Nearly a year and half later, the Committee on Foreign Investment in the United States (CFIUS or Committee)1 has yet to issue its statutorily required annual report for CY2015. This delay degrades the potential value of its content and raises more significant concerns for parties considering filing with CFIUS. We know that CFIUS’ docket is exploding, and we suspect that this publication delay is evidence that CFIUS is expending all of its limited resources elsewhere. While we are still waiting for the official numbers for 2015, we know that CFIUS reviewed 147 cases in 2014 and we know CFIUS broke its 2008 record by reviewing a historic 173 cases in 2016.2 Further, we suspect that CFIUS is having a record first half of this year, and if that rate continues, CFIUS could easily review more than 200 cases in 2017.
CFIUS is facing significant challenges beyond an increased number of cases that are stressing the Committee’s limited resources to their breaking point: every Committee member has significant voids in key political leadership positions, some Committee members are facing the looming threat of significant budget cuts, and every Committee member is impacted by the lingering effects from the federal hiring freeze. As a result, CFIUS is both taking much longer to accept formal filings and sending more cases than ever before into the second-stage investigation period. Until these challenges are resolved, it will become increasingly difficult for parties to transactions with possible US national security implications to accurately predict how long it will take to complete a CFIUS review.
These challenges, combined with the uncertainties associated with how President Trump’s administration will leverage CFIUS and whether Congress will pursue material CFIUS reforms, highlight the need for transacting parties to seriously consider voluntarily submitting a notification to CFIUS as early as possible. Because the US national security regime is voluntary, counsel for the parties to a transaction typically consult with each other about the national security profile of a particular transaction to determine whether a filing is warranted. While there is no legal obligation to file, filing offers significant benefits:
1. obtaining a CFIUS clearance provides a safe harbor against a future presidential prohibition or divestment,3 provided parties comply with obligations under the statute;
2. filing may ensure that relevant government security clearances and licenses are not jeopardized; and
3. filing in parallel with regulations involving clearances and licenses can be more efficient.
A look back
Since the passage of FINSA, transacting parties have become more sensitive to CFIUS’ increasingly active role. Over the past two years, the Committee has seen a significant rise in the number of notified transactions and several notable trends have emerged:
1. Transactions routinely take at least three to six months from the date the parties submit a notification before CFIUS reaches a determination.
The notice itself requires a significant amount of information from both parties before CFIUS accepts it as complete. Increasingly, this requires the parties to negotiate with the Committee on the adequacy of the notice before it will start the review period. As a result, drafting negotiations often delay the commencement of the 30-day initial review period for up to several weeks.
CFIUS’ resources are strained by the growing number of notifications. Staff may be unable to respond and progress negotiations as quickly as the notifying parties would like, potentially further delaying the start of the review period. Certain members of Congress raised the issue of staffing in their September 2016 request to the US Government Accountability Office (GAO) for a report on whether CFIUS’ “statutory and administrative authorities have effectively kept pace with the growing scope of foreign acquisitions in strategically important sectors in the US.”4
2. CFIUS is struggling to clear cases in the initial review period.
The CFIUS review process involves a statutorily proscribed 30-day initial review period, which can be extended for an additional 45-day investigation period. In the PreFINSA years 2005–2007, CFIUS cleared roughly 95 percent of all covered transactions within the review period.5 In the PostFINSA years 2008–2014, CFIUS’ clearance rate in the review phase has fallen to approximately 65 percent. While we are waiting for the 2015 and 2016 numbers to be published, we suspect that CFIUS is now only clearing approximately 30 percent of cases within the 30-day review period. The rise in transactions moving into an investigation phase suggests that: (i) CFIUS is being overwhelmed by the increased case load and unable to clear as many filed cases within the review period, (ii) CFIUS is more actively investigating an expanding set of perceived national security concerns than it has in the past, or (iii) some combination of the two.
3. Parties are increasingly aware of the President’s authority to prohibit foreign investment, including the power to unwind a closed transaction.
President George H.W. Bush issued the only order prohibiting a transaction6 until President Obama prohibited two transactions.7 With this trend flowing into President Trump’s administration, CFIUS can credibly threaten a prohibition or divestment in order to convince parties to withdraw a notification. Under such a threat, parties can withdraw and abandon the transaction, withdraw and refile a notification to allow for more time to negotiate a mutually acceptable resolution to mitigate the identified national security concerns, or allow CFIUS to refer the transaction to the President for final resolution.
While there have been only three Presidential Orders blocking foreign investment in the United States on national security grounds, many other transactions have been abandoned in the face of such concerns (e.g., in January 2016 Philips announced it was abandoning the proposed sale of its Lumileds business to China’s GO Scale Capital in light of CFIUS opposition). Since CFIUS does not include such “voluntary” abandonments in its annual reports, it is difficult to track how many of the cases that are withdrawn but not refiled were abandoned under pressure from CFIUS or because of unrelated commercial decisions. We suspect that the 2016 annual report will show both a spike in the amount of notices that were withdrawn and refiled and a spike in the amount of notices that were withdrawn and not refilled.
Parties facing a potential prohibition, however, should now have access to significantly more information to help them as a result of the Ralls Corporation’s lawsuit in response to President Obama’s prohibition after the parties failed to reach agreement on acceptable mitigation measures. In the Ralls Corporation case, the District Court ordered CFIUS to provide all unclassified information on which it relied for its decision, afford Ralls an opportunity to respond to that information, and provide Ralls’ response to the information along with CFIUS’ updated recommendation to the President. Order, Ralls Corporation v Committee on Foreign Investment in the United States, No. 12-cv-01513-ABJ (DC Cir 13 March 2015) (ECF No. 73). As a result of the decision in Ralls Corporation, CFIUS now provides greater unclassified details related to the Committee’s national security concerns when no mitigation appears viable, allowing the parties to better formulate responses to those concerns in an effort to avoid prohibition.
We anticipate the significant delays will continue and possibly expand during 2017, which will inhibit parties from confidently predicting the time necessary to close a deal subject to CFIUS review. Further, it will be increasingly difficult to assume even relatively benign transactions can successfully complete a CFIUS review in 30 days, even for those parties who have done so previously.
We also assume that President Trump will continue to expand the use of Presidential Orders to prohibit transactions posing unacceptable and unmitigable risks to US national security. Given this trend, it is essential for companies to assess potential national security concerns surrounding a contemplated transaction in the context of the current political climate and whether there is an enforceable and monitor-able mitigation measure that is commercially acceptable in order to determine the likelihood of executive intervention.
Given the overall increase in CFIUS activity and the interest in bringing the scope of the Committee’s authority in line with today’s national security concerns, transacting parties should be on the lookout for new legislation or executive orders addressing CFIUS during President Trump’s administration. Until such time, parties will continue to face longer timelines and delays. As a result, a smooth CFIUS process will require engagement with CFIUS, and counsel is critical to help formulate a strategy for collecting the necessary information, engaging with CFIUS staff, and managing timing expectations.