CFIUS Annual Report Shows Increase in Notified Transactions in 2011

by Wilson Sonsini Goodrich & Rosati

The Committee on Foreign Investment in the United States (CFIUS) recently released the unclassified version of its annual report to Congress for transactions notified to CFIUS during the calendar year 2011. Most notably, the report indicates: (i) a continued increase in transactions notified to CFIUS since the significant decline in 2009; (ii) the effect of the Foreign Investment and National Security Act of 2007 (FINSA) amendments to Section 721 of the Defense Production Act of 1950 on the likelihood of a CFIUS investigation; (iii) an increase in foreign investment in U.S. manufacturers and service providers of U.S. computer, electronic, and other technology products; (iv) a significant increase in notifications by Chinese-controlled acquirers; and (v) concern regarding the likelihood of a coordinated strategy by foreign governments or companies to acquire U.S. critical technology.

CFIUS Authority and Procedures

CFIUS is an interagency committee that has the authority, pursuant to Section 721 of the Defense Production Act of 1950, as amended by FINSA, to conduct a national security review of transactions that could result in control of a U.S. business by a foreign government, entity, or person (otherwise known as a "covered transaction").1 Parties may voluntarily notify CFIUS of a covered transaction, or CFIUS may initiate its own review before or after a transaction has been consummated. Parties to a covered transaction may choose to voluntarily notify CFIUS in order to qualify for a safe harbor after CFIUS has reviewed and determined that a transaction does not threaten to impair U.S. national security, preventing the government from later unwinding the transaction or requiring a divestiture.

An initial 30-day review period commences the next business day following a determination that the submitted notification is complete. Within that period, CFIUS must determine whether to clear the transaction or to initiate an investigation because the transaction presents national security concerns and those concerns have not been mitigated. FINSA created a further obligation for CFIUS to undertake an investigation where the transaction results in control by a foreign government absent a determination by the chairperson of the committee and the head of any lead agency that the transaction will not impair the national security of the United States. CFIUS has 45 days to determine whether to clear the transaction, granting a safe harbor, or to recommend to or request a determination by the President to block or unwind the transaction. Presidential determinations are rare, however, as most parties will abandon or restructure a transaction to avoid a Presidential action.

CFIUS also has the authority to enter into an agreement with or impose conditions on parties to mitigate any national security risks presented by a covered transaction. As mitigation measures can be complex, it may take CFIUS and the parties more than the 75-day combined review and investigation period to reach an acceptable mitigation agreement. Parties therefore may request a withdrawal of their notification and re-file the notification so that they have additional time to resolve national security concerns through a mitigation agreement. Other reasons for withdrawing a notice include material changes in the terms of a transaction that require a new notification, abandoning a transaction (either for commercial reasons or to avoid a Presidential determination), and to provide additional time to answer information requests from CFIUS.

Key Observations from the 2011 CFIUS Annual Report

FINSA increased congressional oversight of the CFIUS process by requiring the committee to provide Congress with confidential briefings upon request and issue an extensive annual report on all of the reviews and investigations completed during the previous calendar year. FINSA also required CFIUS to release an unclassified version of the report to the public. Although the unclassified version does not contain specific details regarding the parties or substance of the reported transactions, it nonetheless provides useful insight into CFIUS's enforcement policy and trends in foreign investment into the United States.

At the end of December 2012, CFIUS released its annual report covering transactions notified to the committee during calendar year 2011. Some of the most notable trends identified in the report are provided below.

Highest Number of Transactions Notified Since 2008

In 2011, CFIUS reviewed 111 transactions, the highest number since the peak year of 2008 when 155 transactions were reviewed by the committee, up from 93 filings in 2010 and 65 filings in 2009. The report notes that these increases correspond generally with the recovery from the global financial crisis. Six notices were withdrawn in 2011, one during the review period (compared to six in 2010) and five during investigation (compared to six in 2010). All of these notices were re-filed, four in 2011 and two in 2012.

Investigations Continued to Be More Common Post-FINSA Amendments

The FINSA amendments have had a significant effect on the number of investigations undertaken by CFIUS. During the three years prior to the enactment of FINSA (2005-2007), only about 4.5 percent of the transactions notified to CFIUS proceeded to investigation. In 2008, the year when FINSA went into effect and CFIUS promulgated new regulations, the percentage of transactions that went to investigation increased to 14.8 percent. From 2009 through 2011, the percentage of transactions that were investigated increased substantially to 37.2 percent. In 2011, 40 of the 111 transactions notified to CFIUS proceeded to investigation—the highest number reported in a single year. The percentage of notices proceeding to investigation in 2011 (36 percent) was generally consistent with 2009 and 2010 (38 percent).

