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 in compliance with all regulations and requirements. of the Foreign Investment Risk Review Modernization Act. 2018.
Here’s what we find interesting:
- CFIUS reviewed 164 statements and 272 opinions in 2021 – a record number. Canada topped the list of statements, with 22. China topped the ratings list, with 44 – far outstripping Canada and Japan, with 28 and 26 respectively. Overall, however, Canada led the way, with a grand total of 50 statements and opinions. Only one Chinese transaction was filed in the form of a simplified declaration. Clearly, Chinese investors know their chances of striking a deal in a statement aren’t good — and they need to tie in for the long haul.
- Six statements concerned insurers, recalling that operations outside the defense sector may deserve to be filed, insofar as they may involve access to sensitive personal data. Indeed, overall, the finance, information and services sector accounted for 55% of CFIUS “non-real estate” reviews in 2021.
- None of the 164 statements were withdrawn after filing, indicating that the parties had considered their strategy before filing. Certain declarations, of course, are mandatory, including investments controlled by a foreign government. CFIUS has the authority to waive this requirement. No waivers were granted in 2021.
- Of the 272 reviews accepted for review, 130 were investigated, or approximately 48%. This corresponds to historical data.
- 74 of the 272 deposits have been withdrawn. This can happen for many reasons, the most common being that CFIUS or the parties need more time. In almost all of these cases, the parties filed a new notice. In nine cases, however, the parties withdrew the notice, then abandoned trades either because CFIUS could not find any mitigations that would resolve its national security concerns, or because the parties refused to agree to the proposed mitigations.
- In approximately 10% of cases, CFIUS concluded its review after adopting mitigating measures to address national security concerns. In 2 other cases, mitigation measures were ordered on notice that have been intentionally removed and abandoned, a reminder that parties cannot necessarily escape attenuation by walking away. In two other cases, conditions were imposed following withdrawal and abandonment, even though 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 time is running out, drafting and responding to mitigations along the way can prove unnecessarily costly and detrimental to the business in the long run.
- In its press release announcing the report, CFIUS was careful to highlight the fact that it is recruiting – “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 “unnotified/unreported transactions,” including “interagency referrals, public tips, media reports, commercial databases, and congressional notifications.” ” and plans to hire “non-notified/undeclared process personnel” and promote “training and attention of existing personnel [to non-notified transactions] in CFIUS member agencies…”. In a recent alert, we noted that the Commerce Department is adding twelve new dedicated CFIUS staff positions.1 Obviously, the CFIUS wants investors to know that it is watching.
- In total, in 2021, 135 non-notified transactions were “proposed” for CFIUS review. Only eight of these transactions gave rise to a filing request. This number can be misleading. It is not clear from the report whether the parties were contacted in each of these cases (some investigations may have been resolved during an internal review), but it is fair to assume that CFIUS approached the parties. in many of the 135 “presented” cases. ” for assessment. In these cases, we suspect that a CFIUS investigation has injected an undesirable measure of uncertainty for investors and lenders. To be clear, in many cases the filing is not justified – and the 2021 figures support this conclusion. Nevertheless, it is also clear that CFIUS found sufficient concern in all of these cases to warrant, at the very least, an internal investigation. All of this argues for consideration of CFIUS’ approach to due diligence in any transaction that may involve CFIUS review. If a transaction is not deposited and the CFIUS comes knocking, it is best to be prepared to explain why the deposit is not necessary.
The annual report is over 70 pages long and invites in-depth analysis of foreign investors and their targets. At the same time, these reports can reveal very little about the CFIUS process. Each transaction presents its own challenges. As with any government exam, preparation is key.
1. “CFIUS Spills the Beans – and Commerce Staff: Lessons for Foreign Investors and Their Targets” July 25, 2022.