Key Takeaways

• Speaking recently at a conference concerning the Committee on Foreign Investment in the United States (“CFIUS” or the Committee”) in Washington, D.C., senior CFIUS officials from the Department of Defense (“DOD”), the Department of Homeland Security (“DHS”), the Department of Justice (“DOJ”) and the Department of the Treasury (“Treasury”) provided interesting commentary looking back, and looking forward, at the Committee’s work, mission and motivations.

• Below, we highlight five key takeaways regarding upcoming amendments to the CFIUS regulations, enforcement, outbound investment, mitigation and non-notified transactions, as well as recent relevant updates in the CFIUS space.

CFIUS Highlights & Updates

1. CFIUS is planning amendments to its implementing regulations (including one which was just published). CFIUS is in the process of undertaking an assessment of its implementing regulations (31 C.F.R. Part 800 and 31 C.F.R. Part 802) to identify gaps and areas for enhancement and/or clarification. In fact, one such amendment has already been proposed. On May 5, 2022, Treasury published a proposed amendment to the CFIUS real estate regulations at Part 802 that would amend the definition of “military installations” and add eight new military installation locations identified by DOD as important to national security such that they should be considered covered real estate. The proposed military installation additions are located in California, Texas, South Dakota, North Dakota, Iowa, and Arizona.

Although CFIUS officials have not specified what other potential amendments will entail, they have offered some high level details that point to amendments that are more technical in nature and less broad than the sweeping changes made as a result of the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”). For example, one issue that may be subject to clarification is when a mandatory filing obligation is triggered (and therefore when parties’ should submit the proposed transaction for CFIUS review). Under the CFIUS regulations, a mandatory filing must be submitted 30 days before the completion date of the transaction. In CFIUS’ view, the “completion date” of the transaction is when any applicable equity interest in the U.S. business is granted (e.g., once parties have signed the transaction documents). However, CFIUS has seen parties take the view that the mandatory filing obligation is triggered when the applicable equity interest is vested (e.g., once the transaction has closed), which does not allow the Committee to review the proposed transaction before it is consummated, and which means there is an interpretative disconnect between CFIUS and the market.

The current CFIUS regulations have only been in place since 2020, and the Committee continues to amend them (and adapt its practices) to address emerging national security risks and resolve inconsistencies and ambiguities in its practice.

2. CFIUS has issued multiple penalties under its new enforcement guidelines that have not yet been publicized widely but intends to release additional information regarding these penalties soon. Last October, CFIUS released a memorandum that outlined the Committee’s penalty process, as well as the aggravating and mitigating factors that would be taken into consideration during the penalty process (and determine the dollar amount of a resulting civil penalty). You can find our OnPoint regarding the CFIUS enforcement memo here. Historically, CFIUS has disclosed limited information with respect to its enforcement activities; only two were disclosed pre-FIRRMA, and none have yet been disclosed post-FIRRMA. However, CFIUS officials have emphasized that lack of public disclosure does not mean lack of action, and information about CFIUS’ recent enforcement activities is forthcoming. In an effort to incentivize compliance and increase reporting to the Committee, we understand that CFIUS will work to be more transparent about its enforcement activities and any resulting penalties, with the goal of releasing information about penalty actions on a rolling basis (e.g., several times a year).

3. An outbound investment review mechanism is coming. In light of so-called civil-military fusion efforts ongoing in China, there is increased concern among United States government officials that investment in traditionally civilian sectors in China nonetheless advances the interests of the Chinese military. This has renewed interest in the U.S. government for the establishment of an outbound investment review mechanism to protect U.S. national security and prevent countries of concern (e.g., China) from receiving investments that could result in the advancement of military and dual-use sensitive technologies and related production capabilities. As the chatter in Washington grew louder last summer, it was not yet clear whether such a mechanism would be established (Congressional proposals introduced in July 2021, which you can read more about here, stalled in the face of bipartisan disagreement). Now, the question seems to be not if, but when: CFIUS officials recently indicated that the Biden Administration is finalizing its proposal and that CFIUS will play an important role in the implementation of the outbound review mechanism (although it was clarified that the establishment of a “reverse CFIUS” is not currently on the table). Recent reporting has indicated that President Biden will sign an Executive Order outlining the Biden Administration’s proposal ahead of the upcoming Group of Seven (“G7”) summit in Japan, which will begin on May 19th, in order to use the summit as an opportunity to garner support, and discuss coordination, among G7 member countries for the outbound review mechanism. If established, the outbound review mechanism will be the first of its kind in a major western economy (though we note that China, Taiwan, and South Korea each has a form of outbound review mechanism established).

