JANUARY 19, 2018
By Stacy Ettinger

Arctic communities considering deals with international investors and developers should be aware of the Committee on Foreign Investment in the United States (CFIUS) and how it could affect potential transactions.
The vast resources of the Arctic are increasingly appealing to international investors and developers. The United States and the other Arctic nations generally maintain open investment policies. Those policies, however, typically require national authorities to take into consideration whether specific foreign investments implicate national security and/or economic issues.
Arctic communities contemplating the benefits of increased international investment and development should also consider how to manage and mitigate possible risks associated with foreign investment, and whether a CFIUS filing is warranted before completing any transaction.
Transactions involving Chinese investors will likely be subject to heightened scrutiny, particularly where the investors are affiliated with the Chinese government. Whether a foreign investment raises national security concerns will depend on the facts associated with that transaction. Understanding the framework governing foreign investment and developing a regulatory strategy early in the deal process will be critical.
Framework Governing Foreign Investment
CFIUS is the U.S. government interagency committee that vets foreign investment in the United States for national security risks. CFIUS is charged with reviewing “covered transactions” – mergers, acquisitions or takeovers by or with any foreign person that could result in foreign “control” of any person engaged in interstate commerce in the United States.
CFIUS must determine whether a covered transaction threatens to impair U.S. national security by reviewing various factors, including whether the covered transaction would result in foreign control of any “critical infrastructure” that could impair U.S. national security. CFIUS has authority to take action to mitigate any national security risk, including requiring the parties to modify the deal structure or even recommending that the President block a transaction or order divestment for transactions that have already closed. CFIUS will provide greater scrutiny where the foreign investor is controlled by a foreign government.
The U.S. Treasury Department chairs the CFIUS interagency committee, which includes officials from the Departments of State, Defense, Justice, Energy, Commerce, and Homeland Security, the Office of the United States Trade Representative, and the Office of Science and Technology Policy. CFIUS transactions also are analyzed by the Office of the Director of National Intelligence, which coordinates its threat assessment with other intelligence agencies. Based on the subject matter of the transaction under review, CFIUS may seek input from other federal agencies such as the Department of Transportation.
A review can be initiated by CFIUS even after a deal has closed. More typically, a CFIUS review is initiated through a voluntary written notice filed jointly by the parties to the transaction before the transaction has been closed or completed.
CFIUS is legally prohibited from publicly disclosing sensitive business information under review. The review process includes an informal screening, as well as a formal review, and can take up to three months or more. There is no affirmative requirement currently for parties to notify CFIUS of a covered transaction.
In assessing the risk posed to national security by a foreign investment transaction, CFIUS looks at the facts of the transaction under review. Specifically, CFIUS will consider:
(1) The threat posed by the foreign investment in terms of intent and capabilities;
(2) Whether aspects of the business activity pose vulnerabilities to national security; and
(3) The potential national security consequences if the vulnerabilities are exploited.
The voluntary review process allows for CFIUS to issue a “no action” decision that protects the parties going forward with a so-called safe harbor provision – a major benefit for the parties to the transaction. Regardless of the outcome, CFIUS decisions are generally not judicially reviewable.
Increased Scrutiny of Foreign Investment
There is strong bipartisan support in Washington DC for increased scrutiny of foreign acquisitions in the United States. Multiple bills have been introduced in the Senate and House to strengthen the CFIUS process. Most are narrow, messaging bills that focus on discrete aspects of CFIUS reform, including making economic security a factor in foreign investment reviews.
Some of these targeted reforms, including economic security considerations, could be folded into a more comprehensive CFIUS reform bill which could be enacted before the November mid-term elections. Committees in both the House and Senate have begun holding hearings on CFIUS reforms.
In November 2017, Senators John Cornyn (R-TX) and Diane Feinstein (D-CA) introduced the Foreign Investment Risk Review Modernization Act (“FIRRMA”) to expand CFIUS authority and modernize conduct of national security reviews of foreign investments and acquisitions in U.S. businesses. This bill could provide the foundation for comprehensive CFIUS reform.
Key aspects of FIRRMA include:

  • Expanding of the definition of a “covered transaction” (i.e., transaction subject to CFIUS review jurisdiction) to “non-passive” investments by foreign persons in U.S. critical technology and critical infrastructure companies. This would effectively convert CFIUS into a process for reviewing technology exports and transfers that are not covered by current export control laws.
  • Focusing on CFIUS review on “countries of concern,” defined as countries that pose a significant threat to U.S. national security interests. While the legislation does not identify specific countries, China is widely considered to be the primary country of concern.
  • Authorizing CFIUS to exempt certain otherwise “covered transactions” if all foreign investors are from a country that meets certain criteria, such as being a U.S. treaty ally, having a mutual investment security arrangement, and having a sound CFIUS-like process of its own.
  • Making notification to CFIUS mandatory for investments of 25 percent or more by a foreign investor in which a foreign government owns a voting interest of 25 percent or more.
  • Authorizing CFIUS to assess fees for filings capped at the lesser of one percent of the transaction value or $300,000. Collected fees could be used to fund increased CFIUS staffing.

As currently drafted, FIRRMA would expand the CFIUS mandate and increase scrutiny of a broader range of proposed foreign investments. However, many of the reform aspects of the legislation reflect current CFIUS practice. The legislation would merely codify those practices.
Even without new legislation, CFIUS could exercise its considerable discretion under the law to increase scrutiny on Chinese or other investment in the United States.
Opportunities and Challenges
The opening of the Arctic offers significant economic and commercial opportunities and will continue to attract the interest of foreign investors. Careful analysis of possible investment deals can help ensure local communities and companies reap the benefits of such transactions.
A thorough review of any transaction should also include consideration of whether the foreign investment possibly implicates national security concerns. Preparation and planning when considering deals with international investors and developers will be critical to the successful completion of such deals.
Stacy Ettinger, Partner at K&L Gates, has extensive experience in the field of international trade and investment. For more information, Ms. Ettinger is available to further discuss Arctic investment and other trade and commercial matters and may be reached at

About The Author

Andrea Wagner