In February 2016, the Committee on Foreign Investment in the United States (“CFIUS”) released its Annual Report to Congress for Calendar Year 2014 (the “CFIUS Report”). CFIUS is a regulatory regime that reviews and investigates foreign direct investments into the United States that implicate national security concerns. Below we have provided a primer on the CFIUS regulations and filing process, as well as a summary of the CFIUS Report.
I. Primer on the CFIUS Regulatory Regime and Voluntary Notice
CFIUS is a federal panel chaired by the Secretary of the Treasury and includes key members of the cabinet of the President of the United States. The CFIUS regime is enshrined in federal statutory law, executive orders, and agency guidance. These rules grant the President of the United States the power to suspend or prohibit a “covered transaction” that threatens to impair the national security of the United States. A “covered transaction” is any merger, acquisition, or takeover by a foreign person that gives such person control of a person engaged in interstate commerce within the United States.
What constitutes a threat to national security has been interpreted broadly by CFIUS, creating uncertainty for foreign companies looking to invest in or acquire U.S. businesses. However, foreign entities planning to invest in the U.S. may file a voluntary notice and submit the transaction for a confidential review by CFIUS, thereby eliminating the risk that the deal will be challenged in the future. The notice must include basic information regarding the transaction, such as the parties, the deal value, and a description of the target. In addition, the filer must provide a description of its own business, a list of its key personnel, its plans with regard to the acquired business, and information regarding any contracts between the target and the U.S. government.
Upon submission of the voluntary notice, CFIUS must review the transaction within 30 days and make one of the following three determinations. First, CFIUS may determine that the transaction is not a covered transaction. Second, CFIUS may determine that the transaction is a covered transaction, but conclude that it does not impair national security or that the threat may be mitigated by negotiating a “mitigation agreement,” which is a contract establishing conditions that minimize the transaction’s threat to national security. Third, CFIUS may commence an investigation of the transaction, which must be completed within 45 days of its commencement. At the end of the investigation, CFIUS may determine that there is no national security issue or that the national security risk can be mitigated. If CFIUS is in a deadlock or concludes that the transaction should be prohibited, it will refer the transaction to the President, who may block the transaction, approve it, or approve it subject to certain conditions.
While each transaction should be examined on a case-by-case basis, regulations and past CFIUS dispositions provide guidance as to when heightened scrutiny of a proposed transaction is likely. Statutory law provides a number of factors that the President may consider in reviewing a transaction, including whether the domestic entity meets national defense requirements, the potential effect of the transaction on sales of military goods to certain countries, the potential effect of the transaction on critical infrastructure, and whether the covered transaction would result in the control of a U.S. business by a foreign government. In addition, transactions involving entities from countries with which the United States has sensitive relationships or transactions involving key industries, such as telecommunications, energy, transportation, and information technology are more likely to invite scrutiny.
II. Summary of the 2014 CFIUS Annual Report
The CFIUS Report reveals that there was a marked increase in the number of CFIUS reviews of foreign investments in the U.S. during calendar year 2014, which is the most recent period for which data is available due to the delayed release of such Annual Reports. While CFIUS reviewed only 97 transactions in 2013, it reviewed 147 transactions in 2014. The manufacturing sector saw the most significant increase and accounted for 47% of all voluntary notices. The percentage of voluntary transaction reviews which were escalated into investigations decreased to 35% in 2014 from 50% in 2013. CFIUS implemented mitigation agreements only 9 times in 2014.
CFIUS’ review of transactions involving Japanese entities decreased from 18 in 2013 to 10 in 2014. In terms of industry sector, between 2012 and 2014, Japanese filers submitted 18 voluntary notices for transactions in the manufacturing sector; 10 in the finance, information and services sectors; 5 in the mining, utilities, and construction sectors; and 4 in the wholesale, retail, and transportation sectors.
Notably, the CFIUS Report indicates that the U.S. intelligence community believes that there may be “an effort among foreign governments or companies to acquire U.S. companies involved in the research, development, or production of critical technologies for which the United States is a leading producer.”CFIUS identified 108 mergers or acquisitions between foreign entities and U.S. companies involving critical technologies. The information technology, electronics, semiconductor, and energy fields showed the greatest number of such transactions. European and East Asian entities were involved in 80 such “critical technologies” transactions, while Japanese investors in particular were party 5 of them. The CFIUS Report’s emphasis in this area suggests that federal authorities may pay closer attention to deals involving providers of critical technologies in the future.
While Japan is not a country with which the United States has sensitive relations, Japanese companies that are investing in the US should nevertheless consider whether a voluntary notice to CFIUS is warranted on a case-by-case basis. Japanese companies investing in or acquiring U.S. businesses involving the defense industry, critical infrastructure, or sensitive technology are advised to retain experienced counsel to guide them through the process of preparing and filing a voluntary CFIUS notice.