The Committee on Foreign Investment in the United States ("CFIUS"), a multiagency U.S. regulatory body empowered to review investment transactions involving a foreign person and a U.S. business that may affect U.S. national security, recently delivered its unclassified Annual Report to Congress for the calendar year 2015 (“Annual Report”) and certain statistics for calendar years 2014-2016. The most notable trends are that the number of CFIUS filings remained relatively steady in 2015 before significantly increasing in 2016, while the frequency of 45-day investigations significantly increased. Additionally, in 2016, the number of notices withdrawn more than doubled compared to 2014 and 2015. This indicates a general trend that CFIUS reviews have become more unpredictable and longer on average. Also, for the fourth straight year, Chinese investors have filed the greatest number of CFIUS notices. Since the unclassified Annual Reports are issued well after the covered period (and this report was released at least seven months later than in previous years), the data is necessarily outdated to some extent. Nevertheless, since CFIUS is a confidential process and these are the most comprehensive official statistics released by CFIUS, they provide great insight into investment trends and U.S. policy-making.
As in previous years, and as required by the Foreign Investment and National Security Act of 2007 (“FINSA”), the Annual Report summarizes CFIUS’s activities during the covered period, including the number and disposition of CFIUS notices, the nature and prevalence of mitigation arrangements, and the geographic source and sector concentration of covered transactions. In addition, the Annual Report describes its 2015 calendar year activities in comparative and cumulative perspective for the years 2009- 2015. We have set forth below a brief summary of the key data points of the Annual Report, which highlights the need for parties to consider CFIUS-related issues in the transactional context. In accordance with the legal prohibition against public disclosure of such information, the Annual Report contains no information with respect to specific transactions. Nonetheless, it remains a remarkable window into the reach and operation of CFIUS, and its impact on transactions involving U.S. businesses. Key Data Points A. Notices In 2015, 143 CFIUS notices were filed and determined to describe “covered transactions,” or transactions within CFIUS’s regulatory purview. The number of notices filed in 2015 represents a slight decrease compared to the 147 notices filed in 2014, but a continuation of the general rising trend in CFIUS filings since 2009. This largely reflects the strong M&A market in 2015, rather than any change in CFIUS practice. However, it may also reflect parties’ recognition of CFIUS’s broad view of national security and a Fried Frank International Trade and Investment Alert™ No. 17/09/21 09/21/17 2 greater willingness to file a voluntary notice in order to secure the CFIUS safe harbor, as well as increased investment from China. One notice was rejected in 2015. CFIUS informed the parties that it rejected the notice because the U.S. government possessed information that contradicted information provided in the notice submitted by the parties. The parties subsequently abandoned the transaction. The preliminary numbers published for 2016 indicate that 172 notices were filed and determined to describe covered transactions. This represents a significant (17% over 2014 and 20% over 2015) increase from 2014 and 2015. This trend appears to be continuing, as commentators and public officials have indicated that 2017 is currently on pace for a record 250 notices. These numbers have put stress on CFIUS’s limited resources, and the resulting backlog is one reason for increasing delays in the CFIUS process and for more cases proceeding to investigation. B. Withdrawn Notices Of the 143 transaction notices filed in 2015, three were voluntarily withdrawn from CFIUS consideration during the initial 30-day review and ten were voluntary withdrawn during the subsequent 45-day investigation phase. According to the Annual Report, eight of these notices was resubmitted in 2015. Of those eight notices, three were eventually withdrawn and abandoned because CFIUS was unable to identify mitigation measures that would resolve its national security concerns or CFIUS proposed mitigation terms the parties chose not to accept, one was eventually withdrawn and abandoned for commercial reasons, and one was refiled in 2016, but that notice was withdrawn and abandoned before CFIUS completed its national security assessment. While CFIUS notices may be withdrawn for a variety of reasons (both related and unrelated to CFIUS itself), these statistics indicate that at least certain deals were scuttled as a result of the CFIUS process. In 2016, of the 172 transaction notices filed, twenty-seven notices were withdrawn – over double the number withdrawn in the two previous years. Of those twenty-seven notices, fifteen were withdrawn and refiled, five were withdrawn and abandoned because CFIUS was unable to identify mitigation measures that would resolve its national security concerns or CFIUS proposed mitigation terms the parties chose not to accept, and seven were withdrawn for other reasons. This represents a dramatic upward trend in the chances that a CFIUS notice would eventually be withdrawn – an increase from 9% in 2015 to almost 16% in 2016. This salient development, which