Law360 (May 22, 2020, 5:26 PM EDT) -- In this installment of Coronavirus Q&A, Skadden's top national security lawyer discusses the pandemic's profound effect on regulatory processes for domestic and international deals, including issues related to the Committee on Foreign Investment in the United States.
Michael E. Leiter
This interview has been edited for length and clarity.
How has the coronavirus affected the Skadden practices you are a part of, and how has the CFIUS in particular been impacted by the pandemic?
Beyond the obvious disruption forcing companies, law firms and their government counterparts to work remotely, the impact has been relatively light in most areas. CFIUS has continued to function quite efficiently and effectively.
Matters we had initiated before the pandemic are being resolved on time, and matters we're submitting now are generally still being accepted. In some cases, getting matters formally accepted is moving a little more slowly than anyone would like, but given all that is going on, I think this is a relatively minor issue and our clients have continued to be served well.
We are certainly seeing some areas of change, and sensitivities related to the supply chains running through China in sectors like biotech, pharmaceuticals and health care have been heightened in the COVID-19 environment. CFIUS has always looked quite closely at supply chains that run in China for many key sectors, from raw materials to technology. One only needs to think about the U.S.'s reliance on China for key pharmaceutical precursors or personal protective equipment to understand how the pandemic brought the broad issue of supply chain security front and center.
CFIUS rulemaking has continued, and we've seen a number of regulatory actions proceed apace as naturally and quickly as we could ever expect from the U.S. government. That includes a supply chain security-focused order on energy markets and power systems that came out of the White House. There have also been some reforms to export control.
Are regulatory processes taking longer during the pandemic, and if so, how has that impacted your day-to-day?
Once the CFIUS process has begun, the committee adheres to statutory timelines, including a 45-day review after a notice has been filed and a 45-day investigation if regulators determine one is warranted. CFIUS can ask you to pull your notice and refile to restart the clock, which has happened both before and during the pandemic.
Given these strict timelines, the most significant CFIUS delays we are seeing are occurring in the pre-acceptance phase of filings. During this period, we've seen the government move a little more slowly and carefully given the very real logistical issues arising from the pandemic. Early in the review process, the committee relies on assessments from the intelligence community, and discussions about matters must occur within secure government facilities. Because of new logistical hurdles associated with travel and the need to conduct on-site proceedings, we've seen associated delays in the acceptance of filings.
Much of what we do in the CFIUS practice normally involves in-person interactions. We'll meet on one matter, and while you're in the meeting with CFIUS staff, you might have quick conversations about three or four other matters, whether it's related to timing, process or something else. These in-person conversations created efficiencies, some of which have been lost in the current climate. When all these meetings happen by phone, fewer sidebar conversations can take place.
How has the coronavirus affected the rate of cross-border M&A that needs to be reviewed by the CFIUS? And is the overall dip in deal volume also being seen in the number of deals requiring CFIUS review?
I do think that, across the firm and the market, we are seeing a dip in deals, particularly in the U.S. and western Europe. The uncertainty within companies has clearly lead to some 'pencils down' on deals.
Our pipeline was pretty robust before the pandemic, and there has continued to be more than enough activity to keep us busy. Prior to the pandemic hitting the U.S., the shutdown in Hong Kong and elsewhere had produced a real slowdown in Asia, but we've seen that market start to bubble back to life. Optimism is growing that conditions will continue to improve, allowing for more business activity again, and, in turn, increased dealmaking.
Additionally, with the declining fortunes of companies, certain investment opportunities are also emerging, for example, in private equity and elsewhere. I think we are all cautiously optimistic that, as people start getting back into offices, companies will be better able to project what the remainder of the year may look like, and deals will pick up again.
How has it been going in terms of dealing with clients during the pandemic considering you can't physically meet up?
Engagement with clients generally has not been problematic. Of course, seeing clients in person is always better, and especially during the first few months of a new client relationship, that initial development is really important. Unfortunately, we can't go out and do that right now, but this is something that everyone seems to understand and is happy to work around.
We do video conferences more than we used to, which is better than the phone is to get a feel for people, and for participants to feel connected and engaged. We've had a series of issues arise, independent of traditional areas of practice because of the pandemic, that have been critical emergencies for clients. I think we've strengthened relationships in some areas through the guidance we've seamlessly provided related to these unforeseen issues under extenuating circumstances.
For example, we did a lot of work early in the COVID-19 crisis analyzing what businesses are essential, how to determine if your particular business is essential and how state law intersects with federal guidance. We hope that's not a practice area for long, but it's a really important way to help U.S. companies that have operations in the U.S., as well as those who operate overseas and face a different set of rules and processes with non-U.S. governments. We are very lucky to have a global platform that can quickly help clients almost anywhere they operate. And my prior work across the U.S. interagency landscape has been extremely helpful in addressing emerging business crises in the midst of the pandemic. We're helping clients navigate what are very new waters for everybody.
