The recently published annual report to Congress by the Committee on Foreign Investment in the United States (CFIUS), a U.S. government interagency committee that conducts national security reviews of transactions that could result in control of a U.S. business by a foreign person, suggests that the committee’s reviews are becoming increasingly stringent. Sweeping conclusions cannot be drawn from a report that covers only the committee’s work in 2013, but the report does include some useful insights, consistent with our experience, that reinforce the message that parties to acquisitions and other corporate transactions in the United States involving foreign persons should assess CFIUS issues at an early stage.
Several highlights from the report are set forth below:
Higher percentage of CFIUS cases proceeding to a second-stage investigation. The percentage of cases that CFIUS could not resolve in its initial 30-day review period increased to nearly 50 percent in 2013, meaning that companies — for planning purposes — likely will have to assume CFIUS’s formal review will last 75 days (30 days for the first stage; 45 days for the second stage). Of the 97 notices that CFIUS reviewed, 48 went to the second stage in 2013. In contrast, from 2009 through 2012, the percentage of cases that proceeded to an investigation hovered just below 40 percent.
CFIUS notes that five cases proceeded to investigation due in part to the U.S. government shutdown of October 2013, but even discounting all five of these cases, over 40 percent of the notices resulted in an investigation. Moreover, if — following the trend of the past few years — 40 percent of these five cases (i.e., two cases) had proceeded to the second stage, that would mean 46 percent of the cases went to the second stage, a discernible increase over prior years. In any case, the data underscores that companies filing notices should proceed with the expectation that their cases will result in an investigation.
More mitigation. The percentage of cases that involved CFIUS imposing conditions to mitigate national security concerns rose from 7 percent in 2012 to 11 percent in 2013. The amount of the increase from 2012 to 2013 is less significant than the longer term trend – just under 10 percent of the CFIUS-reviewed transactions over the past few years have resulted in mitigation.
Mitigation measures can take a variety of forms, from a letter of commitment to a more formal national security agreement (NSA), which essentially is a contract between the parties and certain CFIUS member agencies seeking to address the U.S. government’s national security concerns. The report adds a new type of mitigation measure that was negotiated and adopted in 2013, one forcing a company to grant the U.S. government the right to review certain business decisions and to object if national security concerns are raised. One mitigation measure that CFIUS imposed in connection with the Japanese company SoftBank Corporation’s 2013 acquisition of a controlling interest in Sprint Nextel Corporation appears to track the measure identified in the report. Namely, in Sprint Nextel’s Form 8-K, filed with the Securities and Exchange Commission on May 29, 2013, the company explained that CFIUS conditioned its clearance on the parties entering into an NSA with certain CFIUS member agencies and that one of the NSA’s provisions granted the U.S. government “the right to review and approve certain network equipment vendors and managed services providers of Sprint, as well as of Clearwire once Sprint completes its proposed acquisition of Clearwire.”
Of note, for certain foreign acquisitions that concern defense articles, classified information, or telecommunications, U.S. government agencies, such as the Departments of State, Justice, Homeland Security, and Defense, have the authority and discretion to impose separate mitigation measures that run parallel to those imposed by CFIUS. So, for example, parties to foreign acquisitions involving assets that are subject to the International Traffic in Arms Regulations or otherwise are highly controlled under dual-use or nuclear export controls should assess such transactions very carefully and develop a strategy at an early stage for addressing U.S. government concerns.
- Higher percentage of CFIUS notices withdrawn but not refiled. Seven of the eight CFIUS notices withdrawn in 2013 were not refiled with the committee. One possible explanation for some of these withdrawn-but-not-refiled cases is that they raised significant national security concerns that ultimately scuttled the deals. Although 2012 saw a spike in the number of CFIUS cases withdrawn — 22 — more than half of those were refiled. The total number of withdrawn cases in 2013 (eight) was consistent with the average number withdrawn from 2009 to 2011 (eight), suggesting that the 2012 spike indeed was anomalous. Nonetheless, the 2013 data show a continuing trend of a small number of CFIUS cases being withdrawn and not refiled.
- China again tops the list of filers. For the second consecutive year, companies from China submitted more filings to CFIUS than any other country, with nearly a quarter of the filings involving Chinese buyers. Japan was close behind with 18 notices filed in 2013, doubling its filings from 2012. On the other hand, United Kingdom investors filed only seven notices in 2013, a drop from 17 in 2012.
- Intelligence community confirms foreign efforts to acquire critical U.S. technologies. The report states that the U.S. Intelligence Community (IC) believes that foreign governments are “extremely likely” to continue to use a range of collection methods to obtain critical U.S. technologies. This is unsurprising. The IC also believes that one or more foreign governments or companies may be coordinating their efforts to acquire U.S. firms engaged in research, development, or production of certain critical technologies. The IC’s view on this issue has varied over the past few years — 2010 (no), 2011 (yes), 2012 (no), and 2013 (yes). The variation could be explained by any number of factors, including that coordinated foreign efforts come and go or that the quality of the intelligence collected fluctuates from year to year.