by all accounts has continued in 2017, reflects increased CFIUS scrutiny of certain transactions, buyers, and industries. The historical pattern by which very low numbers of CFIUS notices ultimately failed to gain approval no longer holds in all cases, and the CFIUS risk analysis for transactions should reflect that new reality. C. Investigations and Presidential Review In 2015, 66 (or 46%) of the 143 notices for “covered transactions” went beyond the initial 30-day review and into the 45-day investigation phase. The percentage of notices moving into the investigation phase increased from 2014 (34%). It is also marginally higher than the 39% average since 2009. The percentage of notices proceeding to investigation is the second-highest in recent years (behind 2013’s 49%) and the number (66) is the highest in recent years. This high number indicates that CFIUS continues to review many transactions that require additional time to process, due to various reasons ranging from increased transactional complexity to a backlog in CFIUS’s workload. The large number of investigations is also important in the transactional context because a prolonged process may create delay and uncertainty regarding deal timing. Fried Frank International Trade and Investment Alert™ No. 17/09/21 09/21/17 3 The President did not block any transactions in 2015. The last year covered by an Annual Report in which there was a blocked transaction was 2012. There have been two transactions blocked since 2015 – the proposed acquisition of Aixtron and the proposed acquisition of Lattice Semiconductor Corporation, both by Chinese acquirers. In 2016, 79 (or 46%) of the 172 notices for “covered transactions” proceeded to 45-day investigation. This indicates that the upward trend shown by the 2015 Annual Report was not an outlier, and should serve as a notice to parties considering filing with CFIUS that a 45-day investigation is approximately a 50/50 outcome. D. Notices Filed by Country of Origin Transaction notices were filed in 2015 by prospective acquirers from 28 different countries. In 2015, the following countries accounted for the highest number of notices: China (29) Canada (22) United Kingdom (19) Japan (12) These countries have remained at the top of the list for several years. China remains in the top spot for the fourth year in a row. Anecdotal data suggests that this pattern has continued into 2016 and 2017 due to increased liquidity in Asia and Chinese companies’ search for new markets in light of the slowdown of the Chinese economy. There were notable increases in filings since 2014 from Canada, the Cayman Islands, and China, while there were notable decreases in filings since 2014 from Germany, the Netherlands, Singapore, and South Korea. Finally, filings were made by acquirers in the following countries that had not made filings in 2013 or 2014: Belgium, Denmark, Italy, Portugal, South Africa, and Turkey. E. Mitigation Measures In 2015, eleven (or 8%) of the covered transactions were approved by CFIUS subject to the acceptance of mitigation arrangements, compared to nine (or 6%) in 2014, and the 2013-2015 average of 10%. Pursuant to these arrangements, the parties were required to take one or more of the following actions: Ensure that only authorized persons have access to certain technology and information; Establish a Corporate Security Committee and other mechanisms to ensure compliance with all required actions, including the appointment of a U.S. Government (“USG”) approved security officer or member of the board of directors, and requirements for security policies, annual reports, and independent audits; Establish guidelines and terms for handling existing or future USG contracts, USG customer information, and other sensitive information; Ensure that only U.S. persons handle certain products and services, and ensuring that certain activities and products are located only in the U.S.; Notify security officers or relevant USG parties in advance of foreign national visits to the U.S. business; Security protocols to ensure the integrity of goods or software sold to the USG; Notifying customers regarding the change of ownership; Fried Frank International Trade and Investment Alert™ No. 17/09/21 09/21/17 4 Assurances of continuity of supply for defined periods, and notification and consultation prior to taking certain business decisions, with certain rights in the event that the company decides to exit a business line; Established meetings to discuss business plans that might affect USG supply or national security considerations; Exclusion of certain sensitive assets from the transaction; and Provide the USG with the right to review certain business decisions and to object if those decisions raise national security concerns. The final measure of allowing the USG to review certain business decisions and object is only being included in this Annual Report for the second time, while the other measures are more longstanding. In addition, it is important to note that CFIUS member agencies have taken a number of steps to enhance their ability to monitor compliance with the mitigation arrangements they may require, including: Periodic reporting to USG agencies by the companies; Onsite compliance reviews by USG agencies; Third-party audits when required by the terms of the mitigation measures; and Investigations and remedial actions if anomalies or breaches are discovered or suspected. F. Industry Sectors As in previous years, notices were filed in connection with