There have been several recent developments related to the Committee on Foreign Investment in the United States (CFIUS). Most notably, CFIUS has released a proposed rule that would change the mandatory filing criteria for certain foreign investments in US companies involved with critical technologies. This change would move the mandatory filing analysis away from the current industry test and instead focus on whether the US business's products and technology would require a license for export to the foreign investor and its substantial owners. CFIUS also released certain statistics for 2019 as well as its annual report addressing filing data for 2018, providing insight into recent CFIUS trends, outcomes, and timing considerations. Of note, substantially fewer transactions were abandoned in 2019 based on CFIUS concerns than in recent years; there has been some but not a dramatic increase in notified transactions since the Foreign Investment Risk Review Modernization Act (FIRRMA) was enacted—though FIRRMA's full implementing regulations did not take effect until earlier this year; and there have been some notable improvements in CFIUS's efficiency compared with recent years. Finally, CFIUS has introduced a new case management system that changes the way in which CFIUS administers the filing process. This alert discusses each of these developments.
Proposed Changes to Critical Technology Mandatory Filing Requirements
On May 21, 2020, the US Treasury Department published a proposed rule that would revise the criteria for determining whether a mandatory filing applies to a given transaction involving a US business with "critical technologies".
Currently, as described in more detail here, CFIUS's regulations limit mandatory filings for certain transactions involving US businesses with "critical technologies"1 based on whether the US business has certain connections to 27 industries identified by North American Industry Classification System (NAICS) codes. CFIUS also used this industry test in the Critical Technologies Pilot Program (CFIUS Pilot Program) that was in place from November 2018 until the new CFIUS regulations took effect earlier this year.
The proposed rule would instead limit such mandatory filings to transactions involving critical technologies that would require certain US government authorizations for export to certain transaction parties or foreign persons in their ownership chains. Specifically, parties would need to submit a declaration to CFIUS, or a full notice in lieu of a declaration, when their "covered transaction" involves a US business that produces, designs, tests, manufactures, fabricates, or develops one or more "critical technologies" if – with limited exceptions – a US regulatory authorization (defined to include licenses, approvals, and other authorizations under the International Traffic in Arms Regulations, the Export Administration Regulations (EAR), or regulations governing certain nuclear energy-related activities, as applicable) would be required for the export, re-export, transfer (in-country), or retransfer of such critical technology to either (a) a foreign person that is a party to (and that provides a basis for) the "covered transaction" or (b) a foreign person that individually, or as part of a group of foreign persons, holds a voting interest, direct or indirect, of 25 percent or more in a foreign person described in (a). Notably, other than for three enumerated license exceptions under the EAR, a mandatory filing would be required irrespective of whether any license exceptions or exemptions would apply for exports of the critical technology to the given foreign person.
By shifting the focus away from the US business's role in certain industries, and focusing instead on the foreign investors and their owners, the proposed rule would concentrate critical technology mandatory filings on critical technologies subject to tighter export controls and foreign investors connected to countries of higher concern to the US government from an export-control perspective.
Any public comments on the proposed rule must be submitted by June 22, 2020. We will update the White & Case CFIUS FIRRMA Tool to reflect the new requirements once the rule becomes effective.
CFIUS 2018 Annual Report and Certain 2019 Statistics
The US Treasury Department also recently released the public version of the 2018 CFIUS Annual Report and certain case statistics for 2019. Of note:
- CFIUS stopped substantially fewer transactions in 2019 than in the prior two years. In 2017, out of 237 notices filed, 24 transactions—or about 10 percent of notices—were abandoned based on CFIUS concerns with the transactions, either because CFIUS could not identify mitigation measures to address its national security concerns or parties would not agree to mitigation measures required by CFIUS. This decreased some in 2018, when approximately 8 percent of notices (18 out of 229) were withdrawn based on CFIUS-related national security concerns with the underlying transactions. In 2019, with a similar number of overall notices as the prior two years, there was a substantial drop in the number of notices withdrawn and transactions abandoned due to CFIUS concerns to approximately 3.5 percent (8 transactions out of 231 notices). Also of note, in each of 2017 and 2018, there were more than double the number of withdrawals and re-files as in 2019, meaning that the total number of notices in 2017 and 2018 represented a smaller number of unique transactions. Accordingly, the decline in the percentage of unique transactions abandoned in 2019 based on CFIUS action was even more substantial than the overall percentages indicate. While CFIUS has yet to release country-specific data for 2019, we expect that the 2019 decline in transactions abandoned based on CFIUS concerns is correlated with a decrease in the number of notices filed with CFIUS in 2019 involving Chinese investors.
