On July 26, 2021, the Committee on Foreign Investment in the United States (CFIUS) released its unclassified Annual Report to Congress for the 2020 calendar year. The Annual Report provides statistics and insights into the transactions CFIUS assessed, reviewed, and investigated in 2020, and explains the updated CFIUS process following the implementation of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), which expanded CFIUS’s authority (additional insights into these regulations can be found on MoFo’s National Security Practice Insights page).
Total Transactions Slightly Decreased. In 2020, CFIUS assessed or reviewed 313 filings for transactions, while in 2019, CFIUS assessed or reviewed filings for 325 transactions. The slight decline is likely the result of a variety of factors—such as the economic slowdown associated with the start of the COVID-19 pandemic, the logistical hurdles faced by the CFIUS staff transitioning to a remote work environment, and the additional clarity in the modified regulations allowing many parties reasonably to forgo notifying CFIUS. Because of this dip in filings, combined with increased funds for staffing, CFIUS was generally more efficient in 2020 despite the challenges posed by the pandemic.
Notices Decreased. In 2020, CFIUS examined 187 notices—a 19% decrease from 2019. Though it was the result of many factors, the February 2020 decision to allow declarations for any type of transaction clearly played a role in the decline. Investors from Japan, China, and the United Kingdom filed the most notices, with the majority involving the finance, information, and services and manufacturing sectors. Of the 187 notices, CFIUS proceeded to the second investigation phase in 88 cases (47%), resolved 16 with mitigation, and rejected one due to a material change.
Declarations Increased. In 2020, CFIUS assessed 126 declarations—a 25% increase from the 94 declarations CFIUS assessed in 2019. Of the 126 declarations, CFIUS approved 81 (64%) by the end of the 30-day assessment period, requested notices for 28 (22%), and was unable to conclude action on 16 (13%). This represents a substantial uptick in efficiency and the clearance rate, as CFIUS was only able to approve 37% of declarations in 2019.
These statistics illustrate that parties to transactions should consider a declaration as a viable and more efficient alternative to the full form notice. It is important, however, to evaluate carefully which path to take—declaration versus notice. Though on the whole a faster process, in the wrong case, declarations may unnecessarily extend the CFIUS process for parties to a transaction with obvious national security interests.
Filings for China-Related Transactions Continue to Decrease. Investors from China were linked to only 17 notices in 2020, down from 25 and 55 in 2019 and 2018, respectively. And only five of the 126 declarations assessed in 2020 involved China. Given the Trump administration’s tough approach to China, the Biden administration’s continued tough-on-China policies, and bipartisan congressional support for the same, this trend is likely to continue. And though the overall number of declarations involving China slightly increased, parties to transactions involving Chinese investors in most cases will likely continue to avoid the declaration process, as it does not appear to be an efficient mechanism for China-related transactions.
Withdrawn Notices. Of the 187 notices described above, parties withdrew 29 (16%), with all but one being withdrawn during the investigation period. This rate is largely unchanged from 2019 when 30 were withdrawn, but is still a marked decrease from 2018 when 66 were withdrawn. Of the 29 withdrawn notices in 2020, seven were abandoned because either CFIUS concluded that mitigation measures would not resolve its concerns or the parties rejected the proposed mitigation measures (eight transactions were abandoned in 2019 and 18 in 2018). However, 15 of the 29 withdrawn notices were refiled in 2020, which usually happens when the parties and CFIUS require additional time to negotiate and agree on mitigation measures. Taken together, these data highlight the fact that the vast majority of CFIUS transactions will be approved, even when national security concerns are raised.
Mitigation Measures and Conditions. Of the transactions that raised national security concerns, CFIUS entered into mitigation agreements 16 times for approximately 9% of the notices filed in 2020. And though these agreements are bespoke, all of the national security agreements required the businesses to promulgate compliance plans and take specific and verifiable actions, such as retaining a third-party auditor or monitor, promulgating security protocols to ensure the integrity of goods or software, and notifying customers regarding the change of ownership. Parties interested in understanding the types of measures CFIUS uses to mitigate its national security concerns should review the list on pages 40-42 of the Annual Report.
In 2020, CFIUS monitored 166 agreements and modified six materially. CFIUS found no major violations of these mitigation agreements or conditions, but did find minor violations in connection with three agreements. As a result, remediation steps were taken. Though CFIUS did not levy any penalties in 2020 for violating mitigation agreements, CFIUS monitoring agencies remain highly engaged in monitoring compliance. Parties to these agreements are encouraged to remain vigilant, including by continuing to train relevant employees and, where prudent, by engaging with the monitoring agencies to resolve ambiguities or minor concerns.
Non-Notified Transaction Outreach Continues. CFIUS identified and evaluated 117 transactions through its non-notified process in 2020. Of those 117 transactions, CFIUS requested a filing for 17. CFIUS’s increased efforts to identify and scrutinize non-notified transactions indicates that parties to transactions that are potentially covered or otherwise of interest to CFIUS should consider the risks of outreach from CFIUS and the impact they may have on the transaction (e.g., closing delays and costs).
Under its regulations, CFIUS must determine that the non-notified transaction (i) may be within CFIUS’s jurisdiction to review (i.e., a “covered transaction”) and (ii) may raise national security concerns before it requests information from transaction parties through its non-notified process. And if CFIUS determines that the transaction is a covered transaction, it can request a filing. Thus, the Annual Report shows CFIUS identified 117 transactions that may raise national security concerns, but made filing requests for only 17 of them—a relatively low number. One statistic not included in the Annual Report is the percentage of the 117 transactions evaluated for which CFIUS requested information from the parties. Additional insights into this process can be found on MoFo’s National Security Practice Insights page.
Critical Technology Transactions. In 2020, CFIUS assessed 122 covered transactions involving acquisitions of U.S. critical technology companies (i.e., companies involved in the research, development, or production of certain export controlled technologies). Foreign investors from Japan filed most frequently, followed by Sweden and Canada.
During the past year, we witnessed a number of noteworthy CFIUS developments, and the 2020 Annual Report illustrates several trends worth watching. MoFo’s National Security team will continue to monitor CFIUS-related activities and keep you apprised of any significant updates.