Introduction
The Committee on Foreign Investment in the United States (“CFIUS” or “the Committee”) recently released its Annual Report to Congress regarding its review of certain transactions involving foreign investment during 2020. You can find our alerts for the Committee’s Annual Reports for the previous four years here (2019), here (2018), and here (2017 and 2016).
The 2020 Report reflects data from the first year in which the provisions of the Foreign Investment Risk Review Modernization Act (“FIRRMA”) were fully implemented. The U.S. Department of the Treasury, as chair of CFIUS, issued final regulations implementing FIRRMA, which went into effect on February 13, 2020. Some of the key changes effected by FIRRMA and its implementing regulations include the expansion of CFIUS jurisdiction to include non-passive but non-controlling investments in so-called “TID U.S. businesses”—U.S. businesses involved with critical technologies, covered investment critical infrastructure, or sensitive personal data. The regulations finalizing the framework governing mandatory declarations for transactions involving businesses that undertake certain activities related to critical technologies went into effect in late 2020.
Notable points from the Report are discussed in Part I, below, and include:
- CFIUS appears to have managed a heavy caseload well, even during the pandemic. While there were some slowdowns in case processing last spring due to the effects of the pandemic as the Committee’s staff moved to a remote work environment, the Committee appears to be processing the vast majority of cases consistent with the timelines envisioned by the statute.
- In addition to its ordinary caseload of notified transactions, CFIUS continues aggressively to identify transactions subject to its jurisdiction that were not filed by the parties. The Committee identified and inquired into over 100 such transactions in 2020, a trend we expect to continue.
- The short-form “declaration,” which was introduced by FIRRMA as an alternative to the full “notice,” appears to be a more attractive filing option than it was in prior years. The number of declarations increased dramatically, and the number of notices correspondingly dropped. CFIUS also is approving a larger percentage of transactions on the basis of declarations than it did previously.
- Investments from allied countries continued to increase, while investments from China continued to decrease.
The Report’s release also offers an opportunity to reflect on trends and insights from the first six months of the Biden Administration. We provide observations on this front in Part II.
Part I—Key Issues from the Report
1. Despite a Global Pandemic, CFIUS Continued Its Work
In spite of the challenges posed by the COVID-19 pandemic, the Committee’s work continued. The number of filings overall declined slightly: 313 notices and declarations were filed in 2020, whereas 325 were filed in 2019. The volume of reviews and the COVID-19 pandemic, however, did not appear to affect the Committee’s ability to process cases in a timely manner and in accordance with the timelines prescribed by statute. For declarations submitted in 2020, the average number of business days that elapsed between the date of submission and the date on which the Commission accepted the declaration was 4.7 days. The average number of calendar days to complete the review of a declaration was 29.8, meaning that for nearly all declarations, CFIUS completed its review on the last day of the 30-day review period. For notices, the average number of business days that elapsed between the submission of a draft notice and the date on which CFIUS provided comments was 7.7 days, well before FIRRMA’s 10-day deadline. Similarly, the average number of business days between the date of the submission of a formal notice and the date on which the Committee accepted the notice was 9.1 days, again under the 10-day limit. For notices that closed in review, the average number of calendar days to complete the review was 45, whereas the average number of calendar days for notices that closed in the secondary investigation phase was 86. Additionally, the Report notes that of all the notices reviewed in 2020 that went into the investigation phase, none were subject to the 15-day extension allowed under Section 721. This mirrors 2019, where no extensions on investigations were imposed. This appears to confirm that CFIUS intends the 15-day extension to be used only in rare circumstances.
2020 also saw the Committee overseeing the completion of FIRRMA’s implementing regulations. The Department of the Treasury issued interim regulations in October 2018, known as the “Pilot Program,” which established certain criteria which, if met, would require the parties to file a declaration with CFIUS. The Pilot Program was in effect through February 12, 2020, after which the final FIRRMA regulations became effective. The Department of the Treasury proposed (on May 21, 2020) and then adopted (on September 15, 2020) a Final Rule that established the scope of the mandatory declaration filing provisions for certain transactions involving TID U.S. businesses. The Final Rule went into effect on October 15, 2020. Our analysis of the rule can be found here.
The Committee’s ability to manage a docket that is significantly busier than prior years, in spite of the pandemic, is likely due at least in part to increased resources and funding that have been made available to it. The Report highlights an interagency focus on hiring qualified individuals at various levels from a variety of relevant backgrounds to bolster the Committee’s capabilities. Additionally, the Report indicates that all CFIUS member agencies have designated, or intend to designate, an Assistant Secretary or equivalent official, to be nominated by the President and confirmed by the Senate, to carry out CFIUS duties for that particular agency.
2. CFIUS is Actively Seeking to Identify Non-notified Transactions Subject to Its Jurisdiction
In addition to reviewing notices and declarations that parties choose to file voluntarily, the Committee actively monitors transactions to identify any that may be subject to its jurisdiction and which it may want to review. As the Report notes, CFIUS uses a variety of methods to identify so-called “non-notified” or “non-declared” transactions, including interagency referrals, tips from the public, media reports, commercial databases, and notifications from Congress. In 2020, the Committee identified and considered 117 transactions through this process. Of the transactions the Committee identified, 17 transactions (approximately 14.5 percent) resulted in a request by CFIUS for a filing from the parties.
