On November 22, 2019, the Committee on Foreign Investment in the United States (“CFIUS”) released its long-awaited Annual Report to Congress covering calendar years 2016 and 2017. While the Annual Report historically has addressed only one calendar year, this report was delayed by a year and covers two years together. The Annual Report does not reflect any of the changes that went into effect following the enactment of the Foreign Investment Risk Review Modernization Act (“FIRRMA”) in 2018. Nevertheless, the report offers insight into the approach CFIUS has taken to assess the national security risks associated with foreign investment under the Trump Administration.1
The report reflects heightened scrutiny of CFIUS cases during 2016 and 2017, with significant increases in the overall number of transactions reviewed, the number of notices that went into a second-stage investigation thus requiring more time for review, and the number of notices that were withdrawn and either refiled or abandoned. Due to the confidentiality of the CFIUS process, the report does not identify transaction, with the exception of parties to the transactions that were the subject of Presidential action.
Below we summarize key takeaways from the report.
1. The Annual Report shows a sustained upward trend in the number of CFIUS filings.
CFIUS noted in the report “a sustained upward trend . . . from 2009 to 2017,” in the number of notices filed, with the number of notices jumping from 65 in 2009, to an average of about 125 between 2010 and 2016, and then up to 237 in 2017.
A table summarizing Notices, Withdrawals, and Presidential Decisions for the years 2014 through 2018 (previously released by CFIUS) shows that the number of notices filed dropped to 229 in 2018. However, the total number of CFIUS filings likely still increased in 2018 because CFIUS began accepting short-form “declarations” in addition to full CFIUS “notices” in November 2018 after the CFIUS pilot program went into effect mandating filings for certain foreign investments involving companies that work with “critical technologies.”
2. The number of investigations increased significantly in 2017.
The number of covered transactions that went to a second-stage “investigation” following the initial “review” by CFIUS increased significantly during the period covered by the report. CFIUS conducted investigations in 35% to 49% of covered transactions between 2009 and 2016, and the percentage increased to 72% of transactions in 2017 and remained high at 69% in 2018.
We anticipate that the extension of the statutorily-defined time period for review from 30 to 45 days that took effect when FIRRMA was passed in August 2018 may give CFIUS the additional time it needs to conclude action on more transactions at the end of the review period without proceeding to an investigation. Anecdotally, we have seen more transactions conclude at the end of the review period recently.
3. Chinese filings were predominant during the period from 2015 to 2017.
The CFIUS report shows that the upward trend in Chinese investment in U.S. businesses continued from 2015 to 2017. Over that period, Chinese investors filed the largest number of CFIUS notices for covered transactions (i.e., transactions that are subject to CFIUS jurisdiction), with 143 filings, constituting approximately 26% of all covered transactions during this period. Investors from Canada were a distant second with just 66 transactions (12%) over that period. Japanese investors had 46 transactions (8.3%), and investors from the United Kingdom had 44 (8.0%). In 2017 alone, Chinese investors had 60 out of a total of 237 covered transactions.
The increase in the number of Chinese investments and correspondingly in the number of challenging CFIUS reviews strained CFIUS’s ability to review transactions in a timely manner. Transaction parties saw timelines for getting through the pre-filing process and getting transactions on the “clock” for review increase, and a majority of transactions went to the investigation stage before the CFIUS process was completed. In some cases involving the negotiation of mitigation measures -- or in the case of some post-closing reviews, the negotiation of an orderly process for divestiture -- CFIUS notices were withdrawn and refiled multiple times to allow additional time to address the issues.
The investments in 2017 may represent a high-water mark for Chinese investment in the United States. The Rhodium Group reports that Chinese foreign direct investment in the U.S. dropped over 80% in 2018 from 2016 and 2017. The impact of this decrease – generally attributable to trade tensions – is likely to be reflected in the next CFIUS annual report.
4. The report reflects a large increase in the number of withdrawn and abandoned notices, particularly in 2017.
In recent years, there has been a significant increase in the number of transactions that were withdrawn. In the period between 2009 and 2016, the percentage of notices withdrawn averaged just over 10%. In 2017, however 31% were withdrawn, and the number remained high in 2018 with 29% withdrawn. While the reasons for withdrawals can vary, the number of notices withdrawn because transactions were abandoned for national security reasons increased significantly in 2017 with 24 of 237 transactions abandoned (10%), and remained high in 2018 with 17 of 229 transactions abandoned (7.4%) for national security reasons.
