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 2022 (the “2022 Report”). You can find our alerts for the Committee’s Annual Reports for the previous six years here (2021), here (2020), here (2019), here (2018), and here (2017 and 2016).
The 2022 Report confirms trends that we have observed over the last 18 months or so, including an overall heightened level of scrutiny from CFIUS, with more reviews proceeding to investigations, more short-form declarations resulting in requests for full notices, more notices being withdrawn and refiled, and more instances of CFIUS requiring mitigation agreements as a condition of approval. The final point is especially noteworthy: 2022 saw a sharp increase in the number of transactions being subject to mitigation agreements, with 41 notices resulting in mitigation out of 286 notices filed—a rate above the Committee’s historical average. When considered together with the data on the home countries of foreign investors, the report suggests that CFIUS is increasingly requiring mitigation in transactions involving investors from friendly jurisdictions that previously were unlikely to face mitigation. The volume of agreements, when combined with the Committee’s increased focus on overseeing compliance, further underscores points that we have discussed previously—namely, that parties need to be able to anticipate and plan for potential ongoing compliance obligations, and equally, in order to preserve investors’ confidence in CFIUS, it is imperative that the Committee develop a more mature and accountable structure for monitoring and enforcing compliance.
Notable points from the 2022 Report are discussed below, and include:
- Nearly one-third of declarations resulted in CFIUS requesting that the parties file a full notice, suggesting that the Committee had a lower threshold for requesting a full notice. Only 14 declarations resulted in a “shoulder shrug,” where CFIUS neither approves the transaction nor requests a notice at the conclusion of a declaration review, suggesting that the Committee is increasingly working to avoid that outcome.
- CFIUS reviewed a higher number of notices in 2022 (286) compared to 2021 (272), and those reviews proceeded to the investigation phase at a higher rate (approximately 57 percent in 2022 compared to 48 percent in 2021). This increase is especially notable considering that overall deal activity decreased in 2022 versus 2021, suggesting that a higher percentage of transactions are being filed with CFIUS.
- CFIUS reviews of notices resulted in an increased number of withdrawals (88) and refiles (68). In 12 transactions, the parties withdrew and abandoned the transaction because CFIUS informed the parties that it was unable to identify any mitigation that would resolve its national security concerns, or the parties were unwilling to accept the mitigation that CFIUS would require to approve the transaction. Unlike in prior years where most such failed deals involved Chinese acquirers, it appears that more deals involving acquirers from other jurisdictions may be facing insurmountable opposition from CFIUS or that CFIUS increasingly is insisting on mitigation measures that parties are unwilling to accept.
- CFIUS approved transactions conditioned on mitigation agreements at an increased rate (approximately 14 percent of the total number of cases in 2022, compared to approximately 10 percent in 2021). From 2016-2020, the average number of annual mitigation agreements was in the range of 9-13 percent of total cases. When calculated as distinct notices (i.e., excluding transactions that were withdrawn and refiled), the number of transactions where the Committee conditioned its approval on mitigation agreements climbed to approximately 23 percent, indicating that CFIUS is now requiring mitigation for nearly a quarter of transactions it reviews.
Key Issues
- More Conservative Approach on Declarations
Since 2019, parties have had the option of submitting a short-form “declaration” rather than a full notice. At the conclusion of a 30-day declaration review, CFIUS can (a) approve the transaction on the basis of the declaration; (b) request that the parties file a full notice subsequent to the declaration; or (c) inform the parties that it cannot conclude action on the basis of the declaration, and leave it to the parties to decide whether to file a full notice (the “shoulder shrug” response). The choice of whether to file a notice or declaration accordingly requires transaction parties to make a judgment as to whether CFIUS is likely to be able to complete its analysis in the abbreviated 30-day period, or is more likely to request a full notice.
