Increasing DOJ Involvement in CFIUS Carries New Risks, Law Firm Says

DOJ’s recent emphasis on corporate compliance may cause companies to update how they conduct due diligence on investment transactions, Morgan Lewis said in a new report released this month. The firm said DOJ is increasingly playing a more active role in the Committee on Foreign Investment in the U.S., which could prompt investors to reassess their procedures for evaluating sensitive deals.

“One thing is clear: maintaining the status quo of using template language, relying on representations or certifications, and conducting post-closing ‘clean up’ carry new risks for investors,” Morgan Lewis said.

The firm pointed to several signs DOJ is placing more of an emphasis on foreign investment compliance, including comments by the agency in March, in which it stressed that a “well-designed compliance program should include comprehensive due diligence of any acquisition target." While “not a new concept,” Morgan Lewis said DOJ’s “strong emphasis on these points suggests that investors and targets reexamine the manner in which diligence is conducted” and “the areas where enhanced diligence may be needed.”

Morgan Lewis also said DOJ has “taken the lead” in a larger number of CFIUS reviews in recent years, including by enforcing penalties for breaches of mitigation agreements and providing the committee with “detailed input” on counterintelligence and national security issues. “Concerns regarding personal information, data aggregation, and the power of information more generally have placed DOJ at the forefront of CFIUS reviews” the firm said, “in some instances overshadowing the U.S. Department of Defense.”

As those data concerns and other non-traditional national security issues become a larger part of CFIUS’ priorities, investors are now facing a “risk calculus that is no longer predicated solely on military, defense, or intelligence sectors,” Morgan Lewis said. The firm pointed to the “swift and impactful expansions” of U.S. export controls and sanctions in recent years, which have expanded the U.S. national security lens to cover corruption, healthcare, biotechnology, telecommunications, public welfare, climate change and more, the report said. “In a sense, no sector of the U.S. economy falls outside the scope of national security interests.”

Investors should be updating their due-diligence processes to meet these challenges, Morgan Lewis said, including by considering questions that can help them “delve more deeply into how these interests can affect government concerns." The firm said investors should be considering a range of export control questions, including how the technology produced by the purchaser or investor can be used and whether it's considered an “emerging” or “foundational” technology -- two areas being scrutinized by the Commerce Department for potential export controls (see 2205200017).

Investors also should ask themselves whether U.S. “foreign adversaries” may use the technology “in a manner detrimental to US interests.” That calculus should “be viewed in terms of U.S. government objectives rather than conclusory statements that indicate ‘it is low-level technology’ or ‘it is available from foreign sources,’” Morgan Lewis said. Investors should also consider the “avenues by which the technology may be accessed -- in essence, is the detriment to U.S. interests direct or indirect.”

Companies also should scrutinize the “reliability” of any export classifications they are provided, including by asking for the “underlying documentation for any classification.” Investors should also consider the source of those classifications. “Was the classification prepared and provided by someone technically knowledgeable, trained in export controls and in coordination with resources who understands the legal significance of the Classification?” Morgan Lewis said.

Investors also should examine the purchaser’s or investor’s relationship with China. They should be asking: “How long has the foreign purchaser/investor had relationships in China?” and “What kind of relationships are they?” Another question to consider is: “Was any of the technology routed through third parties? For example, did the U.S. company enter into an agreement with a third party which then forwarded the technology to China?”

The firm also listed a range of other due diligence questions investors should be asking, involving sanctions compliance, access to data, cybersecurity and supply chains, among other things. Parties “that seek to minimize or more accurately assess the national security risks in cross-border investments should consider updating at least” these areas, Morgan Lewis said, and “collecting underlying documentation to support the responses prior to closing a deal.”