On July 31, 2020, the Committee on Foreign Investment in the United States (CFIUS) released its latest annual report, detailing its reviews of foreign investment in the United States during 2019. The report covers the first full calendar year following the passage of the Foreign Investment Risk Review and Modernization Act of 2018 (FIRRMA), which made the submission of certain transactions to CFIUS mandatory and expanded CFIUS’s jurisdiction in several key areas (see our previous Legal Update detailing FIRRMA’s changes).
While FIRRMA’s changes were not fully implemented during the period covered by the annual report, a pilot program mandating certain filings was in effect throughout 2019. That pilot program addressed transactions involving “critical technologies” and has since been largely subsumed into the FIRRMA regulations finalized in February 2020 (see our previous Legal Update on the pilot program). CFIUS’s 2019 annual report is the first to include mandatory filings, and this expansion of CFIUS’s jurisdiction is reflected in CFIUS’s activity throughout the reporting period.
CFIUS reviewed 94 short-form Declarations submitted pursuant to the mandatory pilot program in 2019. These reviews were in addition to CFIUS’s review of 231 long-form Notices (a figure that was virtually unchanged from 2018, when CFIUS reviewed 229 Notices). After reviewing a Declaration, CFIUS can either (1) inform the parties that there are no unresolved national security concerns regarding the transaction, (2) request that the parties submit a long-form Notice regarding the transaction or (3) inform the parties that CFIUS is unable to complete its review on the basis of the Declaration and that the parties may submit a Notice if desired. In 26 of the Declarations it reviewed, CFIUS requested that the parties file a Notice. CFIUS informed the parties in 32 transactions that it was not able to complete action on the basis of the Declaration and the parties in 35 transactions that it had completed its review and there were no national security concerns.
Of the 231 Notices filed in 2019, 113 (49%) proceeded to the 45-day investigation phase. This is a significant drop compared to 2018, when 69% of the 229 Notices went to the investigation phase. The report attributes this drop in investigations to FIRRMA’s extension of the statutory review period for Notices from 30 to 45 days. Parties withdrew 30 Notices after the start of the investigation period in 2019, a decrease in withdrawals of 55% over the previous year. Of these 30 withdrawals, roughly half were subsequently re-filed, and half were abandoned.
In 2019, CFIUS required mitigation measures for 33 Notices. These mitigation measures were typical of those historically required by CFIUS and included restrictions on transfers of intellectual property, the appointment of a Corporate Security Committee to ensure compliance with internal security procedures, the exclusion of sensitive assets from a transaction and the divestiture of all or some of the US business at issue in a transaction.
Notices from the Manufacturing sector and the Finance, Information, and Services sector made up approximately 75% of all CFIUS Notices in 2019. This is also largely in line with recent trends, as these two sectors have consistently made up a majority of the Notices that CFIUS has reviewed. By comparison, Notices from the Mining, Utilities, and Construction sector returned to 2016-2017 levels following a marked increase in 2018.
2019 also saw a continued decrease in investment from China, as only 25 Notices reviewed in 2019 involved Chinese investors—less than half as many as in 2018, when 55 Notices involved Chinese investors. Transactions involving investors in Japan were the basis of 46 Notices in 2019, the highest count for any country and constituting 20% of all Notices filed. Canadian investors were involved in 23 Notices (10%) in 2019, while investors from the United Kingdom, France and Germany were involved in 13 Notices (5.6%) each. These trends were also reflected in the mandatory pilot program; investors from China were involved in only three mandatory Declarations in 2019, while investors from Japan and Canada were involved in 14 and 12, respectively.
The 2019 annual report provides important data that is generally in line with what CFIUS practitioners have observed in the marketplace. With the new FIRRMA regulations now implemented, which allow Declarations to be filed for all transactions, investors should closely monitor these trends and CFIUS’s execution of its expanded jurisdiction.