CFIUS Annual Report Sheds Light on Key Transaction Review Trends
The Situation: In early August 2022, the Department of the Treasury's Committee on Foreign Investment in the United States ("CFIUS" or "the Committee") released its new annual report.
The Result: The Committee's findings reflect a marked increase in both mandatory and voluntary filings as well as scrutiny of so-called non-notified transactions, demonstrating the importance of making CFIUS a routine aspect of diligence and deal design.
Looking Ahead: As investment screening regimes emerge as a favored regulatory and national security tool, CFIUS and other FDI review bodies will continue to shape the international M&A landscape.
CFIUS looms large as a factor in cross-border deals, yet rarely makes its deliberations or decisions public. Each year, CFIUS's Annual Report to Congress provides welcome insight on key CFIUS trends, statistics, and review outcomes. This year's newly released report, covering reviews in calendar year 2021, offers insights that can help inform deal design and negotiations.
Highlights from CFIUS's report include:
- Increase in Notified Transactions. 2021 represented the first full year in which CFIUS operated under new rules implementing the Foreign Investment Risk Review Modernization Act of 2018 ("FIRRMA"), which significantly expanded CFIUS's authority and jurisdiction. In this context, CFIUS filings grew to the highest number on record. In 2021, CFIUS received 164 declarations (short-form filings) and 272 full notices, totaling 436 filings and reflecting a 45% increase in filed notices from 2020.
- CFIUS Continues to Expand Resources Focused on Non-Notified Transactions. In addition to the transactions CFIUS is informed about via declaration or notice, CFIUS also learns of non-notified transactions through various channels, and now regularly reaches out to parties to request information. CFIUS examined 135 non-notified transactions, representing a roughly 13% increase from those identified in last year's annual report. CFIUS ultimately requested full filings on eight of these transactions.
- Increase in "Withdraw and Refile" Activity. CFIUS approved the withdrawal of 74 notices, a significant increase from the 28 withdraw requests reported in the prior year. Roughly 85% of these withdrawn notices were followed by the parties refiling a new notice, a 52% increase over the previous year's refile total. (In 11 instances, parties withdrew their notice and abandoned the transaction outright, either for commercial reasons or because a mitigation agreement proved infeasible.) Parties often "withdraw and refile" where CFIUS conducts a particularly long and searching review of a transaction, or asks for a form of mitigation that takes extra time to assess or negotiate. Increases on this front indicate a larger number of complex reviews requiring more than 90 days of time "on the clock" with CFIUS.
- Sharp Increase in Finance, Information, and Services Filings. Notices concerning transactions in the finance, information, and services sector almost doubled from the previous year, and accounted for a majority of all notices filed in 2021. Filings in the manufacturing, mining, utilities, and construction sectors increased at a more modest rate. Filings in the wholesale, trade, retail trade, and transportation sectors declined from the previous year.
- Slower Start on Specialized Real Estate Regulations. Only six of the notices filed in 2021 (roughly 2%) were filed under CFIUS's separate new "real estate" regulations, relating to land acquisition, greenfield projects, and real estate access rights. However, the sector remained on CFIUS's radar under traditional CFIUS authorities: There were 10 declarations and five notices filed in 2021 relating to investments in real estate-related businesses.
- Mandatory Filings for "Technology, Infrastructure, and Data" Businesses. CFIUS continued robust use of its new "TID U.S. Business" jurisdiction afforded by FIRRMA, including its new authority to mandate certain filings. Mandatory declarations steadily rose to 47 in 2021, or 29% of all declarations—a figure that does not include instances in which parties opted to file a full "voluntary" notice in lieu of a mandatory declaration.
- Short-Form Filings Receive Clearance. The 2021 report reflects a 30% increase from the number of declarations filed in 2020, reflecting parties' determination to use the new filing format despite the reality that some declaration assessments end with a request for a notice or with "non-action." Of the 164 declarations filed in 2021, CFIUS cleared approximately 73%, requested a written notice for 18%, took "no action" in 7%, and rejected the remainder.
- Investigation and Mitigation Outlooks Remain Steady. As in prior years, CFIUS undertook a second-phase "investigation" in roughly half of its notice reviews. Approximately 10% of notices were cleared after parties agreed to mitigation measures. Of mitigation agreements and conditions entered into in 2021 and prior years, CFIUS reported that it is currently monitoring 187 to ensure compliance by the parties, an uptick from the 166 agreements reported in 2020.
- Geographic Trends. China accounted for the highest number of notices, nearly tripling its 2020 number filed, with Canada and Japan close behind. Canada accounted for the highest number of declarations, followed by Germany, Japan, South Korea, and the United Kingdom. Germany, the United Kingdom, and Japan led the field of countries investing in "U.S. critical technology" businesses in deals resulting in CFIUS filings.
The 2021 annual report reflects a CFIUS that has emerged into the new post-reform era with its authority and stature increased, and an investment community newly sensitized to the value of weighing CFIUS factors early in the life of a deal and achieving regulatory certainty through filings where appropriate. As investment screening continues to rise in prominence as a favored regulatory and national security tool, CFIUS analysis and risk-mitigation will remain a key factor in many cross-border deals.
Three Key Takeaways
- CFIUS is reviewing—and will likely continue to review—a record number of declaration and notice filings.
- Parties that do not file should still be prepared for potential outreach from CFIUS staff—the report reveals that CFIUS's interest in reviewing non-notified transactions continues to grow.
- More parties are utilizing the option to file a short-form declaration, and CFIUS continues to clear the majority of declarations filed.
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