August 3, 2022
Chris Griner, Shannon Reaves, Tom Firestone, Christopher R. Brewster, Gregory Jaeger, Andrew J. Astuno, Erin Bruce Iacobucci
On August 2, the Committee on Foreign Investment in the United States (CFIUS) released its annual report for calendar year 2021, the first full calendar year in which CFIUS operated under all of the regulations and requirements of the Foreign Investment Risk Review Modernization Act of 2018.
Here’s what we find interesting:
- CFIUS reviewed 164 declarations and 272 notices in 2021 – a record number. Canada led the list of declarations, with 22. China was #1 for notices, with 44 – far outstripping Canada and Japan, with 28 and 26 respectively. Overall, however, Canada led the way, with a grand total of 50 declarations and notices. Only 1 Chinese transaction was filed as a short-form declaration. Clearly, Chinese investors know that their chances of clearing a deal in a declaration are not good – and that they need to strap in for the long haul.
- Six declarations involved insurance carriers, a reminder that transactions outside the defense sector can merit filing, insofar as they can involve access to sensitive personal data. Indeed, overall, the Finance, Information, and Services sector accounted for 55 percent of the “non-real estate” CFIUS notices in 2021.
- None of the 164 declarations was withdrawn after filing, indicating that the parties had thought through their strategy before filing. Some declarations, of course, are mandatory, including foreign government-controlled investments. CFIUS has authority to waive this requirement. Zero waivers were granted in 2021.
- Of the 272 notices accepted for review, 130 went to investigation – roughly 48%. That’s consistent with historic data.
- 74 of the 272 filings were withdrawn. There are any number of reasons why this might happen – the most common being because CFIUS or the parties need more time. In virtually all of these cases, the parties filed a new notice. In nine cases, however, the parties withdrew the notice and then abandoned the transactions either because CFIUS could not find mitigation measures that would resolve its national security concerns, or because the parties refused to accept proposed mitigation measures.
- In roughly 10% of cases, CFIUS concluded its review after adopting mitigation measures to resolve national security concerns. In another 2 cases mitigation was ordered on notices that were voluntarily withdrawn and abandoned, a reminder that the parties cannot necessarily escape mitigation by walking away. In an additional two cases, conditions were imposed following withdrawal and abandonment, although these conditions did not involve mitigation agreements.
- In cases where mitigation seems likely, we believe it is prudent to handicap potential mitigation strategies before a notice is filed. Once a case is filed, and the clock is ticking, drafting and responding to mitigation measures on the run can prove unnecessarily costly and damaging to the company in the long run.
- In its press release announcing the report, CFIUS took pains to highlight the fact that it is staffing up – “including with respect to identifying transactions that have not been voluntarily filed with CFIUS and monitoring and enforcement activities.” The report adds that CFIUS uses a range of methods to identify “non-notified/non-declared transactions,” including “interagency referrals, tips from the public, media reports, commercial databases, and congressional notifications” and plans to hire “dedicated non-notified/non-declared process staff” and promote “training and attention of existing staff [to non-notified transactions] across CFIUS member agencies….” In a recent alert, we noted that the Commerce Department is adding twelve new staff positions dedicated to CFIUS.1 Plainly, CFIUS wants investors to know that it is watching.
- In all, in 2021, 135 non-notified transactions were “put forward” for CFIUS review. Only eight of these transactions resulted in a request for filing. This number can be deceptive. It is not clear from the report whether the parties were contacted in each of these cases (some inquiries may have been resolved on internal review) but it is fair to assume that CFIUS approached the parties in a goodly number of the 135 cases “put forward” for review. In these cases, we suspect a CFIUS inquiry injected an unwelcome measure of uncertainty for investors and lenders alike. To be clear, in many cases, filing is not warranted – and the 2021 numbers support that conclusion. Nevertheless, it is also clear that CFIUS found sufficient concern in all of these cases to support, at the least, an internal inquiry. All of this argues for thinking through the approach to CFIUS as part of the due diligence in any transaction that could implicate CFIUS review. If a transaction is not filed, and CFIUS comes knocking, it is best to be prepared to explain why filing is unnecessary.
The Annual Report is 70+ pages long and invites a deep dive by foreign investors and their targets. At the same time, there is only so much that these reports can reveal about the CFIUS process. Each transaction presents it own challenges. As with any government review, preparation is key.
1. “CFIUS Spills the Beans – and Commerce Staffs Up: Lessons for Foreign Investors and Their Targets” July 25, 2022.