August 3, 2023
Chris Griner, Shannon Reaves, Tom Firestone, Christopher R. Brewster, Gregory Jaeger, Andrew J. Astuno, Erin Bruce Iacobucci
On July 31, the Committee on Foreign Investment in the United States (“CFIUS” or “the Committee”) released its annual report for calendar year 2022. The report details a record number of reviews: 154 short form declarations and 286 formal notices: 440 in all. Canada filed the most declarations – 22 – but Singapore’s 46 filings – 9 declarations and 37 formal notices, was the top overall. (China filed a total of 41 declarations and notices). All of that is interesting for anyone keeping score, but here’s what we find most interesting:
- A lot of declarations are resulting in requests to file. After a 30-day assessment, CFIUS asked the parties to 50 declarations to file a written notice, and told another 14 that the Committee was unable to conclude action after review – what is sometimes called a “shrug.” Lenders are rarely comfortable with shrugs, and most contracts require CFIUS clearance. That means, in all likelihood, those 14 declarations also got filed as formal notices. Only 90 of the 154 short form declarations – roughly 58% – were resolved after the 30-day review. As many as 42% went on to file the longer joint voluntary notice.
- No one can predict with certainty how the declaration process will go – but 42% is a pretty hefty number, and may indicate that transactions that have no likelihood of being resolved in 30 days are nevertheless being filed as declarations by investors with their fingers crossed.
- Parties file declarations to expedite reviews, and in many cases they can. Last year, 58% of filers were successful. But the other 42% merely added another 30 days to the review process.
- Bottom line: A rigorous self-assessment with experienced CFIUS counsel should be done before filing a declaration. As we have written before, wishful thinking is not a strategy.
- It’s not just the defense sector. Three notices involved insurance carriers, another reminder that transactions outside the defense sector can merit filing, if they can involve access to sensitive personal data. Overall, the Finance, Information, and Services sector accounted for 52% – a majority – of the “non-real estate” CFIUS notices in 2022.
- Plan for investigations. 162 notices went to investigation – roughly 57% – meaning they extended beyond the initial review period. That’s better than half. And CFIUS says that this is because, among other things, deals are getting more complex, and risk assessment is getting more complicated. So, transaction parties need to know that investigation is a real possibility, and plan accordingly.
- Not all stories end well. Roughly 30% of the 286 filings were withdrawn. As we have noted, there are any number of reasons why this might happen – the most common being because CFIUS or the parties need more time to review a transaction than the regulatory calendar allows. Sometimes, of course, deals fall through. In the majority of these cases, however, the parties refiled to restart the clock. And yet, in 12 cases, the parties withdrew the notice and then abandoned the transactions either because CFIUS did not believe mitigation would resolve its national security concerns, or because the parties found the proffered mitigation to be unacceptable.
- Mitigation is a real possibility. Mitigation was required for roughly 23% of cases. In another 3 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 five additional cases, conditions were imposed after withdrawal and abandonment, but without formal mitigation agreements.
- It is important to assess a transaction at the outset to determine whether mitigation is likely, and if it is – to handicap potential mitigation strategies before a notice is filed – not when the clock is ticking. Drafting and responding to mitigation proposals on the run can add unnecessary costs – both now and in the future.
- Non-Notified transactions get attention. Finally, there are the transactions that CFIUS refers to as “non-notified” – the cases that CFIUS looked at even though no formal filing was made. CFIUS says that 84 non-notified transactions were “put forward” for review, and 11 resulted in a request for filing (plus another 8 transactions that were identified in a previous year). A few notes on these numbers:
- It was more than 11. CFIUS says this number does not include voluntary filings that followed “outreach.”
- It was more than 84 – a lot more. CFIUS says the 84 cases “put forward” for CFIUS review does not reflect “the much larger number of transactions considered by the Committee – including individual member agencies – as potential non-notified transactions, which regularly number in the thousands.”
- But it was also a lot less than in 2021, when CFIUS looked at 135 non-notified transactions. CFIUS says that they expect these numbers to decrease as they work through the backlog of pre-FIRRMA cases, which have gone from 80% to 1% of non-notified reviews. This does not mean that transaction parties who have not filed can rest easy. CFIUS says it is now monitoring “more recent foreign investments for potential non-notified and nondeclared transactions…” and will continue to monitor the older cases.
- In many cases, filing is not warranted – but it’s important for parties to assess the case for and against CFIUS review as part of the due diligence in any transaction that is a candidate for review. If a transaction is not filed, and CFIUS comes calling, it is best to have a better explanation than “we didn’t think anyone would notice.”
The CFIUS Annual Report to Congress is 80+ 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 its own challenges. As with any government review, preparation is key.