The Committee on Foreign Investment in the United States (CFIUS)1 recently released the unclassified version of its annual report to Congress for transactions notified to CFIUS during calendar year 2015.2 While the data contained in the report is almost two years old, the trends evidenced and the insights into CFIUS's focus are important tools for parties to consider when a foreign person may acquire control over a U.S. business. Most notably, the report indicates:
-
a sustained number of transactions notified to CFIUS from 2014 to 2015, but far below current estimates of 2017 notices;
-
a significant increase in the percentage of transactions that progressed to investigation;
-
a slight increase in the number of transactions withdrawn, but a clear beginning to the current trend of parties withdrawing and refiling in attempts to obtain CFIUS clearance for their transactions;
-
an increase in the percentage of notifications by Chinese-controlled acquirers;
-
an increase in the percentage of covered transactions with targets in the semiconductor space; and
-
the vast majority of covered transactions involved U.S. critical technology companies.
Sustained Number of Covered Transactions with Significant Increase in Investigations
The total number of covered transactions in 2015, 143, remained relatively the same as 2014, 147. While the 2015 total is slightly lower than the 2014 total, the 2015 total maintains the trend of an increased CFIUS caseload compared to prior years, such as 2013 with 97 covered transactions and 2012 with 114. As further evidence of the trend, the number of CFIUS filings in 2017 already exceeds 175 filings.
Further, in 2015, there was a significant increase in the number and percentage of cases that proceeded to the 45-day investigation period. CFIUS sent 66 transactions into investigation in 2015—a large increase from 51 transactions the year before. This represented an increase to 46 percent from 35 percent in 2014.
2015 also saw a slight increase in the number of transactions withdrawn from CFIUS review with a total of 13 withdrawals. Of the 13 withdrawals, three notices were withdrawn during the initial 30-day review period and 10 were withdrawn in the subsequent 45-day investigation period. Of the 13 withdrawals, eight were refiled. In 2014, three notices were withdrawn during the review period, and nine were withdrawn during the investigation period but there was only one instance of parties refiling a new notice. Thus, the report clearly evidences that the current trend of parties withdrawing and refiling their notices in attempts to receive CFIUS clearance for their transactions started in 2015, with eight of the 13 withdrawn notices being refiled.
CFIUS also imposed mitigation measures in 11 transactions, which is consistent with its actions in prior years. Most of the specific mitigation imposed in 2015 mirrored 2014 measures, including restricting access to technology and/or information; creating a Corporate Security Committee, requiring the appointment of a security officer approved by the U.S. government; implementation of security policies and independent audits; implementation of policies and procedures for handling U.S. government business and the related data; requiring that certain activities and products remain in the United States; and agreeing that the U.S. government has the authority to review and object to certain business decisions. The 2015 report also included additional mitigation measures not listed in the 2014 report, including:
-
implementing security protocols to ensure the integrity of software or goods sold to the U.S. government;
-
notifying customers of the change of ownership;
-
requiring assurances of continued supply for defined periods, and notification and consultation before taking certain business decisions, including certain rights in the event that the company decides to exit certain business lines; and
-
exclusion of sensitive assets from the transaction.
Number of Chinese-Controlled Acquirers Continues to Climb
Since 2012, China has claimed the top spot among acquirers in covered transactions. In 2015, China again led the pack with 29 covered transactions, or approximately 20 percent of notices submitted, up from 16 percent in 2014. The annual report also indicates that Chinese investment remained concentrated in the manufacturing sector. Following China, acquirers came most often from the Canada (22 transactions), which saw a notable rise from 15 transactions in 2014, the United Kingdom (19 transactions), and Japan (12 transactions).
Manufacturing Transactions Remain Dominant; Semiconductor Transactions Rise Dramatically
As has been the case for several years, manufacturing sector transactions continue to dominate. In 2015, CFIUS reviewed 68 transactions in the manufacturing sector, which represented approximately 48 percent of their total caseload—consistent with the 47 percent in 2014. Computer and electronic product manufacturing transactions rose sharply to 33 transactions, up from the 12 transactions in 2014 and six transactions in 2013 reviewed by CFIUS. The transactions in this sector primarily involved the manufacture of semiconductor and electronic components, which accounted for 18 transactions or 55 percent of the sector, dramatically higher than 2014 (12 transactions and 41 percent). The significance of the manufacturers of semiconductor and electronic components has continued to rise since 2015, most recently with President Trump blocking Lattice Semiconductor Corp.'s proposed acquisition by Canyon Bridge Capital Partners.3 Similar to 2014, chemical, machinery, and transportation equipment made up the bulk of the remaining transactions in the manufacturing section, with eight covered transactions each in 2015.
The remaining covered transactions in 2015 fell into the following sectors: finance information and services sector (42 transactions); mining, utilities, and construction sector (21 transactions); and wholesale trade, retail trade, and transportation sector (12 transactions). The majority of transactions in the finance information and services sector were from professional, scientific, and technical services (12 transactions), publishing industries (except Internet publishing) (nine transactions), and telecommunications (seven transactions) areas. In addition, consistent with 2014, utilities accounted for over half (11 transactions) of the transactions in the mining, utilities, and construction sector.
Vast Majority of Covered Transactions Included Critical Technology Companies
Unlike in 2013 and 2014, the U.S. Intelligence Community (USIC) declined to provide an unclassified assessment of whether it believed in the existence of a coordinated effort among foreign companies and governments to acquire U.S. companies involved in the research, development, or production of critical technologies for which the United States is a leading producer. Critical technologies include technologies subject to certain export controls administered by the Department of State, the Department of Commerce, and the Department of Energy. The report stated that of the 143 covered transactions in 2015, CFIUS identified 130—over 90 percent—as concerning critical technologies, most of which involved information technology (38 transactions) or aerospace and defense (30 transactions). This statistic is not surprising, as "critical technologies" is a broad category covering technologies that are controlled for export to almost all countries, as well as those controlled only for export to embargoed countries. Further, parties are generally less likely to file with CFIUS when a transaction does not involve export-controlled technologies, software, or products.
New Considerations Bearing on the National Security Risk Determination
The report includes additional factors that CFIUS considers in evaluating the perceived adverse effect of covered transactions that were not included in the 2014 report. The factors include an assessment of whether there are alternative suppliers to the U.S. business and whether foreign control of that business will damage U.S. technological competitiveness in a field with significant national security implications. With this update, CFIUS appears to be signaling that future reviews may include a market analysis, potentially applying scrutiny to the industry and the position of the U.S. business within it. The report further provides that the size and nature of data about U.S. persons and businesses is an important consideration for CFIUS's review. The report notes that potentially sensitive datasets could exist in a wide variety of industries, including the insurance, health services, and technology sectors. In the future, even companies operating in industries of traditionally negligible national security concern, such as online retail or mobile advertising, may find their transactions under unexpected scrutiny due to the repository of consumer data they have been compiling over the entire life of the company.
Conclusion
The latest report confirms that CFIUS review continues to be significant in foreign investment in U.S. businesses. The report makes it clear that many of the current trends were present or even began in 2015, including the prevalence of parties withdrawing and refiling their transactions in attempts to get CFIUS clearance and the focus on transactions involving Chinese investors and/or semiconductor-related companies.
To successfully navigate the CFIUS process, it is important to have a well-coordinated strategy with the other party to the transaction and have experienced CFIUS counsel involved at all stages of the process, including during (1) the development of an investment strategy within the United States; (2) negotiations of specific transactions; (3) drafting and submission of the CFIUS notifications; and (4) the CFIUS review process.
