Massachusetts, so am closely monitoring that situation from afar – as only a mother can.  

And how has the firm been affected? I know Hogan Lovells has more than 50 offices all over the world, from Moscow and Shanghai to Dubai and Paris, so “remote working” is relative here. But has it been hard to not access your D.C. office?

Hogan Lovells partner Anne Salladin

The firm is very much open for business, though physically working in the DC office is currently voluntary.  Fortunately, the firm is well positioned for remote work.  The expectation is that the majority of the firm will continue to work from home for the time being.   I have to say that I miss the camaraderie of the office, but feel confident that we’ll all be able to be together when the time is right. I feel fortunate to work as part of a terrific practice group – Hogan Lovells’s international trade and investment group — that understands the value of connection under these challenging circumstances.       

While we’re talking about the impact of COVID-19, I’m curious to hear your thoughts about the mid-pandemic spate of rules and proposals addressing national security and foreign investment globally. Germany, Japan, Israel and others have recently proposed or approved new regulatory regimes. What’s happening here? 

It’s worth noting that many countries were already in the process of putting together proposals for addressing foreign direct investment well before the pandemic. So the impetus for change in this area is not new.  

A lot of countries have recognized what the United States has, that national security interests are better served by focusing less time on investments that are unlikely to raise national security concerns and more on those that are likely to raise such concerns, such as certain Chinese investments in high tech. The United States, of course, led the way with FIRRMA, the new CFIUS law, in reinforcing a risk-based framework. That has encouraged other countries to continue to upgrade their investment screening regimes and to coordinate with the United States, both of which are strongly encouraged by FIRRMA. It goes without saying, perhaps, that it does no good to put in place a robust framework in the United States only to have investment migrate elsewhere to take advantage of a less robust framework. 

To that end, FIRRMA contains incentives for other countries to enhance their investment screening mechanisms.  I am thinking, in particular, of the list of “excepted foreign states,” currently Australia, the UK and Canada. Under FIRRMA, preferential jurisdictional and mandatory filing treatment is accorded to certain investors from these excepted foreign states. There will be additions to that list; the robustness of a country’s investment screening mechanism is an important factor in CFIUS’s consideration in determining which states will be added to the list and, therefore, which investors can benefit from this preferential treatment.  

It will be fascinating to see whether, at the end of the day, an upgrade of multiple countries’ investment screening mechanisms creates a kind of multilateral regime for investment screening.  I am skeptical given the challenges of creating such a multilateral framework, but you never know. Watch this space.                

As a followup, do you expect the regulatory climate to change once the pandemic eases? What about changes if Biden wins the upcoming election?

In neither case do I expect the foreign investment regulatory climate to change significantly.  

It’s worth remembering that CFIUS’s now well-known concerns about foreign investments in U.S. companies involved in critical technologies, critical infrastructure, and sensitive personal data pre-date FIRRMA, and FIRRMA was passed by a strong bipartisan vote, so I don’t expect much to change come January. There was a clear recognition by both Democrats and Republicans that the framework needed to be modernized to take account for changes in the investment landscape, particularly the extraordinary increase in Chinese investment in this country from about 2012 through 2017, new transaction structures, and new avenues of potential national security risk – I am thinking here particularly of digitization and sensitive personal data. 

One point worth noting is that unlike the prior CFIUS regime, FIRRMA allows for the regulations to be updated from time to time to account for evolving national security concerns. The new regulations in a way are a living, breathing document.  Never again will there be ten years that go by without a critical assessment of whether the framework is up to snuff.         

Okay, so it’s clear the new regulatory regime isn’t going away, which means that investors need to expect and plan for more of their transactions to be scrutinized. So what do investors need to think about?

Of course, now more than ever, investors need to assess CFIUS implications up front when putting together a deal.  With mandatory filings now in place under FIRRMA, the single most important thing that a U.S. company considering foreign investment needs to think about is the export control classifications of its hardware, software, materials and technology, regardless of whether the company actually exports those items.  

The rules on critical technology mandatory filings typically require that a U.S. company have assessed the export control classification of its items to see whether those items might be “critical technologies” for mandatory filing purposes; accordingly, foreign investors will continue to care a lot about whether a company has classified such items.  Not having done so can hold a deal up and create significant timing challenges. 

One more point on this front is worth mentioning — that the universe of “critical technologies” is likely to expand in the future as the Commerce Department identifies and controls “emerging and foundational” technologies that may well include AI, robotics and biotech. So it’s important for a company to understand what it’s got.         

Do you get the sense that investors are generally aware of CFIUS and new regulatory climate, or is there still a little ignorance, especially with everyone focusing on the pandemic?

The awareness about CFIUS is much greater now than ever before, though in certain areas, such as smaller companies and startups, still not well understood. I started working on CFIUS cases as a fluke really — when my colleague at Treasury, who was the only one in the general counsel’s office handling CFIUS cases at the time — came into my office and asked me if I wanted to help out on a reasonably high profile case, one of well less than a hundred that the office worked on that year. This was in the Dubai Ports World era (some of your readers may recall the purchase by a Middle Eastern company of a UK company with U.S. ports operations in 2006). I said yes and never looked back. At the time, the press referred to CFIUS as “secretive,” “obscure” and “that little known panel of government officials.” Times have changed.  These days, the Committee, which I recently heard referred to as the “ultimate regulatory bazooka,” reviews hundreds of cases a year.  I guess you could say that CFIUS has been thrust into the spotlight in recent years, albeit perhaps reluctantly.            

You’ve represented so many companies successfully before CFIUS. Are there any common lessons you’ve observed during the process, or any “tips” you’d give companies before filing?

Though I have represented a number of companies before CFIUS, potentially of more importance is that I have reviewed many cases as part of CFIUS.  If you asked me what the single most important mistake filers make when going before the Government, I would have to say that it is not anticipating what CFIUS’s concerns may be and trying to address them early on, up front. 

Understand the agencies that you are dealing with and how each one might view your particular deal. Some may not know that CFIUS operates by consensus – for the Committee to sign off on any particular transaction, all CFIUS agencies must agree.  That results in quite robust debates, particularly among agencies that may have differing agendas.  The balance of power between the so-called “economic” agencies and the “national security” agencies on the Committee shifts over time.  

In addition, consider being proactive in suggesting mitigation where the national security concerns are clear – CFIUS is typically quite open to hearing ways that will address concerns while preserving the commercial benefits of the deal. Do national security due diligence up front – you want to understand where CFIUS may have concerns so that the deal can be structured in consideration of those concerns, if necessary. Understanding these concerns may help determine the scope of the acquisition, the price and potential mitigation that could ultimately affect the economics of your deal. Finally, perhaps it goes without saying, but there is no substitute for having a thorough understanding of your client’s business.                   

Thanks Anne.

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Anne Salladin, who was featured in our Top Advisors 2020 feature, is a partner at Hogan Lovells, where she assists foreign and domestic clients in various industries in connection with matters involving national security and cross-border transactions, in particular before CFIUS.

Previously, Anne spent nearly 20 years at the Office of the Assistant General Counsel for International Affairs of the Treasury Department, which provides legal advice to the Secretary of the Treasury as chairperson of CFIUS. As senior counsel, she was responsible for providing legal advice on CFIUS matters, working closely with other CFIUS agencies, played a role in developing laws and regulations related to CFIUS, and participated in the review and investigation of well over 500 transactions filed with CFIUS, including many major Chinese acquisitions.

She can be reached at [email protected]​hoganlovells.com or (202) 637-6461.

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