As published in Law360
—By Farhad Jalinous, Karalyn Mildorf, Keith Schomig and Jennifer Fernandez
On Feb. 26, 2015, the Committee on Foreign Investment in the United States published its annual report summarizing its activity during 2013, which is the most recent calendar year for which data has been compiled. The report highlights certain key trends as well as some notable developments.
CFIUS, which is a committee composed of executive-branch agencies, conducts national security reviews of foreign direct investment into the United States. In particular, CFIUS has jurisdiction to review “covered transactions,” which are transactions that could result in control of a U.S. business by a foreign person, to determine whether they present any unresolved national security concerns. Transactions deemed to threaten U.S. national security may be subject to mitigation requirements or conditions, or can be referred to the president for review and potential prohibition or divestment relief.
The annual report shows a decline in reviewed transactions for 2013, an increase in cases taken to the 45-day investigation phase and some notable developments regarding the countries most active in CFIUS reviews. As with 2012, China led all countries represented in CFIUS reviews, though 2013 also saw a notable decline in U.K.-based transactions as well as an increase in transactions involving Japanese investors.
- There were 97 CFIUS reviews in 2013, compared to 114 reviews in 2012, and 111 in 2011. The total reported value of all U.S. mergers and acquisitions in 2013 by foreign direct investors (including transactions not reported to CFIUS) was over $122 billion — on par with the $121 billion reported in 2012 and $124 billion reported in 2010. Although the 2013 numbers continued to lag behind the $300 billion levels posted in 2008, when 155 CFIUS notices were filed, there has been a marked increase in CFIUS reviews since 2013, with 156 notices submitted to CFIUS in 2014.
- For the second year, China led foreign countries represented in CFIUS reviews with 21 transactions in 2013, signaling continued aggressive Chinese investment in the United States. Although there certainly remain some heightened national security concerns associated with certain Chinese investments, in our experience with careful planning there are many opportunities for Chinese buyers to successfully invest in the United States.
- Japan was the second largest source of CFIUS-reviewed transactions in 2013, with 18. This was a significant jump from nine Japan-based CFIUS reviews in 2012. Moreover, the recent move toward opening Japanese defense trade may lead to further increased Japanese investments going forward. Canada once again ranked third in CFIUS reviews, with 12 transactions in 2013. Notably, the United Kingdom, which has historically led all other countries in CFIUS reviews, further decreased its CFIUS participation, with only seven notified transactions in 2013 (following 17 in 2012 and 25 in 2011). This decline may at least in part reflect the impact of sequestration on the U.S. defense budget.
- The annual report also reflected an increase in the number of transactions that moved past the initial 30-day review into a 45-day investigation. Investigations can be necessary when there are unresolved national-security concerns about the transaction, CFIUS needs more time to complete its analysis, and in some cases where the buyer is determined to be foreign-government controlled or the transaction involves critical infrastructure. In 2013, nearly half (49 percent) of all cases went to investigation, a clear increase over previous years in which less than 40 percent were subject to investigation. Notwithstanding this increase, the 2013 numbers may be somewhat artificially inflated due to five cases that went to investigation during the temporary suspension of government operations in October 2013. Even discounting this anomaly, however, the increase is notable — rising from 39 percent of cases in 2012 to at least 44 percent in 2013. Accordingly, parties should anticipate the possibility of investigation and factor in sufficient time when planning acquisitions. At a minimum, parties should plan for investigation in any case that arguably involves government-controlled entities, critical infrastructure or an investor and/or target expected to be viewed with heightened scrutiny.
- The number of notices withdrawn by parties declined significantly in 2013 after a surge in 2012. Eight of the 97 notices accepted for review by CFIUS in 2013 were withdrawn (three during review, five during investigation), and one was refiled in 2014. The 2013 number of withdrawn notices represents a steep decline from the 22 in 2012 and is closer to historical trends. Filings can be withdrawn for a number of reasons. Some filings involving complex deals are withdrawn because government reviewers need more time to address open questions or negotiate mitigation measures, some because it becomes apparent that the deal must be restructured to survive CFIUS review and others because the transaction is abandoned due to commercial or CFIUS-related factors.
