In the world of the Committee on Foreign Investment in the United States (CFIUS), the first few months of 2020 proceeded largely as expected: CFIUS unveiled new regulations containing no major surprises (see our summary here); the pace of CFIUS filings remained steady (annualized 350-400 filed cases, roughly the same as in 2019); and CFIUS continued with predictable enforcement activity largely focused on China-related transactions (see the leading example, culminating in the President's divestment order, here). However, several trends have become apparent as 2020 has progressed:

COVID-19. The world-changing pandemic has resulted in a CFIUS slowdown for two distinct reasons: (i) with investors exhibiting caution in uncertain times, there are fewer transactions; and (ii) CFIUS staff, while continuing to work, have reduced the pace at which they accept cases for review, which can have significant implications for transaction timing. There are, however, reasons to think the pre-COVID-19 pace of CFIUS filings will eventually resume or even increase.

Enforcement. Perhaps related to the current slowdown in cases under review, CFIUS enforcement staff have been contacting a number of transaction parties that did not make CFIUS filings for transactions that closed over the last few years. CFIUS reaches out in such cases to assess whether it has jurisdiction over past transactions and whether there is sufficient national security concern to prompt CFIUS intervention (which ultimately can lead to forced divestment, conditions on the governance or operation of the U.S. company, and/or monetary penalties). Anecdotal evidence suggests the frequency of such CFIUS outreach is increasing.

Jurisdiction. Over the last several months, CFIUS staff also appears to be more frequently determining that filed transactions are outside CFIUS's jurisdiction. With new, complex jurisdictional rules, this growth trend is not surprising, as CFIUS presumably wants to conserve resources and convey to the public its interpretations of the new jurisdictional rules. However, CFIUS's general opacity regarding the reasons for its jurisdictional dismissals seemingly undermines the goal of clarifying the jurisdictional rules.

We briefly discuss each of these developments below.

The COVID-19 Slowdown

Preliminary reporting suggests, unsurprisingly, that acquisitions and IPOs have declined dramatically as a result of the COVID-19 pandemic and the resulting climate of uncertainty. For example, JPMorgan reportedly has seen a "near-total halt in M&A activity and underwriting." While there is little data available yet regarding private equity and venture capital investment activity, many observers predict declines that are similar, if less precipitous.

In the short term, fewer deals likely will mean fewer filings. The number of CFIUS filings is at least partly a reflection of the amount of investment activity. In the recession year 2009, for example, CFIUS filings dropped to fewer than half the number in the previous year before rebounding over the next several years.

Further, as a result of the COVID-19 outbreak, many CFIUS staff have been working from home, which makes it harder to process cases. Staff cannot access classified information, and providing sufficient information to senior officials—i.e., "briefing up" the chain of command—is often difficult when in-person meetings cannot be held. These and related obstacles have resulted in CFIUS staff accepting cases for review less quickly than was the case before the pandemic. Parties are filing cases, and CFIUS ultimately is reviewing them, but for many of the filed cases the official "clock"¹ will not start for weeks after the parties make the filing; CFIUS is metering its workload by exercising discretion as to when to officially accept a case for review.

Transaction parties that want a CFIUS clearance (or that are required to obtain one because of the new mandatory filing rules) should be aware of the slowdown in processing and plan their transactions and closing timelines accordingly. In some instances, this will mean that to avoid delay, the parties will choose to forego a voluntary CFIUS filing (though they cannot do so if the transaction is subject to the mandatory filing rules). However, parties that forego a filing must also weigh the risk that CFIUS will intervene in their transaction post-closing—especially given the uptick in enforcement discussed below—and may wish to consider reallocating that risk in their transaction documents.

In the medium-to-longer term, filings likely will resume at the level of 350-400 cases annually or perhaps even increase. The CFIUS staff will return to normal in-office hours when the COVID-19 risk subsides. Moreover, to the extent that valuations of U.S. companies decline, particularly in comparison to valuations of non-U.S. companies, those valuations may make U.S. companies attractive targets for foreign investment. Accordingly, after the initial shock caused by the pandemic, there could be an increase in foreign investment, which might yield an increase in CFIUS filings. The Department of Defense and a group of U.S. Senators, anticipating such increased foreign investment—and viewing it with skepticism—have urged CFIUS to protect U.S. companies from "adversarial capital."

