The Committee on Foreign Investment in the United States (CFIUS) caught some lawyers and businesses off guard in early May 2023 when it issued new Frequently Asked Questions (FAQ) indicating that staged transactions that provide springing rights are treated as complete as of the earliest date the equity interest is acquired. This has significant implications for sovereign wealth funds (SWFs) engaging in such deals.
The interpretation means that transactions subject to mandatory declarations (those involving TID US businesses) may no longer use springing rights to delay a CFIUS submission until after the equity investment is made.
SWFs, being state-owned investment vehicles, often participate in transactions involving TID US businesses. Understanding the impact of this FAQ is crucial for SWFs navigating CFIUS regulations.
Previously, SWFs commonly employed the strategy of springing rights, wherein they would provide funding with the expectation of acquiring certain rights in the future, contingent on CFIUS clearance. This approach allowed SWFs to assess the regulatory landscape before committing to additional governance or providing more detailed disclosures or filing. However, the new FAQ nullifies this practice when TID US businesses are involved.
CFIUS now asserts that springing rights transactions should be considered complete at the initial closing, thereby requiring a mandatory CFIUS filing prior to the closing date. This interpretation requires SWFs to submit a declaration to CFIUS at least 30 days before the equity closing, treating the entire transaction as a single action subject to review.
While the CFIUS position is represented as a clarification, and not a change, springing rights were generally viewed as a permissible way to inject much-needed money while making the CFIUS decision later.
This development raises concerns for SWFs in several ways. First, it limits the flexibility and timing of acquiring additional rights. SWFs may have planned to secure governance or information rights after the initial investment, contingent on CFIUS clearance. However, with the new FAQ, CFIUS views the transaction as a whole and requires all parties, including SWFs, to have filed a mandatory declaration in advance.
Additionally, the enforcement focus of CFIUS has intensified, with a larger enforcement team and increased scrutiny toward non-notified transactions. This is placing a brighter spotlight on SWF transactions that previously may not have triggered CFIUS attention. Failure to file mandatory declarations or violating CFIUS regulations may lead to penalties and potential legal challenges.
The springing rights interpretation, which does not clarify how CFIUS will apply the view to past transactions, leaves many wondering what to do about previous closings. SWFs may want to consider these prior transactions and whether voluntary disclosures or additional filings are now advisable.
The FAQ also creates uncertainties around the treatment of investment tranches, syndication, and multiple transactions executed simultaneously. SWFs engaging in these complex deals need to carefully analyze the implications of the FAQ and its impact on their investment strategies.
It is worth noting that SWFs, as state-owned entities, may face unique considerations when dealing with CFIUS. The interplay between national security concerns, foreign ownership, and SWF investments may require heightened scrutiny. SWFs should seek legal counsel familiar with CFIUS regulations to navigate these complexities and ensure compliance.
In conclusion, the CFIUS FAQ on springing rights transactions has significant implications for sovereign wealth funds. SWFs may need to adapt their investment strategies to comply with the new interpretation of completion dates and mandatory filings.
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