- The large increase in the number of filings (either notices or declarations) originally expected under FIRRMA has not materialized so far, though the number of notified transactions has increased. In 2017 (pre-FIRRMA), CFIUS received 237 notices. In 2018, which included the first two months of the CFIUS Pilot Program, CFIUS received 229 notices. In 2019, CFIUS received 231 notices. On its face, the number of notices over the past three years appears consistent, but as noted above, 2019 saw fewer than half the number of withdrawals and re-files as in 2017 and 2018 (18 in 2019 compared with 44 in 2017 and 42 in 2018). This substantial decline in withdrawals and re-files in 2019, compared with the prior two years, indicates that the overall number of notices in 2019 reflects more unique transactions being notified. Declarations also emerged as a filing option for transactions subject to the CFIUS Pilot Program starting in November 2018, and 21 declarations were submitted that year. While CFIUS has not yet formally published 2019 declaration statistics, CFIUS officials have informally reported that CFIUS received about 110 declarations in 2019. Thus, on average only about 10 declarations were filed per month while the CFIUS Pilot Program was in effect. Statistics are not yet available on the impact of the full implementation FIRRMA, which started in February 2020 and included further expansion of CFIUS's jurisdiction and mandatory filing requirements.
- Only about 10 percent of transactions notified by declaration were "cleared" in the early months of the CFIUS Pilot Program, though declaration clearance rates improved in 2019. According to the 2018 Annual Report, CFIUS concluded action on (i.e., cleared) only 2 of the 21 declarations submitted in November-December 2018. CFIUS did not conclude action (but did not request a full notice) on 11 declarations, and CFIUS requested a full notice for 5 declarations. As 2019 proceeded, CFIUS's declaration clearance rate appears to have increased—CFIUS officials have informally reported that CFIUS cleared about one-third of all declarations submitted in 2019. These statistics reflect the period when the CFIUS Pilot Program was in effect, during which only transactions subject to the CFIUS Pilot Program's mandatory filing requirements were eligible to be notified via declaration.
- CFIUS is clearing more cases in the initial review phase, moving closer to CFIUS's longer-term average. Between 2010 and 2016, on average about 42 percent of all notices proceeded to the investigation phase. In 2017, as CFIUS was hit by a dramatic increase in the number of notices without the budget or staffing to keep pace, about 73 percent of all notices proceeded to investigation; and pre-FIRRMA in 2018, about 76 percent of all notices proceeded to investigation. To ease the pressure on CFIUS's reviews, FIRRMA increased the length of the CFIUS "review" phase from 30 days to 45 days and provided additional resources to enable CFIUS to better manage the caseload. Post-enactment of FIRRMA, the percentage of notices proceeding to investigation dropped to 53 percent in the remainder of 2018, and to 48 percent in 2019.
- Withdrawals and re-files remained high in 2018 but decreased substantially in 2019. In 2017, along with a steep increase in notices proceeding to investigation, there was a significant increase in notices needing to be withdrawn at the end of the investigation phase and re-filed into a second (or more) CFIUS cycle. Of the 237 notices in 2017, 44 (about 19 percent) were withdrawn and refiled. Similarly, in 2018, of the 229 notices, 42 (about 18 percent) were withdrawn and refiled. In 2019, however, of the 231 total notices, only 18 (8 percent) were withdrawn and refiled.
- Notices involving foreign investors from China continued to be, by far, the largest source of filings in 2018, but this likely does not tell the whole story. Based on our experience with CFIUS cases, notices involving Chinese acquirers are more likely to be complex and thus withdrawn and re-filed one or multiple times before reaching resolution. Because CFIUS only reports statistics on the number of "notices" or "declarations"—as opposed to the number of unique transactions notified—CFIUS's published statistics likely systematically overstate the actual number of unique cases involving Chinese investors. As noted above, consistent with the overall continued decline in Chinese investment into the United States in 2019, we expect that the 2019 CFIUS Annual Report will show a decline in notices involving Chinese acquirers, likely correlating with the declines in 2019 of withdrawals and re-files and transactions abandoned because of CFIUS concerns.
- Through 2018, CFIUS continued to approve the vast majority of transactions without mitigation requirements. In 2018, approximately 12.6 percent of notices (29 out of 229) were cleared with mitigation requirements. This is a slight increase from 2017 (approximately 12 percent) and up from approximately 10 percent in 2016. Mitigation statistics from 2019 have not yet been made available. The high-level summaries of mitigation and compliance oversight measures for mitigation required in 2018 were the same as what the prior annual report identified for 2016 and 2017. Even though most transactions are ultimately approved without conditions, given the impact mitigation can have on a transaction, it is still critical to assess and plan for potential mitigation when structuring deals.
New CFIUS Case Management System
The US Treasury Department also announced that – as of June 1, 2020 – all draft and formal filings submitted pursuant to CFIUS's investment regulations (31 CFR Part 800) or real estate regulations (31 CFR Part 802), both declarations and full notices, must be submitted through a new electronic CFIUS case management system (CMS). CFIUS is implementing the CMS to standardize filing formats and facilitate data analytics across filings.
The CMS will replace the current practice of submitting a declaration or full notice as a PDF by email to the US Treasury Department. Instead, parties' representatives will need to individually input almost all of the information typically contained in a notice or declaration directly into the CMS, with PDF uploads limited to certain documents that typically form exhibits to the notice or declaration. As a result, parties will need to allot additional time for the direct entry of transaction information into the CMS.
The CMS will also be used for correspondence between the US Treasury Department and the parties during the course of an assessment, review, and/or investigation.
1 Mandatory filings are also required for certain transactions involving a "substantial interest" by a foreign government, as described in more detail here. Such mandatory filings would be largely unchanged by the new proposed rule.