Overview of 2023 CFIUS Annual Report and New Notice of Proposed Rulemaking Expanding Jurisdiction Over Certain Real Estate

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 2023 (the “2023 Report”). You can find our alerts for the Committee’s Annual Reports for the preceding two years here (2022) and here (2021). The U.S. Department of the Treasury (“Treasury”), as Chair of CFIUS, also issued a Notice of Proposed Rulemaking (“NPRM”), on July 8, 2024, to expand CFIUS’s jurisdiction over the acquisition of certain real estate in the United States by foreign persons. The following alert provides an overview of both developments.

The 2023 Annual Report

Notable points from the 2023 Report are highlighted below, and include:

1. Fewer Notices Filed and Shorter Timelines for Some Transactions. In 2023, CFIUS reviewed 233 notices of covered transactions, marking a 19 percent decrease from the 286 notices reviewed in 2022. This decline is likely attributable, at least in part, to reduced global M&A activity and possibly to more judicious use of voluntary filings by transaction parties as CFIUS’s priorities have continued to evolve since the passage and implementation of the Foreign Investment Risk Review Modernization Act (“FIRRMA”) in 2018 and 2020, respectively. Notably, the withdraw-and-refile rate also decreased somewhat—for the first time in five years—dropping from 23 percent in 2022 to 18 percent in 2023. In 43 out of the 57 instances where a notice was withdrawn, the parties opted to refile. In the remaining 14 cases, parties abandoned the transaction due to commercial reasons or CFIUS having advised the parties that it was unable to resolve its concerns through mitigation and planned to refer the matter to the President.
   
   The percentage of transactions cleared within the initial 30- or 45-day review period increased from 58 percent in 2022 to 66 percent in 2023—also leading to shorter timelines for some transactions. This improvement may be attributed to both the reduced number of notices filed in 2023 and the continued increases in resources dedicated to CFIUS across the member agencies, enabling CFIUS to allocate more resources to each filing, resulting in greater efficiency and shorter overall timelines.
   
   This improved efficiency may, however, obscure somewhat divergent trends. In our experience in recent years, we have observed that the CFIUS process works relatively well for transactions that are not complicated substantively or politically. At the same time, we continue to see considerable risk aversion, particularly at senior levels of the Committee, and transactions that generate any disagreement among agencies or that draw attention from senior levels remain challenging to resolve. The improved efficiency rates, in turn, may reflect that parties elected not to pursue as many transactions that generated interagency disagreement or political attention in 2023. One data point supporting that inference is that 2023 marked a continuing decline in the number of China-related transactions reviewed by the Committee—there were only two China-origin declarations (compared to five in 2022) and 33 China-origin notifications (compared to 36 in 2022, and 46 in 2021), many of which were carry-over filings from 2022.
   
   
2. Declarations Return as an Attractive Option for Certain Transactions. In our analysis of Annual Reports in 2021 and 2020, we noted the continued upward trend for the number of declarations being filed as well as the proportion of “approved” declarations, with CFIUS clearing 73 percent (120 out of 164) and 64 percent (81 out of 126) of declarations, respectively. However, we subsequently noted that this trend faltered in 2022 with the number of declarations decreasing for the first time since parties could opt to submit a short-form “declaration” in lieu of a full notice. The “approval” rating of declarations in 2022 also dipped markedly to 58 percent (90 out of 154). While the number of declarations filed in 2023 continued to decrease, the approval rating in turn reached an all-time high of 76 percent (83 out of 109). The Committee requested that the parties file a full notice for approximately 18 percent of the declarations (20 out of 109), which represents a substantial decrease from 2022 (approximately 32 percent). The rate at which the Committee determined it could not conclude action also fell from approximately 9 percent in 2022 to approximately 6 percent in 2023.
   
