Foreign entities are not barred by the Bankruptcy Code from purchasing assets in section 363 sales in bankruptcy cases. Usually, the debtor’s estate and creditors welcome anyone who may bid up the sale price and raise the return to the estate and creditors from the auction sale. For the foreign purchaser, buying assets out of a bankruptcy sale under section 363(c) promises, among other things, a rapid process, assets at a good price, and the taking of them “free and clear” of the liabilities of the debtor-seller. We have discussed here, here, and here the legal mechanics of these aspects of a section 363 sale.
However, the United States government has the power to say, “Not so fast” and “No” to sales (in or out of bankruptcy) of U.S. assets to the control of foreign persons, on national security grounds, both before and after a sale takes place. The review is conducted by the Committee on Foreign Investments in the United States (“CFIUS”). CFIUS review is not mandatory. However, CFIUS can find the transaction on its own initiative and commence a review, even long after completion of the transaction. Further, there is no reason why the CFIUS could not be alerted to a transaction by an interested party, such as a competing bidder or a representative of workers.
A foreign purchaser and a domestic seller may wish to seek CFIUS clearance and to condition closing of the sale transaction on CFIUS clearance. A voluntary review is initiated by the parties submitting a draft joint notification (containing information about the transaction, the assets, and the ownership of the purchaser). The CFIUS conducts a 30-day initial review to determine whether further national security investigation is required. Clearance may occur at this point, perhaps conditioned upon completion of changes to the transaction or parties required by CFIUS. If not, a further 45-day review period will ensue.
If CFIUS cannot clear the transaction at that point, it can request a decision by the President, to be made with 15 additional days. Presidential vetoes of transactions are rare: one in 1990 and one in 2012. However, a veto can undo a transaction, even well after closing.
The CFIUS process is opaque, and can be quite intense. Further, obtaining clearance from the CFIUS could seriously complicate a section 363 sale. The pace of due diligence, submission of bids, qualifying of bids, auction, and closing in a section 363 sale are set by court order and often are scheduled to take less than two months in toto. Liquidity needs of a bankruptcy estate and the desires of creditors for efficient and speedy realization of assets often require such dispatch. The possibility of CFIUS mandating changes to the deal or of the President vetoing a deal could seriously impair a foreign purchaser’s ability to prevail at auction, especially if the assets figure in the technology or defense sectors of the U.S. economy.
A foreign purchaser may avert the timing problem by lending sufficient cash, in the form of a DIP loan to the debtor’s estate to enable the sale process to accommodate CFIUS review. Potential purchasers often finance cases through a sale (DIP lending is structured to ensure payoff of the DIP loan), in order to facilitate acquisition of the assets as a going concern. If the incentives of the potential foreign purchaser and the domestic debtor’s estate align, there is no reason the purchaser could not supply DIP lending to buy sufficient time to overleap the CFIUS regulatory barriers. The President has the authority to review all mergers, acquisitions, and takeovers that “could result in foreign control of any person engaged in interstate commerce in the United States” and may suspend or prohibit a transaction that the President deems to threaten U.S. national security. 50 U.S.C. app. § 2170.  The discussion herein of CFIUS draws upon a more comprehensive article, Farhad Jalinous & Mark Liscio, “CFIUS Considerations Arising in the Acquisition of Distressed Assets in the United States,” China Legal Review (July 30, 2013), reposted at http://www.kayescholer.com/news/publications/considerations-arising-in-the-acquisition-of-distressed-assets.
This article was originally published on September 11, 2014. It was updated on February 14, 2017.
Mr. Cahill is counsel with Lowis & Gellen LLP, in Chicago, Illinois. He guides secured lenders, creditors, debtors, creditors’ committees, potential purchasers and others through bankruptcy cases, out-of-court workouts, assignments for the benefit of creditors, and receiverships. Mr. Cahill has substantial mega-case experience at national law firms representing very large debtors, and has counseled and…
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