Introduction
The Committee on Foreign Investment in the United States (“CFIUS” or “the Committee”) recently released the public version of its Annual Report to Congress regarding its review of certain transactions involving foreign investment during 2021 (the “2021 Report”). You can find our alerts for the Committee’s Annual Reports for the previous five years here (2020), here (2019), here (2018), and here (2017 and 2016).
The 2021 Report reflects data from the first complete year in which all of the provisions of the Foreign Investment Risk Review Modernization Act (“FIRRMA”) were fully implemented. In February 2020, the U.S. Department of the Treasury, as chair of CFIUS, issued final regulations implementing FIRRMA, which expanded 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. In September 2020, Treasury issued regulations that finalized CFIUS’s framework governing mandatory declarations for transactions involving businesses that undertake certain activities related to critical technologies.
Notable points from the 2021 Report are discussed below, and include:
- CFIUS’s already heavy caseload in 2020 grew even heavier. CFIUS reviewed 164 declarations and 272 notices—a record number for the Committee.
- In the review of three notices, CFIUS invoked a 15-day extension of the “investigation” review period, which is permitted in extraordinary circumstances—the first such uses by CFIUS of this authority.
- CFIUS cleared an increasing number of short-form declarations in the 30-day review period, solidifying the declaration review process as an attractive option for certain types of transactions.
- CFIUS cleared notices at a rate consistent with the previous year, but the number of withdrawn and refiled notices increased significantly, suggesting that CFIUS took longer to reach mitigation agreements with parties and resolve more complex matters.
- The number of Chinese transactions reviewed by CFIUS was two and a half times greater in 2021 than in 2020, likely owing to several factors explained below.
- Interestingly, CFIUS pursued notices for non-notified transactions at a lower rate than in 2020.
Key Issues
1.CFIUS Reviewed a Record Number of Transactions in 2021
In 2021, parties could elect to notify a transaction to CFIUS by filing either a declaration or notice, including for transactions subject to mandatory filing requirements, and CFIUS reviewed a record number of transactions: 164 declarations (up from 126 in 2020) and 272 notices (up from 187 notices in 2020).
Of the 164 declarations in 2021, CFIUS: (i) cleared 120, or roughly 73 percent, during the declaration review period; (ii) requested that the parties to 30 declarations, or roughly 18 percent, file a written notice; and (iii) notified the parties to 12 declarations, or roughly 7 percent, that the Committee was unable to conclude action but did not request a notice. CFIUS also rejected two declarations, one of which was refiled as a notice. In comparison, of the 126 declarations in 2020, CFIUS: (i) cleared 81, or roughly 64 percent, during the review period; (ii) requested that the parties to 28 declarations, or roughly 22 percent, file a written notice; and (iii) informed the parties to 16 declarations, or roughly 13 percent, that the Committee was unable to complete action. The average number of calendar days that elapsed between the date of submission and the date on which the Committee accepted a declaration was 5.48 days (up from 4.7 in 2020). The average number of calendar days to complete the review of a declaration was 29.9 days (essentially unchanged from 29.8 days in 2020), meaning that for nearly all declarations, CFIUS continued to complete its review on the last day of the 30-day review period, as opposed to sooner.
Of the 272 notices in 2021, CFIUS conducted a second 45-day “investigation” in 130 cases, or roughly 48 percent of notices. While slightly up from 47 percent last year, the proportion of cases that fail to conclude in the first 45-day period remains notably lower than in 2017 and 2018, when some 70 percent of notices entered the second 45-day “investigation” period.
In accordance with 31 U.S.C. § 800.508 (e), the Secretary of Treasury may, upon a written request signed by the head of a lead agency, extend an investigation for one 15-day period in extraordinary circumstances, defined to mean circumstances for which extending an investigation is necessary, due to a force majeure event or to protect the national security of the United States. In three cases in 2021, CFIUS invoked the 15-day extension on the basis of “extraordinary circumstances.” These three cases represent the first uses by the Committee of the 15-day extension, and while it is notable that CFIUS invoked this authority for the first time, the fact that it only happened on three occasions continues to underscore that it is viewed by the Treasury Department, as Chair of CFIUS, as an authority that should truly only be leveraged in highly extraordinary circumstances. The average number of business days that elapsed between the submission of a draft notice and the date on which CFIUS provided comments was 6.2 days (down from 7.7 days in 2020), 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 6 days (down from 9.1 days in 2020), again under the 10-day limit.