   These data suggest that the declaration process overall is evolving toward optimization, with parties becoming more sophisticated in their calibration of when to choose filing a declaration over a full notice. This also indicates that filing a declaration can still be an attractive option, but only for the right transactions, i.e., where there is a strong basis to believe that CFIUS will be able to conclude its analysis and subsequently approve the transaction in 30 days. As discussed in our previous reviews of CFIUS Annual Reports, the transactions typically best-suited for declarations tend to involve (i) U.S. businesses that present low vulnerability (e.g., the U.S. business is not involved with critical technologies, critical infrastructure, or sensitive personal data, and does not have high numbers of government contracts, at least with agencies that have national security responsibilities); and (ii) foreign acquirers from U.S. allies with extensive and strong records of positive interaction with the Committee. It is also particularly helpful for the foreign acquirer to have recently received CFIUS approval for one or more similar transactions.
   
   The country-by-country statistics for declarations reinforce the foregoing view. The 2023 list is similar to 2022, although France and Australia edged out Germany in the top five filers: Canada maintained its lead as the country with the most declarations filed (13), followed by France (11), Japan (11), the United Kingdom (10), and South Korea and Australia (both 7).
   
   
3. Increased Focus on Enforcement. The annual report reflects the trend under current leadership to seek to transform CFIUS to become more of an “enforcement” authority. The Committee has expanded resources substantially to enhance policing of non-notified transactions, as well as to take a more forward-leaning enforcement approach with respect to violations of CFIUS mitigation agreements. The prioritization of such efforts and the associated resources, together with the tone and tenor of CFIUS and its leadership, is a marked change from the Committee’s history prior to the current Administration. Thus, the current tone and messaging from CFIUS is far less focused on signaling that the United States is open to foreign investment, and much more leveled at “deterrence”—although precisely what the government is seeking to deter in terms of money coming into the United States (apart from investment from China) is not entirely clear.
   
   The Committee is currently monitoring a record 246 mitigation agreements, 36 of which were entered into for transactions filed in 2023. While the rate in which CFIUS required mitigation agreements in 2023 remained consistent with the year prior (approximately 18 percent of the total number of notices for both 2023 and 2022 were subject to mitigation), 2023 witnessed a marked increase in the issuance of penalties. The Committee issued four civil monetary penalties of unspecified amounts for violations of mitigation agreements. The Committee states that this is twice the number of penalties issued during CFIUS’s nearly 50-year history (although by our count there were two such penalties previously along with one liquidated damages matter, and so arguably three penalties). In all events, this increase is a clear reflection of the Committee prioritizing formal enforcement action—including civil money penalties and amended mitigation agreements—over the historical model that focused more on informal engagement with mitigation agreement parties on compliance matters except in the most extreme cases, as well as dedicating increased resources to compliance and enforcement. It is also likely due, of course, to the fact that CFIUS is now monitoring more mitigation agreements than ever before. As was the case in previous years, monitoring agencies also identified instances of noncompliance in mitigation agreements where remediation was needed, but the violation did not rise to such a level that civil monetary penalties were issued, though the 2023 Report does not offer data on instances of noncompliance that did not elicit a penalty.
   
   In 2023, the Committee also conducted several investigations to ensure compliance with its mandatory filing requirements under 31 C.F.R. § 800.401. Some of these investigations led to formal determinations of noncompliance, though no penalties were imposed. Also notable in 2023 was the fact that CFIUS received its first “voluntary self-disclosure” related to a potential failure to file a mandatory declaration. The CFIUS Enforcement and Penalty Guidelines, which were released for the first time in 2022, indicate that parties may reduce the likelihood or severity of penalties by voluntarily disclosing potential violations promptly. This approach aligns CFIUS’s practice with other U.S. regulatory frameworks that similarly promote voluntary disclosures.
   
   The 2023 Report also states that the Committee evaluated “thousands” of potential non-notified transactions, though it initiated non-notified inquiries to the transaction parties for only 60 transactions in 2023. Ultimately, the Committee formally requested filings for 13 of these transactions, approximately 22 percent of the transactions on which the Committee inquired. By comparison, in 2022, the Committee formally requested filings for only 11 out of the 84 transactions for which it had undertaken non-notified inquiries, representing just 13 percent of such deals. These figures exclude cases where parties voluntarily submitted a declaration or notice after receiving non-notified-related outreach; there were three such instances this year.
   