The Report also identifies ways in which the Committee believes the identification of non-notified/non-declared transactions could be improved. First, the Report notes that increased training and attention of staff across CFIUS member agencies could help increase coordination and effective identification of transactions of interest. Second, the Report notes that increasing public awareness of the CFIUS tip mailbox hosted by the Department of the Treasury could also improve identification of non-notified transactions.
CFIUS did not provide similar statistics for previous years, so we cannot ascertain how much of an increase over prior years these figures represent. Anecdotally, we believe the increase is significant. We expect that going forward, CFIUS will continue its aggressive efforts to identify non-notified or non-declared transactions, using the greater resources now available to it.
3. Declarations Are an Increasingly Attractive Option for Both CFIUS and Parties—But Only for the Right Transactions
In our alert on the 2019 Annual Report, we discussed some of the emerging trends resulting from the availability of the short-form “declaration” that was first introduced under the Pilot Program. We noted that between 2018 and 2019, the rate of “approval” for declarations increased more than threefold from approximately 10 percent in 2018 to approximately 37 percent in 2019.
That upward trend continued in 2020: of the 126 declarations submitted in 2020, CFIUS cleared 81 transactions at the declaration stage, representing an “approval” rate of approximately 64 percent. CFIUS also requested that the parties file a full notice for 28 of the 126 declarations (approximately 22 percent), which represents a slight decrease from 2019 (approximately 28 percent). Additionally, the rate at which the Committee determined that it could not conclude action fell from approximately 34 percent in 2019 to approximately 13 percent in 2020. The data therefore suggest that CFIUS is increasingly able to conduct reviews and approve transactions within the more abbreviated timeframe for declaration reviews. We accordingly expect that filing a declaration will be an attractive option for a somewhat wider range of transactions than it was in the past.
While the facts of every transaction are different, some general features seem typical of successful declarations. First, the transactions often involve low vulnerability on the part of the U.S. business—the business is often not involved with critical technologies, critical infrastructure, or sensitive personal data, and frequently, the business does not have high numbers of government contracts. Second, the foreign acquirer is often from an allied country with a strong record of positive interaction with the Committee. Frequently, the investor has recently been through a CFIUS review, and the Committee is accordingly familiar with the investor. This last point is particularly relevant in the declaration context, as the declaration process does not involve a full National Security Threat Assessment by the U.S. Intelligence Community.
The country-by-country statistics for declarations in 2020 reflect a similar list as in 2019, with a few slight changes: Canada-based entities filed the greatest number of declarations (20), followed by Japan (18), the UK (12), Germany (10), and Sweden (7). (In 2019, Japan-based entities filed the most declarations, and South Korea filed the fifth-most.) As with previous years, unfortunately, CFIUS did not provide statistics showing the outcome of declarations filed by country, so we cannot directly assess whether some jurisdictions tend to fare better than others.
The data from 2020 reflect, to a degree, both positive and negative trends. More parties are choosing to utilize the declaration review mechanism, which—when used in the appropriate transaction—can provide the most efficient path for both the parties and the government. Based on the number of “approved” declarations and those for which CFIUS determined that it could not conclude action, parties seem to be accurately identifying the appropriate type of filing approximately 77 percent of the time (approximately 64 percent of declarations being “approved” via a declaration, and approximately 13 percent of declarations where CFIUS does not conclude action). This represents a slight increase from 2019.
On the other hand, CFIUS still requested that the parties file a full notice in 28 of the 126 declarations, representing approximately 22 percent of declarations filed. While this represents a modest decrease from the 2019 levels, it indicates that CFIUS and filing parties are continuing to work on calibrating an understanding and expectation regarding the circumstances in which a declaration is more appropriate than a notice.
4. Generally, the Number and Source of CFIUS Filings Remained Consistent
The Report indicates that the overall number and top sources of filings for 2020 remained relatively consistent with the trends we have observed in previous years. The overall number of filings decreased slightly, from 325 in 2019, to 313 in 2020. We expect that this number reflects, at least in part, some of the uncertainty introduced in economies worldwide by the COVID-19 pandemic.
Investors from allied nations continued to file with CFIUS at substantial rates. Japan represented the highest number of overall filings, with 37, while Canada came in second place with 31. While those figures represented an increase for Canada (23 in 2019), there was a drop for Japan (46 in 2019). The number of filings from several other allied countries increased, following a trend noted in our alert for the 2019 report: Australia increased slightly from 11 in 2019 to 12 in 2020; Germany increased from 13 in 2019 to 17 in 2020; Singapore increased from 10 in 2019 to 14 in 2020; Sweden nearly doubled from 9 in 2019 to 17 in 2020; and the UK in fact doubled its filings, going from 13 in 2019 to 26 in 2020.
