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INSIGHT: Covid-19 Spotlights M&A International Security Concerns

In guidance released Friday, the Organization for Economic Cooperation and Development explained how countries can interpret treaties in instances where employees are stranded abroad or working remotely due to the crisis.

In recently released guidance, U.S. and European Union regulators emphasized their concern that the Covid-19 pandemic and associated economic downturn is providing an opportunity for certain investors to strategically invest in sensitive companies to the detriment of national security. Kirkland & Ellis attorneys outline four key points about what CFIUS and the EU will be watching.

The dramatic effects of the Covid-19 pandemic on cross-border transactions has prompted concerns among U.S. and European Union regulators that certain investors may use the circumstances as an opportunity to strategically invest in sensitive companies, to the detriment of national security.

On both sides of the Atlantic, government officials have emphasized the need to warn and in some cases financially bolster U.S. and EU companies that have been weakened by Covid-19 to ensure they avoid accepting capital from “risky” sources.

In this connection, several U.S. national security officials have advised companies to closely monitor for interest from potentially “adversarial” capital, noting the importance of reviews by the Committee on Foreign Investment in the United States (CFIUS) in monitoring and mitigating national security risks arising from such capital.

Echoing similar concerns, the European Commission recently issued formal guidelines to EU member states that aims to ensure a “strong EU-wide approach to foreign investment screening in a time of public health crisis and related economic vulnerability” (the EC Guidelines).

Specifically, the EC reminded members states that they are empowered to impose measures to address identified risks to security and public order (e.g., supply commitments to meet national and EU vital needs) or prohibit a foreign investor from consummating a transaction. EC President Ursula Von Der Leyen highlighted the need to protect EU companies that may be weakened by the crisis, with a focus on companies connected to “security, public health and serenity, such as health, medical research or strategic infrastructure.”

Four Key Points About Covid-19’s Impact on Global National Security Reviews

1. Despite the pandemic, national security reviews are currently continuing apace …

While many governments are paring back functions and temporarily suspending certain services (e.g., U.S. domestic courts have stayed cases and suspended jury trials) in response to the Covid-19 crisis, statements by U.S. and EU government officials suggest that foreign investment review regimes maintain operational capacity to the greatest extent possible.

2. … However, depending on the severity and longevity of the pandemic, national security regulators may face operational challenges that could delay or complicate future reviews.

While it is too early to tell whether Covid-19 will cause material delays in future global national security reviews, initial signs suggest this is possible. In the U.S., even though many CFIUS personnel are working remotely, the CFIUS staff have continued to engage with transaction parties via Q&A.

However, much of CFIUS’ work is done on classified U.S. government networks, and as a general rule these cannot be accessed remotely. This need to access classified networks may result in delays on cases that have yet to be formally accepted for review. EU observers have noted delays in the processing of foreign investment screening applications in response to the COVID-19 pandemic.

3. Investments in health-care companies may be subject to heightened regulatory scrutiny.

Investments in U.S. and EU companies, particularly in the biotech/health-care sector, will likely be subject to heightened regulatory scrutiny in the near term. The pandemic has prompted regulators to focus more attention on how health-care companies support national security, with Germany pushing back on the Trump administration’s reported attempt to facilitate a U.S. acquisition of a German vaccine company, CureVac, that was developing a treatment for Covid-19.

In the U.S., CFIUS has long been interested in reviewing transactions in the health-care space due to the likelihood that target companies collect or store sensitive personal data. Going forward, we anticipate this trend will continue, with additional potential focus on medical equipment and related devices. And industry may push back: the U.S. Chamber of Commerce recently requestedthat the Trump administration “… work with other governments to oppose export controls and other restraints on trade in vital medical equipment.” [Emphasis added.]

4. Future and existing debt/restructuring transactions could trigger one or more national security reviews.

 The final CFIUS regulations carve out most “lending transactions” from CFIUS’ jurisdiction. However, CFIUS can assert jurisdiction at the time of, or immediately before, a borrower enters into default or triggers another condition that will result in a foreign person obtaining economic or governance rights more characteristic of an equity investment.

As many companies consider strategic options—including potential restructuring scenarios—in light of Covid-19’s adverse economic impacts, they will need to ensure that such scenarios account for the possibility of CFIUS reviews.

In the EU, the extent to which lending transactions and subsequent conversions may trigger national security review processes is evolving as relevant screening legislation develops in each member state.

The EC Guidelines encourage EU member states to strengthen existing FDI screening mechanisms and, for those member states without regimes in place, to consider implementing such mechanisms. Lenders and borrowers operating in sensitive sectors (e.g., health care) should assess whether a restructuring or distressed asset sale could trigger any EU FDI reviews. Depending on the timing of the restructuring, transaction parties should also be aware of new member states FDI reviews being developed in response to the EC Guidelines.

Looking forward, investors and companies will need to carefully consider whether transactions may implicate one or more national security reviews, especially in connection with investments in biotech, pharmaceutical, and medical device companies. Transaction documents and timelines should account for the likelihood of potential delays and heightened regulatory scrutiny.

Finally, buyers and sellers should ensure that regulatory disclosures are consistent and accurate, and take into account the likelihood that information may be shared among national security regulators.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Mario Mancuso is a partner at Kirkland & Ellis and leads the firm’s International Trade and National Security practice. A senior member of the president’s national security team, he specializes in guiding private equity sponsors and companies through the CFIUS process and resolving crises involving economic sanctions and export control-related investigations by the U.S. government.

Shawn Cooley, a partner in the Washington, D.C., office of Kirkland & Ellis, focuses on managing national security reviews and all foreign investment regulatory aspects of clients’ cross-border transactions. He draws on his deep experience and involvement with the interagency CFIUS and the informal interagency working group known as Team Telecom.

Lucille Hague, an associate in Kirkland’s Washington, D.C., office, advises private equity sponsors and companies on CFIUS matters across transactional and investment scenarios, including fund formation, M&A, syndication, co-investments, and exit.

William Phalen, an associate in Kirkland’s Boston office, counsels private equity sponsors and companies on complex corporate transactions and international trade, including platform and add-on acquisitions, equity investments, sales, and general corporate matters relating to portfolio companies.

Reproduced with permission. Published April 21, 2020. Copyright 2020 The Bureau of National Affairs, Inc. 800-372- 1033. For further use, please visit