U.S. private-target M&A may feel familiar to European deal
teams, but that comfort can mask a host of stateside pitfalls.
Today's inbound acquisitions must navigate an expanding
gauntlet of structuring quirks, U.S. foreign direct investment
rules and due diligence traps. This article flags certain key
issues that, in our experience, may ambush a European-to-U.S.
private-target transaction.1

Section I of this article addresses the regulation of foreign
direct investment as it applies to inbound U.S. M&A Section II
highlights deal structuring topics such as completion accounts,
tariff management, tax structuring and securities law
considerations in private-company transactions; Section III surveys
due diligence flashpoints across numerous traditional due diligence
topics; and Section IV provides an in-depth review of recent
developments in U.S. law surrounding the use of noncompetition
provisions. We have not attempted to be exhaustive but rather to
leverage our experience in cross-border transactions to highlight
common traps.

A. The Committee on Foreign Investment in the United
States

The Committee on Foreign Investment in the United States (CFIUS)
is a U.S. government interagency committee that conducts national
security reviews of certain foreign investments into U.S.
businesses and real estate. CFIUS has jurisdiction to review most
inbound M&A transactions and has broad power to mitigate
perceived national security risks on a pre- and post-closing basis.
It is therefore critical to conduct adequate due diligence and
determine early on whether a CFIUS filing is mandatory or, if not
mandatory, whether a voluntary filing may be warranted. If a
transaction triggers a mandatory filing and the parties do not
submit the filing, CFIUS could force a post-closing divestiture
and/or impose significant penalties (i.e., a civil penalty of up to
$5 million or the value of the transaction, whichever is greater).
Where a filing is not mandatory (and where CFIUS has jurisdiction),
CFIUS retains the right to examine the transaction and may require
remedies even on a post-closing basis. A CFIUS filing may impact
the closing timeline of a transaction, as CFIUS review can range
from 30 to 90 days (or longer). Closing while a CFIUS review is
pending is generally disfavored and can be prohibited.

As noted above, nearly all inbound U.S. M&A will fall within
CFIUS' jurisdiction. This is because CFIUS has jurisdiction to
review any investment that may give a foreign person
"control" over any U.S. business. For CFIUS purposes,
"control" is usually met when the foreign person will
obtain any of the following: (i) a voting stake in the U.S.
business of more than 10% of the outstanding voting shares, or (ii)
a voting stake of 10% or less and a board seat, veto rights, other
significant shareholder rights or any other means to determine,
direct or decide important matters affecting the U.S. business.

In addition, CFIUS has jurisdiction to review certain
noncontrolling investments into U.S. businesses known as "TID
U.S. businesses": a critical Technology
business, a critical Infrastructure business or a
sensitive personal Data business (hence,
TID).2 CFIUS may also have jurisdiction in
other circumstances, including foreign acquisition of the assets of
a U.S. business (including assets subject to a bankruptcy
proceeding), foreign investment into a joint venture involving a
U.S. business, de-SPAC investments, certain convertible debt
instruments (if they will confer equity-like rights upon conversion
– such instruments are referred to as contingent equity
instruments) and other lending transactions (if, as a result of
imminent or actual default or other condition, there is a
significant possibility that a non-U.S. lender may acquire control
over a U.S. business or qualifying rights over a TID U.S.
business). CFIUS may also have jurisdiction to review certain
transactions by a foreign person involving U.S. real estate.

Notwithstanding CFIUS' broad jurisdiction, there are only
two categories of transactions, each involving TID U.S. businesses,
where a CFIUS filing is mandatory: (i) a covered control
transaction or covered investment into a "critical
technology" U.S. business when the export of the U.S.
business's critical technology requires a license or other
similar U.S. government permission to pass to the foreign investor,
or (ii) a covered control transaction or covered investment into a
TID U.S. business when a foreign government has, generally, a 49%
or greater interest (direct or indirect) in the foreign investor
and the foreign investor receives a 25% or greater interest (direct
or indirect) in the U.S. business.

However, even if a CFIUS filing is not mandatory, the parties
should conduct a totality of the circumstances review to decide
whether to submit a voluntary filing. Parties voluntarily file to
potentially obtain a "safe harbor" letter, which, among
other things, insulates the transaction from post-closing adverse
action by CFIUS. This is significant, as CFIUS can compel a filing
at any time, including years after closing if CFIUS did not
complete its national security review for that transaction prior to
closing. As there is currently no statute of limitations on CFIUS
outreach, CFIUS will review the national security risks present at
the time of its outreach (as opposed to those present at the time
of the acquisition). CFIUS outreach to parties that did not file
has been steadily on the rise over the past several years.

If the parties decide to file, they must then decide whether to
file the short-form declaration or a full notice. There are pros to
each filing, and which filing is appropriate will be based on the
particular transaction and its circumstances. While the short-form
declaration is less burdensome and subject to a significantly
shorter period of review (30 days), CFIUS is not required to
complete its review within that period. CFIUS can advise the
parties after the 30-day period that they are required to file a
full notice, or it may issue a "shrug letter." If a shrug
letter is issued, it means that CFIUS did not complete its national
security review, but that CFIUS is not taking any further action
for the time being and that the parties to an M&A transaction
may choose to proceed with closing the transaction. Parties often
close on a shrug letter, even though CFIUS could later contact the
parties and ask them to submit a CFIUS notice.

It should be noted that CFIUS reviews most transactions without
imposing mitigation or opposing the deal in its entirety. Over the
past 10 years, CFIUS has imposed mitigation measures and conditions
with respect to an average of 13.1% of total notices received (with
individual year percentages ranging from 8% to 18% during such
period).3 Further, qualitative factors
particular to a transaction may make the transaction more or less
likely to result in risk mitigation action. For example, if a buyer
is from or has strong connections with an adversary nation, the
transaction may be more likely to pose security concerns and result
in CFIUS risk mitigation actions. Further, if the U.S. business is
a supplier to the U.S. military, mitigation may be required even
for European investors. Each transaction is unique and should be
considered accordingly.