In 2016, 172 notices were filed and 27 were withdrawn. Of those withdrawn:
- 15 were refiled as a new notice – for instance, to negotiate mitigation measures
- 12 were abandoned
- 3 for CFIUS-related national security reasons
- 5 for failure to satisfy CFIUS process requirements
- 4 for commercial reasons unrelated to CFIUS
In 2017, 237 notices were filed and 74 were withdrawn. Of those withdrawn:
- 44 were refiled by the parties
- 30 were abandoned
- 24 for CFIUS-related national security concerns
- 2 for failure to satisfy CFIUS process requirements
- 4 for commercial reasons unrelated to CFIUS
In 2018, 229 notices were filed and 66 were withdrawn. Of those withdrawn:
- 45 were refiled by the parties
- 21 were abandoned
- 17 for CFIUS-related national security concerns
- 4 for other reasons (either failure to satisfy CFIUS process requirements or commercial reasons)
5. Two transactions were blocked by Presidential orders.
The CFIUS Annual Report highlights that deals were blocked by the President of the United States in both 2016 and 2017.
- In 2016, President Obama prohibited the acquisition of the U.S. assets of Aixtron SE (of Germany) by a German company whose ultimate parent is Fujian Grand Chip Investment Fund LP of China. Aixtron is a high-tech supplier to the semiconductor industry.
- In 2017, President Trump prohibited the acquisition of Lattice Semiconductor Corporation by a Delaware company ultimately owned and controlled by China Venture Capital Fund Corporation Limited, which is owned by several Chinese state-owned entities.
This marks a trend toward more presidential prohibitions of deals based on national security issues. In contrast, only two CFIUS transactions resulted in a presidential determination prior to 2016. In 1990, President Bush directed China National Aero-Technology Import and Export Corporation to divest MAMCO Manufacturing, and in 2012, President Obama directed Ralls Corporation and its co-investors to divest four Oregon wind farm project companies. Notably, the prior presidential actions both occurred post-closing. In the Aixtron and Lattice Semiconductor transactions, the President acted to block the transactions prior to their consummation.
Though not part of the CFIUS Annual Report, we note that in 2018, President Trump prohibited the acquisition of Qualcomm Inc., a semiconductor chip manufacturer, by Broadcom Ltd. of Singapore by preventing a hostile takeover of Qualcomm’s board of directors.
6. CFIUS adopted mitigation measures with respect to approximately 10% of notices in 2016 and 12% of notices in 2017.
The use of mitigation measures to address national security concerns in 2016 and 2017 represents only a slight increase over prior years. For the period from 2009 through 2017, mitigation measures were imposed in approximately 8.8% of transactions. In addition, some transactions that were abandoned in 2016 and 2017 likely were abandoned because the mitigation required by CFIUS was deemed unacceptable by the parties.
Mitigation measures imposed in recent years include, among others:
- Prohibiting transfer of intellectual property and trade secrets to foreign acquirors;
- Ensuring only authorized persons have access to certain technology;
- Establishing terms for handling U.S. Government contracts;
- Establishing Corporate Security Committees to ensure compliance;
- Requiring notification before foreign nationals visit acquired U.S. businesses;
- Excluding certain sensitive assets from transactions; and
- Requiring divestiture of sensitive assets from transactions.
Compliance is enforced through reporting, on-site compliance reviews, audits and investigations.
7. Consistent with prior years, transactions in the Manufacturing Sector and in the Finance, Information and Services Sector accounted for the largest percentage of notices filed.
In the Manufacturing Sector, which accounted for more than a third of all notices filed (67 notices in 2016 and 82 in 2017), the Computer and Electronic Products Manufacturing and Chemical Manufacturing subsectors had the most notices.
In the Finance, Information and Services sector, which accounted for 40% of notices in 2016 and nearly half (46%) in 2017, the Professional, Scientific, and Technical Services subsector had the most notices, with 20 in 2016 and 40 in 2017. The Telecommunications and Real Estate subsectors also saw a significant number of filings, with roughly ten filings per year each.
8. CFIUS declined to provide an unclassified assessment of foreign government coordination but warns that espionage and other methods will be used to obtain U.S. critical technologies.
As in the Annual Report for 2015, CFIUS has again declined to provide an assessment of whether there is credible evidence of a coordinated strategy to acquire critical technology companies in its public report on the grounds that a meaningful assessment cannot be provided on an unclassified basis. However, with respect to whether foreign governments use espionage activities to obtain commercial secrets related to critical technologies, the report notes that the U.S. intelligence community judges that “foreign governments are extremely likely to use a range of collection methods to obtain critical U.S. technologies” and warns that these efforts will represent “a growing and persistent threat” to U.S. economic security.
The Annual Report covers information for the time period leading up to the passage of the CFIUS reform law, FIRRMA, which now is in the process of being implemented. While the prevalence of certain industry sectors, the use of certain mitigation measures and other factors covered in the report remain as relevant today as they did in 2016 and 2017, significant changes are being made to the CFIUS process and the scope of the Committee’s jurisdiction pursuant to FIRRMA. We are following these developments closely. Our report on the proposed regulations CFIUS released to implement to FIRRMA is available here.