   
4. Real Estate Transactions Continue to Represent a Small Proportion of Transactions Submitted to CFIUS. CFIUS continues to review a relatively low number of real estate transactions (meaning transactions involving real estate that does not constitute a “U.S. business”). Out of the 233 notices of “covered transactions” reviewed in 2023, just two were real estate transactions filed under the real estate regulations, which appear at 31 C.F.R. Part 802. Similarly, out of the 109 declarations of “covered transactions” reviewed in 2023, only three were real estate transactions. These limited numbers of filing are likely due, in significant part, to the fact that (i) many transactions nominally involving real estate—such as those involving acquisitions of commercial real estate—are reviewed under CFIUS’s authority to review acquisitions of U.S. businesses, rather than under the real estate regulations, and (ii) there is a continued lack of awareness in the real estate community regarding CFIUS’s authorities and interests with respect to real estate transactions, coupled with the fact that filings under the real estate regulations are not mandatory. That said, sophisticated parties continue to rely on CFIUS real estate regulations under Part 802 to help guide their diligence in broader “covered transactions” that include a real estate component. As a result, the impact of these regulations arguably is greater in practice than what would be suggested by the number of real estate filings under Part 802 alone.

Changes to Covered Real Estate Transactions

On July 8, 2024, Treasury, as the Chair of CFIUS, issued a NPRM to expand CFIUS’s jurisdiction over the acquisition of certain real estate in the United States by foreign persons. Pursuant to FIRRMA, CFIUS has the authority to review certain transactions involving “covered real estate,” which under the existing legislation includes (i) real estate within one mile of the boundary of any military installation, facility, or property listed in Part 1 of Appendix A to Part 802; and (ii) real estate within 100 miles of the outer boundary of any military installation listed in Part 2 of Appendix A to Part 802 (the List of Military Installations and Other U.S. Government Sites). The NPRM proposes updates to the scope of “covered real estate,” making the following modifications to Parts 1 and 2 of Appendix A to Part 802:

1. Adding 40 additional military installations to Part 1 of Appendix A to Part 802.
2. Adding 19 additional military installations to Part 2 of Appendix A to Part 802.
3. Moving eight military installations from Part 1 to Part 2 of Appendix A to Part 802.
4. Updating the address information for seven military installations to better assist the public in identifying the relevant sites.
5. Amending the names of 14 military installations included in Appendix A to Part 802 to better assist the public in identifying the relevant sites.

While the NPRM only updates the definition of “covered real estate” rather than completely overhauling CFIUS’s existing authorities, it reflects a broader trend within CFIUS: increased emphasis on real estate transactions. This shift likely stems from mounting concerns—from the public, in Congress, and by the Biden Administration—about foreign land acquisitions near U.S. military installations, as signaled by President Biden’s May 13, 2024 divestiture order related to an acquisition by Chinese national-owned MineOne Partners Ltd—the first-ever Executive Order formally prohibiting the acquisition of real estate within the United States by a foreign entity.

The greatest impact from the NPRM will likely come from the additions to Part 2 of Appendix A to Part 802. Most of the original military installations mentioned in Part 2 of Appendix A to Part 802 are in relatively sparsely inhabited areas in the western or southern United States; however, many of the proposed additions to Part 2 of Appendix A to Part 802 (both the new additions and those moved from Part 1 of Appendix A to Part 802) are in or around more densely populated areas where they would be more likely to capture property deals incidentally. In these circumstances, foreign acquirers should be careful to take into account the revised list proposed by the NPRM when conducting diligence on any transaction that might occur after CFIUS adopts the updated list of military installations.

If you have any questions concerning the material discussed in this client alert, please contact the members of our CFIUS practice.