The Committee on Foreign Investment in the United States (CFIUS) issued its Annual Report to Congress in February 2015, covering CFIUS activity during calendar year 2013. The report reflects the US government’s intensified scrutiny of risks to US national security from foreign investment. CFIUS is an inter-agency US government body, chaired by the Department of the Treasury, which reviews foreign acquisitions of US businesses for national security issues. The Annual Report details CFIUS’s review of notified transactions covered by the Foreign Investment and National Security Act of 2007 (FINSA) during calendar year 2013.
According to the report, CFIUS received 97 notices of covered transactions during the 2013 calendar year. The Annual Report does not disclose the number of notices of transactions that CFIUS determined to be outside of its jurisdiction, i.e., “non-covered” transactions. CFIUS reviewed all notices received and conducted a subsequent investigation with respect to 48 of the 97 transactions, or 49 percent. CFIUS notes that five cases went to investigation during the US government shutdown; assuming that all five would have been completed during the review stage, the investigation rate is 44 percent. By either measure, the rate of transactions going to the investigation stage was higher than the rates in 2011 and 2012, which were 36 and 39 percent, respectively.
Additionally, in 2013 CFIUS approved the withdrawal of eight notices: three within the 30-day review period and five after the commencement of the 45-day investigation period, for a total of 8 percent of covered transactions. This is a decrease from 19 percent in 2012, and closer to the 5 percent rate of 2011.
Mitigation measures were applied to 11 covered transactions in 2013, a rate of 11 percent. Mitigation agreements are legally binding instruments that require transaction parties to make divestments, make modifications to acquisition agreements, or take other steps to address national security concerns. From 2011 through 2013, CFIUS reported that 8 percent of cases resulted in the use of mitigation measures.
The primary sources of foreign investment in covered transactions notified pursuant to FINSA in 2013 were China, Japan, Canada, France, and Germany. China, for the second year in a row, was the home country for acquirers in most covered transactions, with 21 transactions, or 22 percent of the total. This percentage may reflect an increase in Chinese-origin investment in the United States, or a more conservative approach to CFIUS filings (i.e., erring on the side of caution and filing notices of transactions when in doubt), or both. The leading sector for covered transactions in 2013 was manufacturing (36 percent of covered transactions), followed closely by the combination of finance, information, and services (33 percent).
Examining the 85 completed cross-border deals identified by CFIUS in 2013 as relating to “critical technologies,”1 the US Intelligence Community (USIC) reported that there “may be” an effort among foreign governments or companies to acquire US companies involved in research, development, or production of critical technologies for which the United States is a leading producer. This finding is a change from the previous year, in which the USIC found such an effort to be “unlikely.” The USIC also determined that foreign governments are “extremely likely” to continue to use a range of methods, including espionage, to obtain critical US technologies. Given this change in perception of foreign efforts to acquire critical technologies, it is not surprising that the Annual Report reveals intensified scrutiny of foreign acquisitions by CFIUS.
The Annual Report demonstrates the US government’s continued focus on investigating potential national security threats from foreign investment. It shows that CFIUS proceeds to the investigation stage for a substantial percentage of notified FINSA-covered transactions, and that CFIUS review frequently results in the delay, restructuring, or abandonment of a transaction, or the negotiation of a mitigation agreement with the US government. Understanding the CFIUS process, analyzing potential US government national security concerns, and engaging CFIUS on those concerns are therefore essential aspects of a cross-border acquisition of a US business. This is especially the case when the transaction involves a critical sector of the US economy or a country with which the US has a sensitive relationship.
1 According to the CFIUS regulations, critical technologies include defense articles or services covered by the United States Munitions List (USML); items specified on the Commerce Control List (CCL); nuclear equipment, technology, and materials; and select agents and toxins.