At a Glance…
The Committee on Foreign Investment in the United States (CFIUS) recently published a summary of its Annual Report to Congress for the fiscal year 2015 (the 2015 CFIUS Annual Report) reflecting a trend that has become evident over the last two years: CFIUS is closely scrutinizing more foreign investment transactions and taking action more frequently than in the past. This alert highlights some of the key points from the 2015 CFIUS Annual Report and other recent developments. The 2015 Annual Report is the most recent report released by the Treasury Department—an official report for fiscal year 2016 has not yet been published.
CFIUS is an interagency organization that serves the President in overseeing the national security implications of foreign investment in the United States. CFIUS is charged with reviewing foreign investments and advising the President on appropriate actions that may be necessary to suspend or prohibit foreign acquisitions, mergers, or takeovers which threaten to impair the national security of the United States. CFIUS coordinates the interagency review and CFIUS may propose measures that the parties can take to mitigate national security concerns.
Key Statistics from the 2015 CFIUS Annual Report
The Annual Report provides a summary of all notices filed with and investigated by CFIUS during fiscal year 2015, including statistics regarding the number of notices withdrawn by the parties, and whether any decisions or actions were taken by the President. In addition, the Annual Report provides statistical data regarding the transactions that are the basis of the CFIUS filings, including the transacting parties’ country of origin, the industry sector and relevant business activities that are the basis of the transactions at issue.
- Continued Rise in Voluntary Notices and Resulting Investigations. The number of voluntary notices filed by companies in 2015 was 143. This number is consistent with the sharp uptick in notices filed in 2014 (147—which was nearly 50 percent higher than the number of filings in 2013). This continued increase in CFIUS filings shows that the trend of increasing merger and acquisition activity continued through 2015. The rise in the number of notices that resulted in an investigation by CFIUS from 2014 to 2015 was the largest yearly increase since 2009. There were 66 CFIUS notices that were advanced to the investigation stage in 2015, up from 51 in 2014. That means that in 2015, 46% of cases underwent investigations, up from 35% in 2014. This also continues the trend of increasing numbers of investigations since 2009 (the first full year data was recorded under current CFIUS rules).
- Mitigated and Abandoned Deals. CFIUS imposed or negotiated mitigation measures on 11 of the 143 notices in 2015. In 3 of the 143 notices, parties withdrew their notices and abandoned their transactions due inability to identify mitigation measures that would resolve national concerns or CFIUS proposed mitigation terms that the parties chose not to accept. From 2013 through 2015, 40 cases (10%) required legally-binding mitigation measures. CFIUS ensures compliance with mitigation measures through periodic reporting to U.S. Government (“USG”) agencies by the companies, on-site compliance reviews by USG agencies, and third-party audits, investigations and remedial actions if anomalies or breaches are discovered or suspected. CFIUS summarized in the Annual Report a list of example mitigation measures that it has imposed or negotiated through the CFIUS review process. Mitigation measures negotiated and adopted in 2015 required the businesses involved to take specific and verifiable actions, including, for example:
- Ensuring that only authorized persons have access to certain technology; that only authorized persons have access to USG, company, or customer information; and that the foreign acquirer not have direct or remote access to systems that hold such information
- Establishing a Corporate Security Committee and other mechanisms to ensure compliance with all required actions, including the appointment of a USG-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 USG contracts, USG customer information, and other sensitive information
- Ensuring that only U.S. 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 USG parties in advance of foreign national visits to the U.S. business for approval
- Establishing security protocols to ensure the integrity of goods or software sold to the USG
- Notifying customers regarding the change of ownership. 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. Providing the USG with the right to review certain business decisions and object if they raise national security concerns.
- Manufacturing Industry Leads in Most CFIUS Notices. As in 2014, the manufacturing industry produced the most CFIUS notices in 2015 (48%), followed by Finance, Information, and Services (29%), Mining, Utilities, and Construction (15%), and Wholesale and Retail Trade and Transportation (8%). The manufacturing subsector with the highest percentage of CFIUS filings in 2015 was computer and electronic product manufacturing.
- China Acquisitions Continue to Draw CFIUS Scrutiny. The home country of the largest number of acquirers whose acquisitions were the subject of CFIUS notices filed in 2015 was China (20% of notices filed in 2015), followed by Canada (15%) and the United Kingdom (15%). This is the fourth year in a row that potential Chinese buyers were party to the largest number of deals being reviewed by CFIUS.
Since the Annual Report covers fiscal year 2015, the findings do not necessarily shed light on CFIUS trends that we may be able to see under the stewardship of the new Assistant Secretary of the Treasury, Heath Tarbert, who is expected to oversee CFIUS. During his May 16, 2017 confirmation testimony in front of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Mr. Tarbert stated that one of his priorities will be to “ensure the office of investment security and CFIUS has the tools and resources necessary to do its work.” Short staffing and an increase in foreign investment has spread resources thin at CFIUS and led to delays and work-arounds to the timeline for CFIUS review set forth in the regulations. Mr. Tarbert’s Senate testimony did not reveal his views on any specific types of transactions that may come under CFIUS review. He stressed that CFIUS’ role is to ensure national security interests over considerations of commerce, but noted that CFIUS’ position in the Treasury Department indicates a desire to encourage foreign investment, only scrutinizing deals with national security concerns. Mr. Tarbert did not indicate any intention to change the current CFIUS rules, which require CFIUS to pursue an investigation when state-owned entities are involved.
Nonetheless, based on recent activity, we can expect CFIUS to continue to focus on certain industry sectors, including in particular the manufacturing, production and development of critical technology. In the 2015 CFIUS Annual Report, CFIUS identified 130 completed foreign mergers with or acquisitions of U.S. critical technology. Though this Annual Report covers 2015, based on recent activity, we find it likely that concerns about the acquisition of critical technology discussed in the Report will continue to drive CFIUS investigations. For example, during the last year—and across administrations—CFIUS has shown particular concern regarding Chinese acquisition of U.S. companies involved in the semiconductor business. The third and fourth transactions ever blocked by a U.S. President pursuant to the CFIUS statute related to the acquisition of semiconductor companies by Chinese investors: on December 2, 2016, President Obama blocked the acquisition by Chinese investors of German semiconductor company Aixtron SE, and on September 13, 2017, President Trump blocked the acquisition of Lattice Semiconductor Corp., a U.S. company that manufactures programmable logic chips. It is likely that CFIUS’ focus on M&A activity involving foreign acquisition of companies involved in the Informational Technology and Electronics sector will continue to be a focus.
While U.S. businesses with export-controlled or sensitive technology will always be a key focus for CFIUS, CFIUS is taking an increasing broad view of national security threats to include issues relating to cybersecurity, personal identifiable information, big data, food security, supply chain and transportation networks, financial services and intermediaries, and proximity to U.S. military or intelligence assets, among many other examples. These national security threats may come as a surprise to transaction parties, as CFIUS will have access to information regarding the assets and parties that is not available to the public and may not be known to the parties. All of these factors and trends reinforce the need to think about CFIUS early in the deal and recognize CFIUS as a process that could be a significant factor in the negotiations of the transaction and the expected timeline for closing.