The recently published annual report of the Committee on Foreign Investment in the United States (“CFIUS” or “Committee”) for calendar year 2014 makes clear that parties to potential foreign investment in the United States must remain alert to the role of CFIUS. Not only does CFIUS continue to play an important role in regulating such transactions, but also CFIUS and its member agencies have become an increasingly diligent, opportunistic collector of detailed information about foreign investments and investors (both individual and corporate) in any product or locale that may have an impact on U.S. national security interests. The Report makes clear that CFIUS is reviewing an ever-increasing number of foreign investments in the United States. While, in the past, investments from Europe (particularly the United Kingdom) made up the majority of transactions reviewed by CFIUS, the Committee increasingly receives more notices relating to Chinese investors than investors from any other single country. Additionally, investments involving “critical technologies” – including products subject to U.S. export control regulations, nuclear-related materials, semi-conductors, and others – represented the largest focus for CFIUS review in 2014.
The 2014 CFIUS Annual Report
CFIUS is a multi-agency U.S. government committee chaired by the U.S. Treasury Department and including participants from the Intelligence Community, the Departments of Defense, State, Commerce, and others. It reviews transactions that could result in control by a foreign person of a U.S. business (“covered transactions”), in order to determine the effect of such transactions on the national security of the United States. As required by statute, CFIUS releases an annual report each year. While the unclassified version of this most recent report does not identify specific transactions, it does provide consolidated data on all notices of covered transactions filed with the Committee during the 2014 calendar year and all reviews and investigations completed during that year.
In 2014, parties filed 147 notices that CFIUS determined related to covered transactions under section 721 of the Foreign Investment and National Security Act of 2007 (“FINSA”). This continues a general trend of increasing numbers of filings each year since 2009, with only 2013 seeing fewer notices than in previous years. CFIUS conducted a review of each notice and a subsequent investigation of 52 of those noticed transactions. Ultimately, of the notices filed in 2014, twelve notices were withdrawn, one of which was later refiled in 2015, and one notice was rejected.
The Report presents an interesting opportunity to help predict potential CFIUS interests and activities in the future. In particular, all parties considering entering into a transaction involving the potential acquisition of control of a U.S. business by a foreign person should anticipate the possibility of CFIUS review and the concerns of the Committee and its members when initially analyzing and structuring those transactions. Early attention to these issues may allow parties both to understand better the potential risks involved and to take steps to minimize those risks in advance.
A notable change identified in this report is the apparent shortening of the amount of time the Committee took to review covered transactions between 2013 and 2014. Although the number of covered transactions requiring an additional 45-day investigation increased steadily between 2009 and 2014, the percentage of transactions moving to the investigation stage decreased sharply from nearly 50 percent in 2013 down to 34.7 percent in 2014, the first time since 2009 that fewer than 35 percent of covered transactions required the extended review. While CFIUS continues to assert that each notice is reviewed on a case-by-case basis, this is an encouraging and commendable trend if it continued in 2015 (for which data is not yet available) and beyond.
Continued Prevalence of Chinese Investors
Chinese investors continued to account for both the greatest number and the greatest percentage of covered transactions noticed in 2014 with 24 notices or 16 percent of the total. In the period between 2012 to 2014, Chinese investors accounted for a combined 68 notices, nearly 20 percent of all notices of covered transactions made to the Committee. During that period, nearly half of the notices involving Chinese investors related to companies in the manufacturing sector.
Investors from the United Kingdom followed those from China with 45 notices or 13 percent over the 2012-2014 period, including two notices involving investors with joint US and UK investors. UK investors filed 21 notices or 14 percent in 2014 alone, a sharp increase from 2013 when UK investors accounted for only seven notices. In addition to those from the United Kingdom, investors from Australia, the Cayman Islands, Germany, Hong Kong, Israel, the Netherlands, South Korea, and Switzerland filed more than twice as many notices in 2014 than in the year before.
