In late July, the Committee on Foreign Investment in the United States (CFIUS) released its Annual Report for 2019, providing insight into recent CFIUS trends. This included encouraging results on CFIUS outcomes for declarations assessed under the CFIUS Pilot Program and Japan taking over as the country most represented in CFIUS filings—breaking China’s nearly decade-long streak. There have also been a number of developments related to the Trump Administration’s concerns regarding TikTok, a highly popular Chinese-owned video-sharing app, and WeChat, another popular Chinese-based app. Finally, the Treasury Department recently published a final rule that formalizes the current CFIUS filing fee regulations and makes a clarifying revision to the definition of “principal place of business” in the CFIUS regulations.
CFIUS 2019 Annual Report
The US Treasury Department has released the public version of the 2019 CFIUS Annual Report (Annual Report). This marks a substantial improvement in the timeliness of reporting—and therefore the report’s value to industry—as in recent years reporting has significantly lagged, sometimes by several years. As we previously reported, CFIUS published certain statistics regarding 2019 CFIUS reviews in May, which provided useful information. The Annual Report offers additional detail, data, and insight into 2019 trends. In particular, we note the following:
- Pilot Program data regarding CFIUS declaration outcomes is an encouraging sign for the new expedited, short-form filing option, with more than 70% of cases receiving clearance or a “shrug”. From November 2018 until the new CFIUS regulations implementing the Foreign Investment Risk Review Modernization Act (FIRRMA) took effect in February 2020, CFIUS implemented a pilot program (Pilot Program) that mandated filings for controlling and certain non-controlling investments in US businesses involved with critical technologies (which are largely items or technology subject to certain US export controls) in connection with one or more of 27 identified industries.1 Transactions subject to the Pilot Program (and at that point only such transactions) were eligible to be notified to CFIUS via the new short-form declaration filing authorized under FIRRMA. Declarations are assessed by CFIUS in 30 calendar days. CFIUS officials had previously advised that in 2019 approximately one third of declarations were cleared, but provided no further details on outcomes. The Annual Report provides the first broader insight into how CFIUS has been resolving declarations—and the results are encouraging. There were 94 declarations in 2019, and in just over 70% of cases CFIUS either cleared the transaction on the basis of the declaration (35 cases; approximately 37%) or could not conclude action but did not request the parties file a notice, which is commonly referred to as the “shrug” (26 cases; approximately 34%). In our experience, transaction parties often consider the “shrug” outcome to be sufficient to close. CFIUS requesting a notice was actually the least common CFIUS outcome, happening in 26 cases (approximately 28% of declarations).2
These results are also notable since even though the Pilot Program was deliberately designed to capture transactions satisfying certain criteria deemed more sensitive by CFIUS—involvement with critical technologies in industries of interest—CFIUS only required a deeper examination of transactions in fewer than one-third of cases. Of course, some transactions subject to the Pilot Program were notified via a notice rather than a declaration, so these figures do not reflect the CFIUS outcomes of all transactions subject to the Pilot Program. That said, this data is a positive sign that CFIUS is effectively using the declaration process to filter out transactions warranting closer examination. Under the new FIRRMA regulations, any transaction may be notified to CFIUS via a declaration rather than a notice, and this data indicates that the expedited, short-form declaration process may be an effective filing option for parties that do not anticipate particular CFIUS sensitivity regarding their transactions.
- For the first time since 2011, China is not the most represented country in CFIUS reviews, and in 2019 Japan was the most-represented investor country across all CFIUS filings. In 2019, the leading investor country for CFIUS notices was Japan at 46 notices (20%). Japan was also the leading country for declaration filings under the Pilot Program in 2019 at approximately 15% (14 out of 94 declarations). The Annual Report also addresses the number of acquisitions involving critical technology companies, and Japan led there as well with approximately 22% (20 out of 92 critical technology acquisitions). As expected, with the overall continued decline in Chinese investment into the United States in 2019, there was a sharp decline in the number of China-based notices. There were only 25 such filings in 2019, which is a drop of over 50% compared to 55 in 2018 and 60 in 2017.
