Parties to transactions that might implicate US national security interests may elect voluntarily to submit a notification to 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. CFIUS, or the US President, may seek to impose mitigation measures on – or completely block – the transaction if it is deemed to threaten US national security interests.

Parties to transactions that might implicate US national security interests may elect voluntarily to submit a notification to 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. CFIUS, or the US President, may seek to impose mitigation measures on – or completely block – the transaction if it is deemed to threaten US national security interests.

CFIUS recently issued its annual report for calendar year 2014 (the Report). The Report indicates that, in 2014, acquisitions by Chinese foreign acquiring persons accounted for the largest number of transactions reviewed by CFIUS for the third year in a row – 16 percent of all such transactions – and acquisitions by UK foreign acquiring persons tripled from 2013 to 2014 and accounted for 14 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. Over the three-year period 2012-2014, though, CFIUS reviewed about as many acquisitions of US businesses by Asian companies as European companies.

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 2014 were:

  • Lenovo’s acquisition of IBM’s x86 server business and its acquisition of Motorola Mobility from Google;
  • Alibaba Group’s acquisition of AutoNavi Holdings Ltd., a mobile mapping business; and
  • Pudong Science & Technology Co., Ltd.’s acquisition of a minority stake in LightPath Technologies, Inc., an optical and infrared component business.

All of these transactions ultimately were cleared by CFIUS and closed, although the LightPath acquisition is most notable due to the fact that mitigation measures enabled the target to retain its export licenses and other approvals from the US Department of State with respect to its ITAR-controlled products and technology.

In 2014, 147 notifications were reviewed, significantly higher than the 97 notifications reviewed in 2013. No Presidential Orders prohibiting a transaction issued. In keeping with past years, most notified transactions involved the manufacturing sector (approximately 47 percent) followed by the finance, information and services sector (approximately 26 percent) and then the mining, utilities and construction sector (17 percent). CFIUS reviewed more notifications in 2014 than any other year in the past five.

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 2014, 52 of the 147 transactions reviewed, or 35 percent, were subject to the 45-day investigation period.

Parties to a notified transaction have the option under certain circumstances to withdraw a notification, typically either to abandon the transaction or to resubmit 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 2014, 12 notices were withdrawn and only one was reported to have been refiled.

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 2014, CFIUS negotiated mitigation measures for nine 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 for prior approval of foreign national visits to the US business;
  • 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 object if they raise national security concerns.

Overall, the statistics suggest that the CFIUS process continues to be a key consideration for foreign investors acquiring sensitive US businesses.