The latest annual report released by the Committee on Foreign Investment in the United States (“CFIUS”) confirms there has been a marked increase in scrutiny of transactions involving foreign investment in the United States. The report, which covers calendar years 2016 and 2017, addresses CFIUS’s activities in the last year of the Obama administration and the first year of the Trump administration. The report covers activities conducted prior to the passage of the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), which gave CFIUS the authority to make review of certain transactions mandatory (see our November 14, 2018 Legal Update) and expanded CFIUS’s jurisdiction in a number of key areas (see our September 18, 2019 Legal Update). Therefore, the trends identified in the latest annual report are likely to continue as FIRRMA is implemented.

In 2016, CFIUS reviewed 172 notices regarding covered transactions, up from 143 during calendar year 2015. In 2017, CFIUS was even busier, reviewing 237 notices of covered transactions.

The sheer number of transactions reviewed by CFIUS increased in 2016 and 2017, as did the scrutiny that CFIUS paid to those transactions. During the period covered by the report, CFIUS’s evaluation of transactions consisted of a 30-day review period and, if necessary, a subsequent 45-day investigation period. (With the enactment of FIRRMA, the initial review period has increased to 45 days.) While approximately 40% of notices during the 2014–2015 period progressed to the investigation phase, this figure increased to more than 60% in the 2016–2017 period. CFIUS’s increased scrutiny of transactions is also apparent in the number of notices withdrawn from CFIUS’s consideration. While fewer than 10% of notices were withdrawn in 2015, 74 notices were withdrawn in 2017—which means that the parties to more than 30% of transactions notified to CFIUS withdrew those transactions from consideration. While the parties to approximately half of these transactions re-filed notices in 2017, in 24 instances, the parties abandoned the transaction entirely, either because CFIUS proposed mitigation measures that the parties did not wish to accept or because CFIUS informed the parties that there were no possible mitigation measures that would alleviate its national security concerns regarding the proposed transaction.

In both 2016 and 2017, CFIUS required mitigation measures for approximately 12% of the transactions it evaluated. These mitigation measures took a variety of forms, including prohibiting the transfer of intellectual property, ensuring limitations on access to technology and information and requiring the appointment of a security-focused member of the board of directors that is approved by the US government. Many investors are aware of the limitations that CFIUS can require, especially on foreign investments in businesses that transact with the US government. But it is also important for investors to remember that, rather than limit interactions with the US government, CFIUS often seeks to ensure that such businesses continue to provide their products or services to the government agencies that rely on them. In 2016 and 2017, for example, CFIUS required supply assurances as mitigation measures in certain transactions and required that parties consult with the government before undertaking business decisions that could affect their ability to supply the government with products or services.

While CFIUS’s evaluation of covered transactions in 2016 and 2017 cut across a number of sectors, transactions in the Finance, Information, and Services sector made up a plurality of the covered transactions that CFIUS reviewed, for the first time since 2009. Though transactions in the manufacturing sector continued to account for a significant portion of CFIUS’s activity during the period, the increase in covered transactions in the Finance, Information, and Services sector may reflect the increased focus by CFIUS on personal data and personal information. Within this sector, the largest subsector involved transactions in Professional, Scientific, and Technical Services.

Not surprisingly, transactions involving investors from China faced particularly close scrutiny from CFIUS in 2016 and 2017, accounting for the highest percentage —nearly 28%—of transactions reviewed during that period% (although it is likely that this percentage has dropped since, as total Chinese investment in the United States has dropped). It is worth noting, however, that CFIUS also reviewed a large number of transactions involving investors from US allies, including Canada (nearly 11% of covered transactions reviewed), Japan (approximately 8%), the United Kingdom (just over 6%), and France (more than 5%). In other words, investors from US allies should not necessarily consider their country of origin to be a “safe harbor.” Many transactions involving such investors could, in the eyes of the US government, still pose a national security risk.

As FIRRMA is implemented, we expect that CFIUS will even further scrutinize transactions involving foreign investors.