Following close on the heels of the President’s decision to block an acquisition by Chinese-backed investors of the US-based Lattice Semiconductor Corporation, the Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”) published on September 20 a long-awaited report to Congress on foreign investments in the United States. The annual report focuses on 2015 and was accompanied by a table with limited summary data on 2016. Data presented by CFIUS highlight an increase in the volume and complexity of CFIUS reviews, the emergence of Chinese acquirers as the top investors before CFIUS, and relative consistency in the proportion of cases approved with and without security commitments known as mitigation agreements. In our experience, these trends are continuing in 2017 under the Trump administration, as CFIUS reviews are taking longer and entail broader questions about buyers’ and sellers’ businesses and prior transactions.
The President is authorized to block or unwind any transaction that may result in control by a foreign person of a U.S. business (“covered transaction”) that could threaten to impair U.S. national security. The President is assisted by CFIUS, a Treasury Department-led interagency committee. For these purposes, “control” sets a low threshold capturing a broad range of foreign investments. The term “national security” is undefined and the President’s national security determinations are not subject to judicial review. While there is typically no legal obligation for a particular investment to be notified to CFIUS, approval by the Committee provides a “safe harbor”. Unnotified transactions may be reviewed and ordered unwound if the President determines it to be necessary for national security.
Continuing Trends in CFIUS Reviews: Increased Caseload, More Investigations, and Consistency in Outcomes and Mitigation Measures
In 2016, CFIUS reviewed a total of 172 notices submitted by parties, a 20% increase from the 143 notices submitted to the Committee in 2015 and a new record total, comfortably exceeding the 155 notices submitted in 2008. The past few years have also witnessed a modest increase in the percentage of notices withdrawn during the CFIUS review process: 8% in 2014 (12 of 147), 9% in 2015 (13 of 143), and 16% in 2016 (27 of 172). However, the proportion of notices that were withdrawn in light of national security concerns has remained roughly constant: 17% in 2014 (2 of 12), 23% in 2015 (3 of 13), and 19% in 2016 (5 of 27). The remainder were withdrawn and refiled, which is often done to give the parties and CFIUS more time to work through issues outside the rigid review timeline, or withdrawn for commercial, procedural, or unrelated regulatory reasons.
However, the proportion of notices that were withdrawn in light of national security concerns has remained roughly constant: 17% in 2014 (2 of 12), 23% in 2015 (3 of 13), and 19% in 2016 (5 of 27). The remainder were withdrawn and refiled, which is often done to give the parties and CFIUS more time to work through issues outside the rigid review timeline, or withdrawn for commercial, procedural, or unrelated regulatory reasons.
CFIUS reviews are also becoming more searching as the proportion of initial notices proceeding past the initial 30-day review period and to the more challenging 45-day investigation period has continued to increase over the years, from 6% in 2006 to 46% in 2016.
This increase in the duration and complexity of the review process, however, has not been accompanied by an increase in the number of transactions requiring legally binding mitigation measures to be cleared. In 2015, the most recent year for which there is data, CFIUS reports that it imposed mitigation measures on 8% of the covered transactions it reviewed (11 of 143), a similar figure to the 6% of covered transactions that cleared with mitigation measures (9 of 147) in 2014.
Home Country of Acquirers with Most Transaction Reviewed Remains Stable
The 2015 CFIUS report also highlighted the continuing prominence of Chinese acquirers. For each reported year since 2012, China has had the largest number of covered transactions, rising steadily from 21 in 2013 to 24 in 2014 to 29 in 2015. As in recent years, the countries whose acquirers represented the next largest number of transactions in 2015 remained fairly constant: Canada (22), United Kingdom (19), Japan (12), and France (8). There were also far fewer covered transaction involving acquirers in Germany (1 in 2015, down from 9 in 2014). continued to increase over the years, from 6% in 2006 to 46% in 2016. The dynamics are almost inverted, however, for acquisitions of U.S. critical technology companies. The 2015 CFIUS report indicates that acquirers in the United Kingdom (21), Canada (20), Japan (8), Germany (7), and France (6) were involved in the largest number of deals, with China (5) following. CFIUS also reports that the largest amount of M&A activity involving foreign acquisitions of U.S. critical technology companies was in the IT and Aerospace & Defense sectors.
The dynamics are almost inverted, however, for acquisitions of U.S. critical technology companies. The 2015 CFIUS report indicates that acquirers in the United Kingdom (21), Canada (20), Japan (8), Germany (7), and France (6) were involved in the largest number of deals, with China (5) following. CFIUS also reports that the largest amount of M&A activity involving foreign acquistions of U.S. critical technology companies was in the IT and Aerospace & Defense sectors.
Trends in 2017
While there is no public data yet available for 2017, all signs point to another record year for the number of covered transactions and to a similarly high volume of transactions involving Chinese acquirers. In recent months, we have also seen CFIUS being increasingly inquisitive, even in cases not involving Chinese investors. We have seen more extensive questions about the corporate structure of acquirers, inquiries into the parties’ past history of transactions in the United States that were not notified to CFIUS, and signs that transactions are being reviewed in the context of the larger geopolitical and industrial policy concerns. The CFIUS process is taking more time, with even the pre-filing consultation process with the Treasury Department extending into weeks or sometimes months. The Trump Administration is still filling key agency positions that oversee CFIUS and the volume of transactions is continuing to increase without any apparent increase in Committee resources. At the same time, we have seen more attempts by disgruntled competitors and other opponents of transactions to leverage the CFIUS process to impede investments.
Potential for CFIUS Legislation
Foreign investment is stoking concerns in advanced markets, with the European Commission President proposing on September 13 that the European Union adopt its own regulation in the area. Please see a previous client alert on the EU proposal. Meanwhile, even as CFIUS has been broadening the scope of its investigations, Congress is considering several proposals to expand the Committee’s jurisdiction and tighten reviews. Trump administration officials have indicated that they believe the focus should remain on national security but seem open to the possibility of amendments that could include real estate transactions and joint ventures abroad. Treasury Secretary Mnuchin stressed, when the President issued his Lattice order, that the United States maintains an open investment policy. However, the evolving investment environment requires businesses to prioritize managing regulatory risks for foreign investments, conducting early risk assessments and developing strategies to navigate the approval process, particularly for transactions involving multiple jurisdictions.