- CFIUS stopping substantially fewer transactions in 2019 than in the prior two years correlated with a decrease in the number of notices filed by Chinese investors. As previously reported, in May 2020 CFIUS released certain case statistics for 2019. These statistics showed that in 2019, with a similar number of overall notices as the prior two years, the number of notices withdrawn and transactions abandoned due to CFIUS concerns dropped substantially to approximately 3.5% (8 transactions out of 231 notices). Although CFIUS clearly stopped more transactions in 2017 and 2018 compared to 2019, it was not previously possible to confirm the reasons behind this drop. Data provided in the Annual Report confirm our previous expectation that the 2019 decline in transactions abandoned based on CFIUS concerns correlated with a substantial decrease in the number of notices filed with CFIUS in 2019 involving Chinese investors.
- CFIUS continued to approve the vast majority of transactions without mitigation requirements. In 2019, approximately 14.3% of notices (33 out of 231) were cleared with mitigation requirements. This is a slight increase in the percentage of cases requiring mitigation from 2018 (approximately 12.6%) and 2017 (approximately 12%). Unlike in prior years, the high-level summary of mitigation measures in the Annual Report differentiates between actions for which mitigation measures were adopted with respect to covered transactions (28 out of 33) and mitigation measures to address residual national security concerns with respect to notices that were voluntarily withdrawn with the transactions abandoned (5 out of 33). This reflects a change under FIRRMA, which provides that CFIUS may use measures to mitigate national security risks both in cases for which CFIUS concludes action (i.e., clears the case) and in cases for which a party to the transaction has voluntarily chosen to abandon the transaction. The Annual Report also included two new additions under the examples of mitigation measures negotiated and adopted in 2019: (1) ensuring that only authorized vendors supply certain products or services; and (2) prior notification to and approval by relevant US government parties in connection with any increase in ownership or rights. Even though CFIUS approves most transactions without conditions, given the impact mitigation can have on a transaction, it is critical to assess and plan for potential mitigation when structuring deals. It is also worth noting that the percentage of cases resulting in mitigation increased slightly despite the substantial drop in Chinese cases, meaning that there was no corresponding drop in mitigation like there was with the decline in transactions being abandoned based on CFIUS concerns.
- Consistent with CFIUS’s increased emphasis on monitoring and enforcement, the Annual Report highlighted additional mitigation monitoring and enforcement measures. CFIUS has increased its mitigation monitoring and compliance resources and efforts, and CFIUS officials have consistently expressed that compliance and enforcement is a key priority. This includes enhanced monitoring of mitigation agreements and CFIUS pursuing non-notified transactions more aggressively. As part of its enforcement efforts, CFIUS has announced the imposition of two penalties for noncompliance in the past two years: one for $1 million in 2018 and one for $750,000 in 2019. Consistent with the heightened focus on compliance and enforcement, the discussion on mitigation monitoring and compliance in the Annual Report adds new language specifying that imposition of penalties and unilateral initiation of another review of the covered transaction are tools available to remediate anomalies or breaches regarding mitigation requirements.
TikTok CFIUS Review & Other Administration Actions Regarding TikTok and WeChat
The Trump Administration has expressed substantial national security concerns about the popular video-sharing app TikTok, which is owned by Chinese company ByteDance Ltd. (ByteDance). On July 29, 2020, Treasury Secretary Steven Mnuchin, who chairs CFIUS, stated that “TikTok is under CFIUS review, and we’ll be making a recommendation to the President on it this week.” This was an unusual confirmation by a CFIUS official of an ongoing CFIUS review. A number of reports indicated that the Trump Administration might take actions with respect to TikTok, including banning the app or ordering ByteDance to divest TikTok to a US buyer (the latter presumably under the authorities of the CFIUS statute). Subsequent reporting indicated that ByteDance reached an agreement with the US government whereby ByteDance would seek to enter into a deal to divest TikTok within 45 days (by mid-September).