Acquisition of Critical Technologies
The report also includes an assertion by the US Intelligence Community that foreign investors may have a coordinated strategy to acquire US companies involved in “Critical Technologies,” defined as items covered by the United States Munitions List (“USML”), items on the Commerce Control List (“CCL”), certain nuclear related materials, and items covered by the Select Agents and Toxins regulations. By reviewing information submitted in notices to the Committee, publicly available information, and agency records, the Committee identified 108 completed transactions involving foreign acquisition of companies involved in Critical Technologies in 2014. Notably, more than half of the completed transactions involving Critical Technology pertained to investors from Europe, far exceeding the involvement of investors from any other area of the world. While Chinese investors have been involved in the greatest number of covered transactions during each of the years 2012-2014, the United Kingdom was involved in 22 transactions involving the acquisition of Critical Technology companies, more than three times as many such transactions as was China in 2014. Canada, France, and Switzerland (with nine, seven, and eight transactions, respectively) also outpaced China in Critical Technology-related transactions during that time.
While supporting evidence is not provided in the unclassified version of the report, the Committee repeated the view of the Intelligence Community that foreign governments are likely to continue using a range of methods to obtain Critical Technologies, including through what the Intelligence Community views as a potentially coordinated effort.
Continued Investment in Manufacturing
While the covered transactions noticed in 2014 involved a wide range of business sectors, manufacturing (69 notices or 47 percent) and finance, information, and services (38 notices or 26 percent) accounted for nearly three quarters of such notices, with mining, utilities, construction, wholesale, retail, and transportation making up the remainder. Manufacturing, which has been the most frequently represented sector since 2010, saw an increase of more than 10 percent over 2013. Within manufacturing, the computer and electronics sector accounted for 42 percent (29 notices), by far the largest segment of manufacturing. Over the past five years, more companies manufacturing computers and electronic products have been the subject of covered transactions than have any other type of company.
An Increase in Withdrawn Notices
In 2014, while most transactions submitted to CFIUS were ultimately approved, CFIUS permitted the withdrawal of 12 notices, three (two percent of noticed covered transactions) during the initial 30-day review period and nine (six percent of noticed covered transactions) during the 45-day investigation period. The Committee reported that one of the 12 transactions withdrawn in 2014 was resubmitted in 2015. While the 12 withdrawals in 2014 is an increase over 2013, it is significantly below the highpoint of 23 withdrawals that occurred in 2008 (15 percent of noticed covered transactions). Since 2006, the number of withdrawals in each year has varied widely, swinging from five to 20 percent with no consistency from year to year. Importantly, parties may choose to withdraw a notice for any number of reasons, including an inability or unwillingness to address Committee concerns, material changes to the noticed transaction requiring an updated notice, or because the transaction is being abandoned. Although it is possible that the current uptick in withdrawals is related to the Committee’s requests for information or mitigation that parties are unwilling to provide, the increase in the number of withdrawals in 2014 is not significant enough, when compared to withdrawals in other years since 2006, to indicate a general trend.
Decreasing Application of Mitigation
In 2014, nine covered transactions (six percent) resulted in mitigation measures. This is a smaller percentage of transactions than has been the average over the period from 2012-2014, in which eight percent of covered transactions resulted in mitigation measures. Despite the decrease in the use of mitigation, the types of mitigation measures adopted in 2014 are significant and may constitute a heavy burden on covered business operations. Those mitigation measures included establishing policies and procedures relating to limiting access to products, services, and facilities by foreign parties; various government notification requirements; and ongoing obligations to allow the government to review business decisions for national security implications.
For each mitigation measure, the Department of Treasury assigns a CFIUS member agency to act as government signatory, and five agencies were so assigned for the mitigation measures approved by the Committee in 2014. These signatories are responsible for monitoring the application of mitigation and reporting back to the Committee.
The figures provided in this most recent report should not be considered in isolation. While parties should be aware of the Committee’s ongoing attention to the potential for coordinated efforts to obtain Critical Technologies, it is important to note that the Committee continues to consider a wide variety of transactions as potentially having an adverse effect on national security. This can include companies and industries that are not traditionally viewed as having any relation to national security. For example, the acquisition of a business in what may be considered a mundane industry with relatively little advanced technology may be considered to be the proper subject of a CFIUS notice because it is physically located in close proximity to a sensitive government facility.
As the Committee continues to act as a major regulator of foreign investment into the United States, potential investors and potential targets should review CFIUS requirements and procedures and seek experienced counsel to analyze fully the risks associated with potential CFIUS review. In particular, despite the increasing percentage of covered transactions resolved during the initial 30-day review period in 2014, parties should continue to take into account the possibility of an additional 45-day investigation when setting forth transaction timelines and other plans. Accordingly, we advise parties to continue to consider national security concerns, including CFIUS review, as early as possible in assessing potential transactions involving foreign investors.