January 14, 2022

National Security: CFIUS & De-SPAC Transactions

This Intralinks article by national security consultant John Lash of Darkhorse Global addresses a topic that I haven’t seen much written about – the potential need to deal with CFIUS in de-SPAC transactions. Lash acknowledges that CFIUS risks seem counterintuitive since going public is usually seen as a way to mitigate against national security risks. However, he points out that if the original U.S. target has received prior foreign investments that weren’t cleared by CFIUS, or if SPAC sponsors are foreign persons, the deal may be subject to CFIUS’s jurisdiction.

The article also contains three specific recommendations for dealing with CFIUS in a de-SPAC transaction:

Proactive Mitigation: Sponsors and targets want the deal to close for various reasons, so evaluate early whether there may be risk in the cap table from early-stage investment and then consider how to address it through various mitigation tools, such as look-back analysis of access to non-public technical information or other intellectual property, security plans/policies, cyber and data security standards, governance structure/security officer and vendor risk, management/approval process and dilution (or accelerated dilution) conditions.

Make the Case for Control: Identify how timely resolution of the CFIUS filing will function to reduce the national security risk as it will effectively dilute both equity ownership and voting control of the potential investors of concern. There are additional options to further address these issues such as trustees, independent directors, or accelerated dilution conditions post-closing.

Make the Business Case: Advocate that permitting the proposed SPAC transaction better protects the national security of the U.S. by comparison to other options presently available and those potential delays could have significantly damaging consequences to the target (and conversely national security) — as many of these high-tech companies are pre-revenue and need investment capital due to burn rates.

John Jenkins