In 2022, CFIUS reviewed 154 declarations (compared to 164 in 2021). Of these declarations, CFIUS: (i) approved 90 transactions (compared to 120 in 2021); (ii) requested the parties to 50 declarations file a full notice (compared to 30 in 2021); and (iii) notified the parties in 14 transactions that the Committee was unable to conclude action but did not request a notice (i.e., the “shoulder shrug”) (compared to 12 in 2021, 16 in 2020, and 32 in 2019). The 2022 Report demonstrates that CFIUS was less likely to approve a transaction on the basis of a declaration in 2022 compared to 2021, and of those transactions where the Committee did not approve a transaction on the basis of the declaration, CFIUS increasingly requested that the parties file a full notice, rather than provide the “shoulder shrug” response.
The lesson from this data is that transaction parties should think twice before filing a declaration, and do so only where there is a strong basis to conclude that CFIUS will be able to complete its analysis and approve the transaction in 30 days. This is likely to be the case for investors from jurisdictions that are allies of the United States, and where the investor has received CFIUS approval in recent years for similar transactions. If the transaction presents facts that will require more thorough investigation by CFIUS (such as large numbers of government contracts that CFIUS will need to analyze)—and in particular if there is a meaningful possibility of mitigation—then a declaration likely will not be the best choice.
- Longer Timelines
CFIUS reviewed 286 notices of covered transactions filed in 2022, which represents an increase from 2021, when CFIUS reviewed 272 notices. The increase in notices in 2022—despite significant drops in global and U.S. M&A activity from 2021—indicates that transaction parties appear to be filing notices for a larger percentage of transactions. For 162 of the notices filed in 2022 (approximately 57 percent), the Committee’s review extended into the second 45-day “investigation” phase. Of note, there was a meaningful increase in the number of notice reviews extending to investigation compared to 2021, when approximately 48 percent of CFIUS reviews of notices proceeded to the investigation phase, signaling that CFIUS approvals at the conclusion of the initial 45-day review period are increasingly difficult for parties to secure.
The 2023 Report also explained that CFIUS reviews of notices resulted in an increased number of withdrawals and refiles. In 2022, CFIUS reviews of notices resulted in 88 withdrawals, and in 68 of those instances, the parties refiled the notice. By comparison, in 2021, CFIUS reviews of notices resulted in 72 withdrawals, and in 63 of those instances, the parties refiled the notice. For 2022, in 12 instances (compared to 9 in 2021), 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 eight additional cases, the parties withdrew and abandoned a notice for commercial reasons. Given that the number of notices involving Chinese acquirers decreased from 44 in 2021 to 36 in 2022, it appears that more deals involving acquirers from other jurisdictions may have abandoned transactions.
The continued increase in withdrawn notices likely reflects that CFIUS is taking more aggressive positions to address perceived risks to U.S. national security, including with investors from friendly jurisdictions. The increase in withdrawn notices also likely reflects upward trends in mitigation (which can take longer to resolve during the CFIUS investigation period) and the prevalence of mitigation for certain issues, such as protection of sensitive personal data and supply chain vulnerabilities.
- Continued Focus on Mitigation
The rate of notices cleared with mitigation measures in 2022 (approximately 14 percent of the total number of cases in 2022) increased from 2021 (approximately 10 percent). When calculated as distinct notices (i.e., excluding transactions that were withdrawn and refiled), the number of transactions where the Committee conditioned its approval on mitigation agreements climbed to approximately 23 percent, indicating that CFIUS is now requiring mitigation for nearly a quarter of transactions it reviews. This suggests a more fundamental change compared to the Committee’s historical practice regarding mitigation.
With the additional mitigation agreements from 2022, CFIUS reported that it was monitoring 214 agreements in total. As the number of mitigation agreements increases—especially given that those agreements more frequently involve investors from friendly jurisdictions—it is going to be imperative that CFIUS agencies enforce mitigation agreements in a coordinated, principled, and fair manner. As described in our previous client alert regarding CFIUS’s Enforcement and Penalty Guidelines (available here), the mitigation monitoring and enforcement regime has been inconsistent in this regard. As mitigation agreements grow in number—and potentially in complexity—it is critical that CFIUS evolve a more mature and consistent monitoring and enforcement framework.
If you have any questions concerning the material discussed in this client alert, please contact the members of our CFIUS practice group.
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