US Government Forces Parties to a Completed Transaction to Submit to Review by the Committee on Foreign Investment in the United States

Originally published November 23, 2010

Keywords: US Government, foreign investment, CFIUS, foreign acquisitions, FINSA, national security

According to press reports, the Committee on Foreign Investment in the United States (CFIUS), an interagency governmental body with authority to review foreign acquisitions in the United States that may threaten to impair the national security, has asked Huawei Technologies Ltd. (Huawei), a Chinese telecommunications equipment firm, to seek approval for a May 2010 transaction involving the US firm 3Leaf Systems (3Leaf). Huawei and 3Leaf did not notify CFIUS before the transaction and did not seek CFIUS approval. CFIUS did not learn of the transaction until after its completion.

CFIUS will review the six-month-old transaction for possible national security concerns. This unusual step by CFIUS, to initiate examination of a completed transaction, raises the prospect of rescission of the transaction or other measures by the government. These events illustrate the serious risk that companies may take in deciding not to notify CFIUS of a foreign acquisition in the United States that might broadly implicate the national security.

California-based start-up 3Leaf created virtual server technology for business enterprise data centers. Reportedly, Huawei acquired technology and key personnel from 3Leaf, but Huawei did not acquire equity or any physical assets of 3Leaf. According to the press reports, the firms did not notify the government because they unilaterally concluded that the deal did not raise national security concerns and because Huawei did not acquire all of 3Leaf's assets. Huawei has said that it filed export control classification requests with the Department of Commerce related to 3Leaf technology.

Under the Foreign Investment and National Security Act (FINSA), the President, acting through CFIUS, can investigate proposed transactions that may result in control of a US business by a foreign person, and can suspend or block such transactions if they threaten to impair the national security. CFIUS considers, among other factors, potential national security-related effects from the foreign acquisition of US-critical technologies or infrastructure, including telecommunications.

Parties to prospective transactions that might have national security implications typically submit joint voluntary notifications to CFIUS. If the parties do not notify CFIUS before a transaction is completed, CFIUS has the...