How to navigate increasing scrutiny on inbound US deals

27 September, 2022

Colin Wittmer
Deals Leader, PwC US
J. Fentress Seagroves
Inbound Deals Leader, PwC US

Government scrutiny of certain inbound US investments, including acquisitions of American businesses, is likely to increase in the months ahead, leading dealmakers to reassess growth strategies and M&A decisions.

To date, deals by non-US acquirers of US companies have been submitted to the Committee on Foreign Investment in the US (CFIUS) at the deal parties’ discretion, and CFIUS can block deals and investments deemed to pose national security threats. CFIUS review may be mandatory in cases when a foreign government has a substantial interest or investments involve critical technology, critical infrastructure or data on large numbers of US citizens. While most CFIUS reviews remain voluntary, the possibility of a mandatory review adds significant potential uncertainty and liability on transactions with partners in rival countries.

What’s changed? As Craig Stronberg of our PwC Intelligence group explained in Policy on Demand, a new US Treasury Department team is searching for inbound deals — proposed and completed — that might pose a risk to national security. The team is now fully staffed and has been operating at high speed for most of the past year. Just as importantly, other units have been established at other US departments, including Commerce, Justice and Defense. Scores of new, full-time government analysts are now on the hunt for inbound deals skipping the CFIUS process.

  • The new team within Treasury’s Monitoring and Enforcement office will look at deals in which parties didn’t voluntarily go through the CFIUS process — essentially checking if those transactions should have been submitted for review.
  • “They are going to proactively seek out those deals, even if they’ve just been announced,” Craig said. “In effect, they’re going to go hunt for them … and they are going to try to ferret out any deals that therefore might escape the CFIUS process.”

How will it work? The team will have access to substantial data about inbound deals and use three types of data to identify transactions that potentially should have been submitted for CFIUS review.

  • Open sources such as press releases, social media posts, company announcements and any required government filings.
  • Closed sources, including any government agency but in particular Defense, Energy, Commerce and Justice as well as the US intelligence community, where the least visible and potentially most powerful data resides.
  • Public input, including a Treasury hotline for tips about potential CFIUS violations.

What should I do? With foreign direct investment still important to the US economy, we don’t expect the new Treasury team to use a heavy hand. But even a balanced approach aimed at maintaining investment while ensuring national security will require adjustments. Dealmakers need to understand that renewed foreign economic competition increases the need to align business interests with national interests, as foreign direct investment from systemic rivals will now be scrutinized to protect US economic security.

  • Assess your CFIUS approach: Any inbound deal that touches critical technologies, infrastructure and data on US consumers is more likely to draw attention. And deals don’t have to be between tech companies. Businesses in many sectors hold sensitive data, and you need to determine your vulnerabilities and develop options to mitigate security risks. While deals involving China and Russia may seem ripest for scrutiny, any inbound deal could be subject to review.
  • Know your business relationships: The elevated focus likely won’t be limited to the parties directly involved in a transaction. An example from the recent past: US regulators intervened in the acquisition of a South Korea company by a company in China because the seller used a significant amount of technology from a US company.
  • Understand your data universe: Determine what information about the companies involved falls within the types of data noted above that could be assessed by Treasury’s Monitoring and Enforcement team. Then ask yourself what stories that data could tell.
  • Consider how you announce a deal: As noted above, it’s not just about the sector but about the technology and the data at issue in a deal. Communications plans for any type of acquisition should recognize that social media and company filings are key data sources and this could influence how you announce a transaction in the market.
  • Focus on transparency: Don’t underestimate the volume of data the Monitoring and Enforcement team will have access to. There have always been risks in deciding to not file a voluntary notice with CFIUS, but that’s likely to grow. It’s imperative to build trust as you work to complete the deal.
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