4. The Biden Administration’s CFIUS Executive Order has resulted in CFIUS looking at risk more broadly, even though its mandate remains unchanged. Mitigation has been a through line in recent remarks from CFIUS officials, and there appears to be at least a tacit acknowledgment of CFIUS’ increased use of National Security Agreements in connection with clearing proposed transactions. One way to explain the increased trend in mitigation is that CFIUS is now looking at risk more broadly even if its risk formula has remained unchanged (threat + vulnerability + consequence). This is in part due to the Biden Administration’s Executive Order on Ensuring Robust Consideration of Evolving National Security Risks by the Committee on Foreign Investment in the United States (the “CFIUS EO”), which we cover here.

While the CFIUS EO does not expand the Committee’s jurisdiction for review, it does highlight a number of factors and sectors that CFIUS should consider as part of its risk calculus. CFIUS now looks not only at the transaction presented to the Committee for review, but also at an investing party’s other investments and acquisitions in the sector to put the puzzle together and assess the complete picture. Cybersecurity and data are also under a microscope; just as important as the data to which a party may gain access is how that data is (or is not) protected and segregated. Third-party risk is also in focus for the Committee; there are 10 references to “third-party ties” in the CFIUS EO. CFIUS officials have described themselves as taking the long view – there is the national security risk that is presented today, and then there is the threat that may evolve in the future.

CFIUS’ new broad view may also account for its continued busy season (FY21 was the Committee’s busiest year on record, and FY22 appears on track to be the same) and what some in the market have noted as increased “hiccups” in the CFIUS process (e.g., more questions, longer case reviews, and short mitigation negotiation runways). It appears that the Committee’s solution is increased staffing. According to public reporting, for FY24, Treasury has requested an additional 39 full-time CFIUS employees (for a total of 144 full-time CFIUS employees). That represents a significant increase (44%) over the 27 additional full-time CFIUS employees that Treasury requested for FY23, and, should the request be granted, it would result in nearly double the full-time CFIUS employees onboard in FY22.

5. The office of non-notified transactions is increasingly active. Although the available post-FIRRMA data from the FY20 and FY21 CFIUS Annual Reports shows a low number of requests for formal CFIUS filings as a result of the work of the office of non-notified transactions (in FY21 CFIUS requested information regarding 135 non-notified transactions and made 8 subsequent requests for formal filings, and in FY20 CFIUS requested information regarding 117 non-notified transactions and made 17 subsequent requests for formal filings), CFIUS officials have stated that the CFIUS Annual Report data does not tell the full story. There are numerous transactions that are reviewed by CFIUS member agencies (most notably, DOD, DHS, and the Department of Energy) on a weekly basis. For example, outreach from the office of non-notified transactions does not mean that CFIUS has determined it has jurisdiction to review the transaction (such jurisdictional analysis is completed only post-filing) nor does it mean that CFIUS has identified a risk in connection with the transaction. It is the chance of both, not the fact of both, that will prompt outreach from the Committee.

Conclusion

Although the Annual Report for FY22 has yet to be released, it appears that the Committee remains active as it adjusts its mission to protect U.S. national security in a constantly evolving risk landscape and an increasingly anxious world. In terms of what’s next, parties should keep their eyes open for increased enforcement, and the establishment of an outbound investment review mechanism. Transaction parties contemplating investments by non-U.S. investors in U.S. businesses should continue to evaluate CFIUS considerations early in the transaction process to avoid surprises and delays on their preferred path to closing.