The Committee on Foreign Investment in the United States (CFIUS), the multi-agency committee charged with conducting national security reviews of acquisitions by foreign persons of US businesses, issued in February 2015 its annual report for calendar year 2013 (Report). Parties to transactions that might implicate US national security interests may elect voluntarily to submit a notification to CFIUS seeking its review and clearance, or face the possibility that CFIUS, or the US President, might seek to impose mitigation measures on (or completely block) the transaction if it is deemed to threaten US national security interests. The Report indicates that in 2013, acquisitions by Chinese foreign acquiring persons accounted for the largest number of transactions reviewed by CFIUS for the second year in a row - 22 percent of all such transactions - and acquisitions by Japanese foreign acquiring persons doubled from 2012 to 2013 and accounted for 19 percent of reviewed transactions.
Historically, UK-based purchasers have accounted for the largest number of transactions notified to CFIUS, followed by other traditional US investors including Canada, France, and Israel. However, over the three-year period 2011-2013, CFIUS reviewed about as many acquisitions of US businesses by Asian companies as European companies. In that period, over 60 percent of the transactions reviewed by CFIUS were from foreign acquiring persons located in Canada, China, France, Japan, and the UK.
Because submission of a notification is voluntary, it is difficult to know whether the data means that Asian investors have increased their investment in the United States generally, in national security-related sectors in particular, or that such investors have decided to notify more investments. CFIUS is required to keep the identities of the notifying parties (as well as in most cases the outcome of the review) confidential, but publicly released information suggests that among the transactions notified by Asian companies in 2013 were Softbank's acquisition of a controlling stake in telecommunications company Sprint, Tokyo Electron's acquisition of semiconductor manufacturer Applied Materials, and Shuanghui International's acquisition of pork producer Smithfield Foods. Each of these transactions ultimately was cleared by CFIUS and closed.
In 2013, 97 notifications were reviewed, a bit below the 114 notifications reviewed in 2012. No Presidential Orders prohibiting a transaction issued. In keeping with past years, most notified transactions involved the manufacturing sector (approximately 36 percent) followed by the finance, information and services sector (approximately 33 percent) and then the mining, utilities and construction sector (21 percent). The dip was short as we expect CFIUS to have reviewed more than 114 notifications in 2014.
The CFIUS review process involves a 30 calendar-day initial review period followed in some cases by a 45-day investigation period. Until 2007, typically far less than 10 percent of all notified transactions were subject to an extended review. Since 2009, the number of investigations initiated each year has held constant at around 35-40 percent. In 2013, 48 of the 97 transactions reviewed, or 50 percent, were subject to the 45-day investigation period. This uptick was due in part to the partial US government shutdown that occurred in October 2013, during which CFIUS was not in a position to clear transactions.
Parties to a notified transaction have the option under certain circumstances to withdraw a notification, typically either to abandon the transaction or to re-submit a notification to extend the review period. Withdrawals typically indicate some level of concern with a particular transaction, although sometimes they result from commercial rather than regulatory problems. In 2013, eight notices were withdrawn and only one was reported to have been re-filed.
CFIUS also reports the number of transactions with respect to which it has negotiated mitigation measures to address national security concerns. These transactions are permitted to proceed subject to certain commitments. In 2013, CFIUS negotiated mitigation measures for eleven different transactions, which is a typical number. CFIUS reports that the mitigation measures involved transactions in the telecommunications, software, mining, oil and gas, manufacturing, consulting and technology industries. Specific mitigation measures imposed included:
- ensuring that only authorized persons have access to certain technology and information;
- establishing a Corporate Security Committee and other mechanisms to ensure compliance with all required actions, including the appointment of a US government-approved security officer or member of the board of directors and requirements for security policies, annual reports, and independent audits;
- establishing guidelines and terms for handling existing or future US government contracts, US government customer information and other sensitive information;
- ensuring only US citizens handle certain products and services, and ensuring that certain activities and products are located only in the United States;
- notifying security officers or relevant US government parties in advance of foreign national visits to the US business for approval;
- notifying relevant US government parties of any awareness of any vulnerability or security incidents; and
- providing the US government with the right to review certain business decisions and to object if they raise national security concerns.
Overall, with the exception of an increase in notifications submitted by Asian-based parties, the other statistics suggest that the CFIUS process continues to proceed in the same manner.