Increased Enforcement Activity

In the very long run, the volume of CFIUS filings will be, at least in part, a function of CFIUS enforcement activity. By enforcement activity, we mean instances in which CFIUS contacts parties that have not made filings with respect to a given transaction. Such outreach by CFIUS sometimes signals only that CFIUS is assessing whether it has jurisdiction and a national security interest in the transaction, but it often is a precursor to CFIUS requesting or requiring a filing. That in turn may result in CFIUS forcing a foreign party to divest its investment, or imposing conditions on the governance or operation of the company. Further, if the transaction was subject to mandatory filing rules, CFIUS has the option of imposing monetary penalties in addition to imposing conditions or forcing divestment.

CFIUS has published very little information regarding its enforcement activity. It is well understood, however, that CFIUS has significantly increased its enforcement resources, including a new enforcement bureau that is adding staff and procuring data streams that were not previously available to CFIUS. Further, anecdotal information indicates that these additional resources now are being leveraged by CFIUS to conduct more frequent outreach regarding non-filed cases, at least to assess CFIUS's jurisdiction and interest in these non-filed cases.

However, it is still too early to assess whether this apparent uptick in enforcement activity presages a substantial departure from the past. CFIUS has for years engaged in limited enforcement activities with limited staff. Whether the increase in enforcement activity will be marginal or dramatic may not be apparent for many months or even years.

Further, it is unclear whether CFIUS will focus exclusively on transactions in which the investors have ties to China or Russia, which has been its past practice, or whether it will broaden its aperture to review cases involving investors with ties to other countries. On their face, the CFIUS mandatory filing rules apply to transactions involving investors from virtually any foreign country (aside from narrow categories of "excepted investors"). CFIUS presumably will consider whether it intends to have mandatory filing rules that are enforced only as to specified countries; if so, that selective enforcement pattern may eventually alter the import of the rules.

Jurisdictional Dismissals

For those cases that have been reviewed over the last several months, there is a noticeable trend toward dismissing cases on jurisdictional grounds. The CFIUS rules give the agencies significant flexibility to determine how to interpret a number of key terms, and CFIUS appears increasingly willing to use that flexibility to dismiss cases that it views as presenting few substantive national security issues. We have seen cases in which CFIUS has made somewhat surprising determinations that the U.S. company was not involved with "critical technology"—determinations seemingly inconsistent with other government guidance with respect to the classification of those technologies—and/or not involved with any of the 27 CFIUS-specified industries of concern. We similarly have seen cases in which CFIUS determined that a foreign acquiror was not a "foreign person" within the meaning of the CFIUS rules—again, despite inconsistency with prior practice in making such determinations—as well as other cases in which CFIUS has questioned whether a business is a "U.S. business."

It is sensible that CFIUS would seek to conserve resources in this way. Processing a case from beginning to end requires substantial labor and sometimes political energy within the CFIUS agencies, especially when these agencies disagree about the merits of a case. When such cases can be dismissed for lack of jurisdiction, it is unsurprising that CFIUS would choose such a path.

It also would be sensible for CFIUS to utilize such dismissals to inform the public regarding CFIUS's interpretations of ambiguous rules and terms that have jurisdictional consequences—e.g., what constitutes a foreign person, a U.S. business, a critical technology, or sensitive personal data. Anecdotally, however, CFIUS is not using jurisdictional dismissals to enlighten the public as to the proper interpretation of jurisdictional rules. That seems like a missed opportunity that would serve CFIUS's interests in not receiving filings for which CFIUS has no jurisdiction, as well as the public's interests in not making such filings. In time, however, CFIUS may change its practice of jurisdictional dismissals so that these dismissals provide clearer guidance for the increasingly complex CFIUS rules of the road.

[1] The CFIUS clock typically runs 30 or 45 days for an initial review, depending on the nature of the filing, with the possibility of an additional 45 days if needed.