transactions in a wide variety of sectors, with the bulk of transactions in the Manufacturing and Finance, Information, and Services sectors. The notices filed in 2015 were divided among four industry sectors as follows: Manufacturing (42%); Finance, Information, and Services (32%); Mining, Utilities, and Construction (18%); and Wholesale Trade, Retail Trade, and Transportation (8%). This distribution is largely in line with historical averages, with manufacturing deals being slightly more common than average in 2015 and finance, information, and services and mining, utilities, and construction deals being slightly less common than average. Within the Manufacturing sector, computer and electronics products remained the largest subsector (46% in 2015), which is largely in line with historical averages, with machinery and transportation equipment the next two largest sectors (11 and 13% each in 2015, respectively). Within the Finance, Information, and Services sector, professional, scientific, and technical services remained the largest subsector (53% in 2015), which is above recent averages. In the Wholesale, Retail, and Transportation sector, half of the filings related to support activities for transportation. This subsector includes air traffic control services, cargo handling, and motor vehicle towing, among other areas. Within the Mining, Utilities, and Construction sector, over half of the filings related to investments in utilities. G. Acquisition of Critical Technology Companies The 2015 Annual Report noted that a meaningful summary of the U.S. Intelligence Community (USIC) assessment regarding a coordinated strategy to acquire U.S. critical technologies through transactions cannot be provided on an unclassified basis. This is in contrast to the 2014 Annual Report, which noted that the USIC judged that there “may be” an effort among foreign governments or companies to pursue transactions with U.S. businesses “involved in research, development, or production of critical technologies for which the United States is a leading producer.” In the 2012 Annual Report, the USIC found that it was unlikely that there was a coordinated strategy among one or more foreign governments to acquire U.S. critical technology companies. Whether a U.S. business deals in critical technology is one national security factor that CFIUS must consider under FINSA. In line with prior reports, the 2015 Annual Fried Frank International Trade and Investment Alert™ No. 17/09/21 09/21/17 5 Report again noted that the USIC believes that it is “extremely likely” that foreign governments will use a range of collection methods, including espionage, to obtain U.S. critical technologies. Conclusion The Annual Report and 2016 data both show the continuance of certain trends that have significant implications for parties to foreign investment transactions. CFIUS continues to process record numbers of filings, taxing its resources. As a result, CFIUS processing times may be significant in a large number of cases, and an increasing number of cases are being forced to withdraw and refile, potentially for only timing/resource management reasons. At the same time, mitigation arrangements continue to be required on a regular basis and a non-trivial (and increasing) number of deals are abandoned during the CFIUS process. These and other factors indicate the importance of early planning in the transactional context. In order to decrease the risk that CFIUS disrupts a deal, it is critical to conduct CFIUS-related due diligence and to account for the CFIUS process – including potential uncertainty in timing and consequences – in the transactional documents. If you have any questions regarding the Annual Report or Fried Frank’s CFIUS practice, please reach out to the contacts listed below. * * * Fried Frank International Trade and Investment Alert™ No. 17/09/21 09/21/17 6 A Delaware Limited Liability Partnership Fried Frank International Trade and Investment Alert™ is published by the International Trade and Investment Practice Group of Fried, Frank, Harris, Shriver & Jacobson LLP. Fried Frank International Trade and Investment Alert™ is provided free of charge to subscribers. If you would like to subscribe to this E-mail service, please send an E-mail message to CRMTeam@friedfrank.com and include your name, title, organization or company, mail address, telephone and fax numbers, and E-mail address. To unsubscribe from all Fried Frank E-mail Alerts and electronic mailings, send a blank E-mail to email@example.com. Authors: Michael T. Gershberg Justin A. Schenck This alert is not intended to provide legal advice, and no legal or business decision should be based on its content. If you have any questions about the contents of this alert, please call your regular Fried Frank contact or the attorneys listed below: Contacts: Washington, D.C. Michael T. Gershberg +1.202.639.7085 firstname.lastname@example.org London Dr. Tobias Caspary +44.20.7972.9618 email@example.com Fried Frank’s International Trade and Investment Group regularly represents clients in international mergers and acquisitions, joint ventures, principal investments, and sensitive corporate investigations, particularly in relation to matters that implicate the U.S. government's regulation of international business activities, such as the Committee on Foreign Investment in the United States (CFIUS), economic sanctions, export controls, and anti-corruption and anti-bribery. 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