Manufacturing Industry Continues to Account for the Most CFIUS Filings

The transactions notified in 2011 cut across a wide range of industries. An increasing number were from the manufacturing sector, which accounted for 44 percent of filings, up from 39 percent in 2010 and 32 percent in 2009. Within the manufacturing sector, the computer and electronic products subsector continued to be the largest source of filings, with 53 notices or 50 percent of the total manufacturing filings from 2009 to 2011. Navigation, measuring, electromedical, and control instruments (34 percent); communications equipment (30 percent); and semiconductor and other electronic component manufacturing (26 percent) made up the largest number of notices within the computer and electronics subsector. Following manufacturing, the finance, information, and services industry made up the next largest source of all filings in 2011, with 34 percent, generally consistent with its share in prior years. Computer systems design made up the largest portion of those filings, with 44 percent.

U.K. Acquisitions Remain Largest Source of Notices; Chinese Notifications Increasing

Acquisitions by investors in the United Kingdom again accounted for the largest number of notices in 2011, with 25 filings. They were followed by France, China, and Canada, with 14, 10, and 9 notices, respectively. This represents a shift from 2010, where while the U.K. remained the largest acquirer by number of transactions, Canada came in second with 9 transactions, followed by Israel and Japan with 7 each, and then China and France with 6 each. The most significant trend is the increase in notifications filed by Chinese-controlled investors over the past three years. In 2009, 2010, and 2011, there were 4, 6, and 10 transactions, respectively, involving a Chinese-controlled acquirer. China jumped from sixth to third in total number of filings from 2009 to 2011. From 2009 through 2011, China notified 20 transactions, ranking fourth behind the U.K. (with 68), Canada (with 27), and France (with 27).

Acquisitions by U.K. investors were concentrated in both the manufacturing and finance, information, and services sectors. Chinese and French acquisitions were focused in the manufacturing sector, while Canadian acquisitions were predominantly in the mining, utilities, and construction sector and the finance, information, and services sector.

Mitigation Agreements

In 2011, 8 notices, or 7 percent of total filings, resulted in mitigation agreements between CFIUS and the private parties. This number is consistent with the 8 percent of filings from 2009 to 2011 that have resulted in such mitigation agreements. The transactions that resulted in mitigation agreements in 2011 included U.S. companies involved in software, computer programming, computer and electronic manufacturing, electrical equipment and component manufacturing, aerospace manufacturing, and finance. CFIUS mitigation measures in 2011 included:

  • establishing a Corporate Security Committee, annual reports, independent audits, and other mechanisms to ensure compliance;
  • ensuring that only U.S. persons handle certain products and services and/or that certain activities or products are located only in the United States;
  • notifying the government in advance of foreign national visits to the U.S.;
  • requiring notification of any material introduction, modification, or discontinuation of a product or service, as well as of any vulnerability or security incidents;
  • ensuring the continued production of certain products for government parties; and
  • requiring a proxy entity to perform certain activities of the U.S. business.

CFIUS monitors compliance with these mitigation measures through mechanisms such as periodic reporting, onsite compliance reviews, third-party audits, investigations, and remedial actions when anomalies or breaches are discovered.

Likely Coordinated Strategy by Foreign Governments or Companies to Acquire Critical Technology

The latest annual report indicates that the U.S. Intelligence Community (USIC) is moderately confident that "there is likely a coordinated strategy among one or more foreign governments or companies to acquire U.S. companies involved in research, development, or production of critical technologies for which the United States is a leading producer." This is the first time since the enactment of FINSA that the USIC has made such a finding. The report also notes that the United Kingdom, France, and Japan were the most frequent originating countries for critical technology transactions in 2011. As in prior years, the USIC determined that "foreign governments are extremely likely to continue to use a range of collection methods to obtain U.S. critical technologies."


The latest report confirms that as foreign investment in U.S. businesses continues to increase, it is important for both the investor and the target company to be mindful of CFIUS, particularly where the target's business involves government contracts, controlled technology, or critical infrastructure. Experienced counsel should be involved at all stages of the process, including during (i) the development of an investment strategy within the U.S., (ii) the negotiation of a specific transaction, (iii) the drafting and submitting of the CFIUS notification, and (iv) discussions and negotiations with CFIUS. A well-coordinated strategy with the other party to the transaction also will increase the likelihood of timely clearance by the committee.

For more information about CFIUS, its annual report, or any related matter, please contact Donald Vieira or another member of Wilson Sonsini Goodrich & Rosati's national security practice.

1 Under the definition in the CFIUS regulations, majority ownership is not required for control. Control, for CFIUS purposes, is broadly defined to include any form of power over a company that gives the holder the ability to determine important matters affecting the entity. See 31 C.F.R. § 800.204.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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