New CFIUS Report Reinforces Understanding of Trends that Led to FIRRMA

The Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”) released its Annual Report to Congress regarding foreign acquisitions of U.S. businesses reviewed by CFIUS in 2016 and 2017, a combined report covering the final year of the Obama administration and the first of the Trump administration. The report also reflects the crucial period leading up to the 2018 development and passage of CFIUS reform legislation, the Foreign Investment Risk Review Modernization Act (“FIRRMA”).

The report provides an accounting, both quantitative and qualitative, of the Committee’s operations that reflect the ramp up of CFIUS activity that catalyzed discussions leading to FIRRMA, both with regards to addressing a perceived rising Chinese threat and securing the Committee more resources to handle a caseload growing in size and complexity. Rather than offering groundbreaking insights for parties familiar with the CFIUS process, the report affirms trends and provides key context for understanding the Committee’s policy objectives and national security concerns as it continues work on the regulations implementing FIRRMA.   

Discussion – Key Issues

The Annual Report, while somewhat dated, does provide useful insight into aspects of the Committee’s operations during the covered period.

1. Continued Expansion in the Size and Complexity of the CFIUS Docket

The Committee’s annual docket expanded along with the significant increases in overall inward foreign direct investment in the United States, increasing 76% compared to the previous decade.[1] The report demonstrates that the upward trend continued within the recent time period as well, with filings going from 143 in 2015 to 172 in 2016, and to 237 in 2017. At the same time as the overall number of filings increased, so too did the percentage of cases proceeding to second-stage investigation. During the 2015-16 time frame, approximately 46% of notices went to investigation, but that figure jumped to approximately 73% for 2017, as the Committee became increasingly overwhelmed by both the number and complexity of cases under review. Underlining that point even further, 2017 also saw a significant spike in transactions that were withdrawn and abandoned due to CFIUS concerns. In 2017, 24 transactions (representing approximately 10% of annual filings) were abandoned due to CFIUS concerns, versus only 6 in 2015 and 2016 combined, representing 1.9% of filings during those years.

While we do not have comprehensive data for 2018, CFIUS also released an updated table that provide some statistics for 2018. There was a small decrease in overall notices, to 229, as well as slight decreases in the overall percentage proceeding to investigation (to 69%) and the percentage of cases withdrawn and abandoned based on CFIUS concerns (to 7.4%), though all remained significantly above historical norms.

2. The Rise in Chinese Filings

A significant part of the increase in numbers and complexity was driven by the dramatic increase in filings from Chinese entities. The contrast in Chinese filings between the period covered by the report and the preceding decade is particularly stark. In 2005-2007, Chinese entities made only 4 total CFIUS filings -- 1.3% of all CFIUS filings for that period. From 2015-2017, however, Chinese entities made 143 CFIUS filings, or approximately 26% of all CFIUS filings. Chinese filings first jumped to noteworthy levels in 2012, rising from 10 filings in 2011 to 23. Chinese filings remained in the 20s until a 2015-16 jump from 29 to 54 filings, holding at 60 filings for 2017.

3. Otherwise, CFIUS Filings Remained Remarkably Consistent

Despite the dramatic fluctuations in Chinese filings, investment from other countries has remained relatively consistent. Investors from U.S. allies like Canada, the United Kingdom, and Japan are the most frequent filers after Chinese entities, with 66, 44, and 46 filings respectively between 2015-17. France and the Cayman Islands also post sizeable numbers of filings by investors, with 30 and 20 filings respectively over the same period. Eight other countries saw their investors make at least 10 filings each during this period, demonstrating the diversity of foreign investors engaged in the CFIUS process.  

Filings by sector also stayed relatively consistent during the period from 2010-2017, even as total filings rose, with a slight dip in Mining, Utilities, and Construction acquisitions (on a percentage basis) being offset by a commensurate increase in Finance, Information, and Services transactions. Of particular note was a substantial increase in the number of Architectural, Engineering, and Related Services transactions (a subsector of Finance, Information, and Services), which jumped from 16 total filing from 2013-2016 up to 17 filings in 2017 alone.

Further, the overall percentage of cases being cleared with mitigation measures has also stayed relatively constant, fluctuating within a fairly narrow range between 8% and 12% most years, with 2017 representing a high point, in terms of both absolute number of transactions involving mitigation measures (29) and the overall percentage of notices resulting in mitigation (12%).

Conclusion

The overall trends and statistics captured in the last CFIUS Annual Report are consistent with what we experienced on an anecdotal basis over the same period. With the overall number of cases, and particularly the number of challenging China cases, rising significantly, the Committee began to show signs of strain. The time it took for CFIUS to accept draft and final filings increased, and many cases that would have, in previous years, been cleared by the Committee at the conclusion of review were moved to investigation, not because of any unresolved national security issue, but simply because the Committee members did not have the resources to process all the simultaneous matters before them quickly enough.

While CFIUS has only released limited statistics regarding 2018, as noted above, when the 2018 Annual Report is released, we would expect the overall trends noted above to largely continue. The major exception to this will likely be with regards to the Committee’s review of Chinese transactions. While the number of Chinese filings for 2018 is not yet publicly available, given the steep drop in Chinese foreign direct investment in the United States, from a record high of $46 billion in 2016 and $29 billion in 2017 to $4.8 billion in 2018, we expect to see a significant drop in Chinese filings as well. This would also be consistent with what we saw on an anecdotal basis as well, with many Chinese entities who would have, in past years, aggressively pursued U.S. investment targets looking for non-U.S. assets to acquire and to carve out U.S. assets that might be subject to CFIUS from multi-national targets.

With respect to the data for 2019, based on our experience, we expect to see a reversal of some of these statistical trends, as many of the provisions of FIRRMA, passed in August 2018, started to take effect. These effects include a lengthening of the initial review period from 30 to 45 days, which has given both the CFIUS agencies and the Intelligence Community more time and flexibility to process low risk transactions within the initial review period. FIRRMA also helped, directly and indirectly, agencies securing additional resources to process and assess transactions, further facilitating more expeditious review. We have seen a notable improvement throughout 2019 in both the pace at which new filings are accepted and the frequency with which they are cleared at the conclusion of review, despite what we understand to be an overall caseload that’s upwards of 50% larger, when considering both traditional notices and declarations under the Critical Technologies Pilot Program.

As a reminder, the final regulations implementing the new authorities given to CFIUS under FIRRMA, which were publicly released in draft form in September, are likely to be issued in January, and must become effective by February 13, 2020. We will issue our updated analysis of those regulations at that time.