Separate from the reported CFIUS-related developments pertaining to TikTok, on August 6, 2020, President Trump issued two Executive Orders (EO) pursuant to the national emergency issued in EO 13873 of May 15, 2019, “Securing the Information and Communications Technology and Services Supply Chain” (the ICT EO; see our prior client alert on the ICT EO, available here):
- EO on Addressing the Threat Posed by TikTok (available here): This EO will prohibit transactions with “ByteDance, or its subsidiaries, in which any such company has any interest,” involving any person, or with respect to any property, subject to US jurisdiction, beginning September 20, 2020.
- EO on Addressing the Threat Posed by WeChat (available here): This EO will prohibit transactions “that are related to WeChat” with “Tencent Holdings Ltd. or its subsidiaries” involving any person, or with respect to any property, subject to US jurisdiction, beginning September 20, 2020.
Neither of these EOs imposes any prohibitions or restrictions before September 20, 2020. For both EOs, on September 20, 2020, the Secretary of Commerce must identify the transactions that will fall within these prohibitions, and is authorized to issue regulations to implement these EOs. The EOs also specifically prohibit any transaction by a US person or within the United States that attempts or conspires to evade, avoid, or violate these EOs, or that causes a violation of these EOs. The EOs only prohibit transactions “to the extent permitted under applicable law,” suggesting that there may be statutory or constitutional limitations on the scope of these prohibitions.
President Trump previously stated on August 3, 2020, that TikTok will “close down on September 15th” unless there is a sale to a US buyer, which is before the prohibitions outlined in the EO on TikTok are due to take effect. President Trump has also stated that “a very substantial portion of [the purchase] price is going to have to come into the Treasury of the United States because we’re making it possible for this deal to happen.” In our experience, it would be unprecedented for the US government to require any proceeds from a CFIUS-related divestment to be paid to the government, and it is not clear under which authorities such a payment could be compelled.
Interim Rule Establishing Filing Fees Adopted & CFIUS Clarifies the Definition of “Principal Place of Business”
On July 28, 2020, CFIUS issued a final rule that adopts the current interim CFIUS filing fee rule without any changes and made a minor change to the definition of “principal place of business” under the CFIUS regulations. The final rule will be effective on August 27, 2020.
As we previously reported, the Treasury Department issued an interim rule on April 29, 2020, to establish fees for parties filing a formal written notice of a transaction for review by CFIUS. The interim rule went into effect—and the Treasury Department began to collect CFIUS filing fees—on May 1, 2020. The Treasury Department solicited public comments on this interim rule through June 1, 2020. The final rule adopts the interim CFIUS filing fee rule as final without any changes. The White & Case CFIUS FIRRMA Tool has been updated to provide users with guidance in determining filing fees.
Additionally, as previously reported, on January 17, 2020, the Treasury Department published two interim rules, each effective on February 13, 2020, that provided a new definition for the term “principal place of business” as applicable to transactions subject to review by CFIUS.3 The Treasury Department solicited public comments on these interim rules through February 18, 2020. The interim rule defined “principal place of business” as “the primary location where an entity’s management directs, controls, or coordinates the entity’s activities, or, in the case of an investment fund, where the fund’s activities and investments are primarily directed, controlled, or coordinated by or on behalf of the general partner, managing member, or equivalent.” (That is qualified, however, by a provision stating that if in the most recent filing to a government agency (other than CFIUS) the entity’s principal place of business is listed as being outside of the United States, then that foreign location shall be deemed the principal place of business.) The final rule makes one “clarifying” change to the definition by removing the language “and investments” from the investment fund portion on the basis that an investment fund’s “activities” would include investments. This is a minor change that does not substantively impact the definition.
1 See our alert on the Pilot Program here
2 In one case, the parties withdrew their declaration for business reasons.
3 The notices published in the Federal Register
on January 17, 2020, included the final implementing regulations for FIRRMA, but left the definition of “principal place of business” as interim rules subject to a public comment period and potential revision since it was newly promulgated.