As we predicted in our alert on the Committee’s 2018 report and observed in our alert for the 2019 Report, the number of filings from China-based entities continued to fall. In 2018, China-based parties submitted 55 filings, representing the most from a single country. In 2019, that number dropped by more than 50 percent to 25 total filings. In 2020, the downward trend continued, albeit not as dramatically, with 22 notices and declarations filed. However, it is possible that this number could rebound in 2021, as more non-notified transactions are reviewed by the Committee, and as parties gain confidence that review by CFIUS under the current Administration will provide a fair process.
The percentage of notices that proceeded to investigation held relatively steady, from approximately 49 percent in 2019 to approximately 47 percent in 2020. The percentage of notices withdrawn reflected a slight increase, from approximately 13 percent in 2019 to approximately 15 percent in 2020. Interestingly, the rate of filings cleared with mitigation measures decreased significantly. We noted in our alert for the 2019 Report that those numbers had been remarkably constant from 2017 to 2019—29 filings cleared with mitigation in 2017 and 2018, and 28 filings cleared with mitigation in 2019. These figures represented a mitigation clearance rate of approximately 12 percent for 2017, 13 percent for 2018, and 12 percent for 2019. In 2020, CFIUS concluded action after the adoption of mitigation measures for 16 transactions, representing approximately 9 percent of all notices for the year. We view this as a sign that the Committee may be becoming increasingly selective in its decision to impose mitigation on transactions. However, it may also simply reflect that more filings are being made by investors from allied countries, and fewer filings are being made by Chinese parties.
5. Critical Technologies Continue to Be a Central Focus
FIRRMA requires CFIUS to include, as part of its Annual Report, an evaluation of whether there is credible evidence of a coordinated strategy by one or more countries to acquire U.S. companies involved in research, development, or production of critical technologies, as well as whether there are espionage efforts by foreign governments against U.S. companies that aim to obtain critical technologies. The Report notes that the unclassified information it is able to provide in its public report is limited. That said, the Report notes that “foreign governments are extremely likely to use a range of collection methods to obtain critical U.S. technologies.” Accordingly, we expect that CFIUS will continue its sharp focus on issues surrounding the protection of critical technologies, and parties seeking to invest in U.S. companies involved with such technologies can expect rigorous scrutiny.
Part II—Observations on CFIUS in the Biden Administration
In addition to commenting on the Report, which inherently looks at past CFIUS practice, we wanted to take this opportunity to provide some observations regarding how CFIUS is functioning, and has evolved, in the first six months of the Biden Administration. Some key points include the following:
- As we anticipated, a stronger commitment to process and interagency consensus has emerged within the process on China-related matters. While this was generally true historically for most transactions, it was not uniformly the case in the last Administration on China-related matters. Now, the Committee’s decision-making is being driven more by formalized, interagency processes, rather than ad hoc engagement among senior political officials. We expect this trend to generally continue.
- Notwithstanding the foregoing, there is still significant skepticism about, and scrutiny of, transactions involving Chinese investors, and CFIUS continues to have a low appetite for risk in such transactions. That said, a slight increase in openness to mitigation in certain cases has also begun to emerge.
- Indeed, on the mitigation front, CFIUS has begun to show an increased confidence in the efficacy of mitigation solutions, rather than prohibiting transactions, to address identified national security risks, though perhaps not yet as completely as expected. At the same time, it continues to be the case that mitigation solutions can be challenging or impossible to achieve for transactions that have closed and present acute national security risks, or for transactions involving high-threat buyers and U.S. businesses that present significant vulnerabilities.
- The economic member agencies—such as the Office of the United States Trade Representative (“USTR”), the Department of State, and the Department of Commerce—have begun to play a more traditional role in the CFIUS process, providing balance that considers the economic benefits of foreign investment alongside the national security considerations. Under the Trump Administration, these agencies sometimes took strong positions opposing transactions—stronger even than the more traditionally hawkish national security agencies—reflecting the positions of senior political officials in those agencies.
- As noted in Part I, the Committee is generally processing and reviewing filings in a timely manner. This reflects, in our view, the good work of the professional staff at the CFIUS member agencies.
- There is, however, a key exception to the previous point: In complex reviews where there is a lack of consensus among the Committee’s member agencies, the review process is being drawn out and extended, resulting in withdrawals and re-files. We think this is, at least in part, a function of the following final point.
- The Biden Administration has been slow to appoint and confirm political officials responsible for CFIUS, particularly at the Assistant Secretary level. This leadership void has increased overall stress on the CFIUS process, especially given the volume of reviews the Committee is undertaking. Assistant Secretaries are always critical players in an interagency process, but are particularly vital in the CFIUS process given the dynamic nature of the Committee and the wide range of issues and matters it handles. Unless and until there is a strong cadre of politically appointed and confirmed Assistant Secretaries, we expect that matters raising complicated issues will continue to be frustrating and potentially difficult to resolve, resulting in longer review times.
If you have any questions concerning the material discussed in this client alert, please contact the members of our CFIUS practice.
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