Have there been any [Foreign Investment Risk Review Modernization Act]-related issues that came about as a result of the pandemic?
Although not a direct result of the pandemic, CFIUS has continued to implement FIRRMA. The biggest action, effective as of May 1, 2020, were filling fees. We knew they were coming, but were a little surprised to see it during the pandemic. Filing fees are simply a cost parties must allocate. CFIUS also promulgated draft rules to modify what transactions have mandatory filings, most notably in that the committee will be eliminating one of the previous requirements: that a U.S. company operate in a designated sensitive industry.
Going forward, regardless of industry, the mandatory filing will be determined by the export control characteristic of the company's technology. That the committee has been able largely to keep up with the flow of deals and continue with rulemaking shows that its workload really hasn't slowed down.
What we haven't seen similar movement on, but which is especially important, is the Commerce Department's further development of what is termed 'emerging and foundational technology.' This will directly drive what is a mandatory filing for CFIUS, but its promulgation is on a much slower path. Don't expect to see this reform until late this year, at the earliest. The legislation will have significant impacts on areas like artificial intelligence, robotics and biotechnology, and transactions in which these technologies are implicated will require mandatory filings going forward.
What are your thoughts about efforts to stop certain deals during the pandemic? For instance, Indiana Rep. Jim Banks recently unveiled the Restricting Predatory Acquisition During COVID-19 Act, which would expand CFIUS' mandate, including by placing temporary restrictions on acquisitions by the People's Republic of China and entities associated with the Chinese Communist Party.
We certainly watch these developments, because they could become law. It's unlikely, but they could. Efforts like these are indicators that reinforce where there are sensitivities, and sometimes they are quite useful in helping to explain to clients why an area is considered sensitive when moving through the CFIUS process.
As of today, CFIUS has not made any formal changes to its process, which is in contrast to many other countries around the world. Our firm's U.S. national security/CFIUS team serves as the hub for our global platform when it comes to monitoring and interpreting foreign direct investment rules. We've worked closely with partners in Germany, the U.K., Brussels, Paris, Japan and Singapore, each of which are places where specific changes to some of the foreign direct investment review rules have recently occurred, many of which are targeted at Chinese investments.
France, for instance, is in the midst of making quite significant reforms to its foreign direct investment rules. Spain implemented some changes directly in response to the pandemic to avoid predatory investments. The European Union released guidance on countries guarding against predatory investments. India limited some specific types of investments. The bottom line is that each of these countries are concerned that domestic companies will be in dire need of capital and, in most cases, Chinese investors might see this as an opportunity to enter a market. Governments have adopted these new regulations, which often lower the threshold for mandatory reviews or specifically limit investments, especially in more sensitive areas such as biotechnology and defense-related industries
We've worked closely in the past with the U.S. government, and in turn have also worked with foreign governments, on issues related to all of this. Having one of the most well-established CFIUS practices in the world, the U.S. government has often turned to us to ask what about CFIUS works and what doesn't work. Similarly, with the expansion of foreign direct investment reviews — in part driven by FIRMMA's urging — we continue to work with non-U.S. governments as they develop more robust reviews of their own.
How do you usually unwind outside of work, and how has that changed in the wake of the coronavirus?
The Lego cake Leiter made for his son's birthday.
I have four kids in the house, so my time for hobbies is limited. I'm pretty religious about daily exercise, and I am lucky enough to have a Peloton and home weights so I can try to stay fit. I have a 4,000-piece aircraft carrier Lego set that I'm trying to finish with my eight-year-old, Ben. I bake almost every day, and recently made what I will claim is a pretty darn good Lego Ninjago cake for Ben's birthday. And if I have any time left, I try to walk or bike around the neighborhood.
I've also tried to fall back on some experiences I had while deployed in the U.S. Navy on a ship with no communications, just waiting for letters to arrive during mail call. It was easy then and it's easy now for all of us to feel isolated. We have to make sure we're taking care of our people, whether it's administrative support teams, billing specialists or other lawyers. The pressures of work have not decreased, while other pressures have increased. At times like these, it becomes critically important for all of our employees to know that it's okay if they need a break, need to go for a run or even log off for a day. We have teams across the firm that can pick up the slack for each other. We're all in this together.
--Editing by Kelly Duncan.
Check out Law360's previous installments of Coronavirus Q&A.
For a reprint of this article, please contact email@example.com.