3 Days Not Enough to Respond to Mitigation Offers, Lawyers Tell CFIUS

A new rule that would impose a three-day deadline for certain responses to the Committee on Foreign Investment in the U.S. was unanimously criticized by several law firms, an industry group and the Chinese government, which said such a time frame doesn’t take into account the complex, time-consuming discussions companies must have when dealing with CFIUS. Some commenters also asked the committee to nix a proposed change that would raise the maximum penalty for violations from $250,000 per violation to $5 million, saying most violations are accidental, and the increase could rattle the “confidence” of foreign investors.

The Treasury Department received the comments after it proposed an expansion of CFIUS powers in April, including by allowing the committee to impose higher penalties, collect a broader array of information from parties involved in non-notified transactions, set timelines for responses to mitigation proposals, and more (see 2404110037).

Each of the law firms that submitted public comments on the rule agreed that a proposed three business-day timeline for companies to respond to a CFIUS mitigation proposal -- a set of conditions offered by the committee to address a deal’s national security risks -- was too short.

Although parties would be able to ask CFIUS for an extension, White & Case still called the deadline “extremely narrow.” Three days will “routinely be insufficient for transaction parties to fully understand and evaluate proposed mitigation measures and prepare a thoughtful substantive response to CFIUS,” the firm said.

The firm added that because CFIUS is a “confidential process,” companies don’t know much about mitigation proposals before they’re offered one, and they usually have little warning from the committee before they receive it. White & Case also said national security agreements between CFIUS and a party are “often” 20-40 complex, single-spaced pages.

“Together, these factors result in transaction parties needing to conduct deliberate and thorough assessments of proposed mitigation terms to understand the full consequences of the measures -- a process that parties can rarely complete adequately in three days,” the firm said.

Freshfields Bruckhaus stressed that a company’s response to a mitigation proposal can be complicated: The company and their advisers need to consider CFIUS’s “intent,” the meaning of each of the words in the proposal, how the proposal will be implemented, how it will affect their “business interests,” whether they can suggest “alternative approaches” to addressing CFIUS concerns, and more.

“These are complex questions that may require extensive deliberations within the businesses, identifying and bringing new people into the conversations who may not even be aware of the transaction,” Freshfields Bruckhaus said, adding that a short time frame to respond to a mitigation proposal may increase the risks that a company fails to implement any deal reached with CFIUS.

“The more time the parties spend diligencing and pressure testing the proposal during negotiations,” the firm said, “the easier it is to implement the agreement.”

White & Case agreed, saying the parties need to “take reasonable time to understand and evaluate mitigation measures.” If they don’t, they’re “more likely to enter into mitigation agreements that they have not fully vetted and understood, thereby creating an increased risk that mitigation measures will not be effective in practice to address the national security concerns identified by CFIUS.”

A three-day response deadline also “overlooks practices and dynamics that more frequently cause delay,” Covington said. The firm said CFIUS speaks with various U.S. agencies, crafts multiple versions of the mitigation proposal and “fully” develops a national security agreement all before even presenting the initial proposal to the parties. This can lead to “mitigation concepts that often misunderstand fundamental aspects of the transaction parties’ operations, with the result that they would have substantial and often unworkable business impacts.”

This also leads to “intensive work on the transaction parties’ side -- work that often takes more than three business days -- to analyze the government’s proposal, formulate a response, and draft and coordinate that response through multiple layers of internal review,” the firm said.

The China Council for International Investment Promotion, a Chinese government investment promotion agency, called three days “excessively short,” saying it “might prevent the parties from fully conducting an objective and comprehensive analysis and assessment” of the proposal.

“Such an unfair enforcement to the parties would not only do no good to the mitigation of national security concerns but also bring great damage for the activeness of the enterprises in proceeding [with] their transactions,” the council said.

The Global Business Alliance also panned the timeline, saying mitigation terms sometimes take weeks to be crafted by CFIUS but “lack direct input from involved parties.” This means proposals can “introduce operational changes with significant implications for the efficiency and competitiveness of the U.S. business” and “reflect an imperfect understanding of” the U.S. company’s operations.

“Understanding these nuances within the three-day timeframe is challenging, making it difficult to determine whether to agree to or prepare substantive responses to the proposed terms,” GBA said. The alliance asked Treasury to eliminate the proposal.

White & Case said CFIUS should impose response deadlines on a case-by-case basis, and if parties take longer to respond, “CFIUS can impose a deadline to facilitate responsiveness and expediency.” If the committee is set on imposing some type of deadline for all parties, the firm said it should at least be five business days.

Freshfields Bruckhaus also urged Treasury to extend the deadline to a week. CFIUS should also pinpoint factors for which it will “establish a presumption of approval” for an extension request, “such as substantive description of the steps that the parties have taken to advance towards a response to the CFIUS proposal.”

The committee also received feedback on its proposed maximum penalty increase, which Covington said lacks transparency. “The Proposed Rule does not provide insight into how the Committee concluded that a $5,000,000 maximum penalty amount would provide the appropriate deterrent effect,” the firm said.

It also said it doesn’t think a higher penalty would do more to deter companies from violating a mitigation deal, partly because most violations are inadvertent. “We have yet to experience a matter where the size of the potential civil money penalty likely would have had any impact on the particular compliance weakness,” the firm said. “[S]uch weaknesses or issues most typically arise not because parties are actively seeking to avoid their obligations under a mitigation agreement but rather due to such factors as human error or misunderstandings as to the meaning of mitigation terms that often have been negotiated in great haste.”

The China Council for International Investment Promotion also objected to higher penalties, saying “heavier” fines, combined with the rest of the changes proposed by Treasury, “would have a serious negative impact on the existent and potential foreign investors in the U.S., shaking their confidence and hindering their transactions.”

The council added: “We are concerned that the implementation of the Proposed Amendments and its operational rules would aggravate the global economic, trade and investment environment that has already gone fragile.”