Of particular note, Chinese acquirers filed the most notices in 2021 with 44 (up from 17 in 2020), followed by Canadian acquirers with 28 (up from 11 in 2020) and Japanese acquirers with 26 (up from 19 in 2020). The increase in notices involving Chinese acquirers very likely results from several factors, including:
(i) CFIUS ramped up its so-called “non-notified” process, resulting in an increase in the number of requested filings, including for previously closed transactions, involving Chinese parties that had not otherwise been voluntarily filed with CFIUS.
(ii) Transaction parties likely were more conservative with Chinese investors and proactively filed notices that investors from other countries would not file.
(iii) While the U.S. government has remained very skeptical of Chinese investment, the market perceived that the CFIUS process under the Biden Administration would be potentially more balanced in reviewing Chinese transactions than its predecessor.
(iv) Notices involving Chinese parties are more likely to present complexities that result in withdrawals and refilings of notices, thereby increasing the number of notices.
2. Declarations Remain an Attractive Option for the Right Transactions
In our analysis of the 2020 Annual Report, we discussed the upward trend for “approval” of a declaration, which was first introduced in 2018 when the Department of the Treasury issued interim regulations implementing FIRRMA. In 2020, CFIUS cleared approximately 64 percent of declarations, and the upward trend continued in 2021, when CFIUS cleared approximately 73 percent of declarations. The increased rate at which CFIUS has been able to clear declarations indicates that declarations remain an attractive option for many transactions, particularly transactions with these two general features: (i) the transaction involves low vulnerability on the part of the U.S. business (e.g., the U.S. business is not a TID U.S. business and does not have a high number of U.S. government contracts); and (ii) the foreign acquirer is from an allied country with a strong record of positive interaction with the Committee.
The country-by-country statistics for declarations in 2021 reflect a similar list as in 2020, with Singapore and South Korea replacing the United Kingdom and Sweden in the top five: Canada-based entities filed the greatest number of declarations (22), followed by Germany (11), Japan (11), Singapore (11), and South Korea (11). In contrast, only one declaration each was filed by Chinese and Russian acquirers.
3. Rate of Notices Cleared with Mitigation Remained Constant, but Withdrawn Notices Increased
The rate of notices cleared with mitigation measures in 2021 (approximately 10 percent) remained fairly consistent with the rate of mitigation measures in 2020 (approximately 9 percent). Of the 272 notices filed, CFIUS entered into mitigation agreements to resolve national security concerns in 26 cases. CFIUS also adopted mitigation measures for two transactions where the notices were voluntarily withdrawn and abandoned, and CFIUS issued letters in two additional cases granting a withdrawal and abandonment but imposing conditions not involving mitigation agreements. In one case, CFIUS imposed interim measures to mitigate risk regarding a notice.
However, the rate of notices withdrawn by parties increased significantly in 2021 (approximately 26 percent) compared to the rate of withdrawn notices in 2020 (approximately 15 percent) and 2019 (approximately 13 percent). In 2021, parties withdrew 72 of 272 notices, and in 63 of those instances, the parties refiled the notice. In nine instances, the parties abandoned the withdrawn notice after either (i) CFIUS informed the parties that it was unable to identify mitigation measures that would resolve its national security concerns, or (ii) CFIUS proposed mitigation measures that were unacceptable to the parties. In two additional cases, the parties withdrew and abandoned a notice for commercial reasons. The increase in withdrawn notices likely reflects a variety of factors, including both substantive considerations (i.e., more complex transactions, including transactions for which CFIUS requested notices through the non-notified process) and process points. In particular on this latter point, we have observed that the higher case load for CFIUS coupled with a slower than ideal transition and appointment of political officials at the sub-cabinet level and, in particular, the Assistant Secretary-level has contributed in a number of instances to CFIUS cases taking longer. While this would require a longer explanation to capture fully, the upshot is that these dynamics had a drag on the CFIUS timelines in 2021, and the hope is that as these positions have been filled and CFIUS staff has grown in 2022, the timeline numbers will improve in the latter half of 2022 and into 2023.
4. CFIUS Continues to Have an Active Process for Pursuing Non-notified Transactions
As we have previously reported, CFIUS actively monitors transactions to identify any that may be subject to the Committee’s jurisdiction and which it may want to review, separate from the notices and declarations filed voluntarily. Interestingly, in 2021, the Committee identified and considered 135 transactions (up from 117 in 2020) through this process, but of those, CFIUS requested a filing for only 8 transactions (down from 17 in 2020). The decrease in requests for filings likely reflected a number of factors, including simply that a certain amount of transactions considered may not have triggered CFIUS jurisdiction and/or implicated no actual national security vulnerability. Nevertheless, this is an area where the agencies are continuing to devote considerable resources and track transaction activity, and we expect that it will remain a focus and comprise a significant amount of CFIUS activity for the foreseeable future.
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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