- The annual report also showed a slight increase in the number of transactions involving mitigation requirements. Although the three-year average continues to be that mitigation is required in approximately 8 percent of cases, there was an increase from 7 percent in 2012 to 11 percent of cases in 2013. Mitigation covered a broad array of industries: telecommunications, software, mining, oil and gas, manufacturing, consulting and technology. In our experience, while CFIUS-based mitigation measures and conditions can and do cover a range of business areas, we have noticed that CFIUS has viewed transactions involving cyber security, identity authentication and access to databases of personally identifiable information with particular sensitivity. As a practical matter, CFIUS is more likely to require mitigation or impose conditions than to recommend to the president that a deal be blocked, and when imposed mitigation measures can have a significant impact on the deal and its underlying rationale. Accordingly, it is critical for companies, especially those engaging in transactions that are expected to be sensitive, to carefully assess potential mitigation measures as part of developing a CFIUS strategy.
- The annual report once again mentions that CFIUS considers foreign control of U.S. businesses that are in proximity to certain types of U.S. government facilities. This issue continues to be relevant to CFIUS reviews (e.g., it was a key factor in the Ralls transaction that was the subject of CFIUS-related litigation we have extensively covered) and was discussed in detail in the Government Accountability Office’s December 2014 report “Risk Assessment Needed to Identify If Foreign Encroachment Threatens Test and Training Ranges.” In the report, the GAO recommends that the U.S. Department of Defense develop means of assessing the risk of close proximity of foreign entities to its ranges and work with other agencies to obtain additional information on transactions near ranges. The report specifically mentions CFIUS as a potential means of addressing proximity issues. This underscores the fact that national-security issues of interest to CFIUS may arise based on close-proximity issues even when the targeted U.S. business otherwise has no obvious nexus to national security or critical infrastructure.
- FDI in the manufacturing sector and the finance, information and services sector continued to account for the greatest number of covered transactions (35 and 32 transactions, respectively), with manufacturing continuing to be the leading represented market sector. Computer and electronic products accounted for 35 percent of all notices in the manufacturing sector.
- Unlike the prior CFIUS annual report that reached the opposite conclusion, the latest annual report states that the U.S. intelligence community (USIC) believes there may be efforts among one or more foreign governments or companies to acquire U.S. companies involved in research, development or production of certain critical technologies. Consistent with the prior annual report, however, the latest annual report repeats its more general assessment that “the USIC judges that foreign governments are extremely likely to continue to use a range of collection methods to obtain critical U.S. technologies.” The latter conclusion is consistent with news accounts of cyberattacks on U.S. companies, and both findings may result in additional CFIUS scrutiny for acquisitions made by certain nations, particularly in the cyberspace.
Although the CFIUS annual report shows both the continuation of certain trends and some notable developments, both the reported data and our experience continue to emphasize that parties to transactions with a nexus to U.S. national security — or that involve a potentially sensitive investor and the possibility of other issues such as close-proximity concerns — should conduct a thorough pre-transaction CFIUS analysis. Parties should also ensure that CFIUS considerations are adequately addressed as part of deal negotiations, particularly since any mitigation measures imposed upon a transaction can significantly impact the contemplated value and benefits of a deal.
It is also critical for parties to be aware of the breadth of what can constitute “national security.” In our experience, some of the most problematic issues have arisen in cases where parties did not believe their transaction required CFIUS review only to find out too late that CFIUS had both an interest in and significant national security concerns about the deal. For these reasons, it is prudent for parties to consider potential CFIUS issues, including whether to submit a filing, in any case involving FDI into the United States, especially if the investor is from an emerging country or a nation otherwise viewed with heightened scrutiny.
Also of Interest
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- Corporate Alert: Commerce Department Requires US Companies to Submit Filings Regarding Certain Foreign Affiliates April 10, 2015 • Client Alerts