The Trump administration is making significant changes to longstanding trade policies. Among the flashpoints is the Committee on Foreign Investment in the United States (“CFIUS”), responsible for national security reviews of certain inbound foreign investments. Since President Trump assumed office, the Committee has taken an increasingly critical eye to many transactions, scuttling an increasing number of deals and recommending that the president take action to block the Lattice Semiconductor/Canyon Bridge deal.
Given this period of significant change in the CFIUS process, the Committee’s annual report has been much anticipated. While the report only offers data through the end of 2015, it nonetheless provides interesting insights on the trends and developments that led up to the present period.
Delayed Publication of the Report
This year’s annual report has been significantly delayed in its release. In years past, the report, which the Committee must submit to Congress on a yearly basis, has been released in February. This year’s delay likely is due to a significant increase in cases occupying CFIUS’s resources and a significant lack of political appointees at the Department of Treasury and other relevant agencies.
CFIUS Report by the Numbers
In 2015 CFIUS reviewed a total of 143 cases. That is down slightly from the 147 cases reviewed in 2014, but not significantly divergent from the longer-term trend of a growing number of cases submitted to the Committee. For example, in 2009 only 65 notices were submitted. The report also indicates a continued rise in Chinese cases. CFIUS reviewed a total of 29 cases from China, continuing a several year trend of Chinese investment topping the list. Other countries with a significant number of cases include Canada (22), the United Kingdom (19), and Japan (12).
The report also indicates that an increasing number of deals are drawing enhanced scrutiny from CFIUS. After a notice is accepted for processing – which may take some time, due in large part to the high volume of cases – CFIUS commences a 30 day review. At the end of those 30 days the Committee can elect to send the transaction into a 45 day investigation phase. According to the report, of the 143 notices received in 2015, a total of 66 entered the investigation phase. That number is significantly higher than any other year for which data is provided in the report. For example, the next highest year included in the report was 2014, when 51 out of a total of 147 cases went to the investigation phase (a higher percentage of cases went to the investigation phase in 2013, but by absolute numbers 2015 was a high water mark for CFIUS investigations).
The increase in cases moving to the investigation phase also coincided with a slight increase from the prior year in the number of cases resulting in risk mitigation measures (security-related conditions on the deal that CFIUS deems necessary to clear a transaction). In 2015, 11 cases resulted in risk mitigation measures (totaling 8% of all cases). That is up slightly from the 6% that resulted in risk mitigation measures in 2014, but in line with historical averages (11% of cases resulted in risk mitigation in 2013).
Of the 143 notices received by CFIUS, 13 were subsequently withdrawn. According to the report, 9 of these cases were eventually refiled, while another 3 were abandoned because the parties and CFIUS could not find a path to resolve all identified national security concerns. An additional case was withdrawn and abandoned due to commercial reasons. The number of refiled cases is a sharp change from 2014, when 12 cases were withdrawn and only one was refiled. This is the first year that CFIUS has indicated whether a transaction was abandoned due to unresolved national security concerns or commercial reasons. This additional level of detail may be designed to highlight that transactions are abandoned for a variety of reasons and that previous reports, which only included an aggregate number, may have misleadingly suggested a more aggressive approach from the Committee than actually was the case.
Other Changes from Previous Reports
In each annual report CFIUS lists a number of factors that are “among the considerations presented by transactions reviewed by CFIUS.” This year’s report included an additional factor of transactions involving a U.S. business that “hold[s] substantial pools of potentially sensitive data about U.S. persons and businesses that have national security importance.” CFIUS has indicated that insurance, health services, and technology services are examples of sectors that might hold such sensitive data. The inclusion of this additional factor in the report likely marks an increased focus by CFIUS on such sensitive data pools.
The 2015 report also took a new approach regarding the question of whether one or more foreign nations have a “coordinated strategy to acquire critical technology companies.” CFIUS is required by statute to report about whether there is such a strategy. Previous reports had indicated growing evidence of a coordinated strategy to acquire critical technology companies, and now the report covering 2015 indicates that the evidence is of sufficient sensitivity that it “cannot be provided on an unclassified basis.”
2015-2017: Where CFIUS Stands Today
While the latest CFIUS report only provides data up until the end of 2015, anecdotal evidence suggests that some of the trends identified in the report have accelerated significantly. In particular, all indications suggest that CFIUS is on track to review a record number of cases in 2017 – well in excess of 200 cases – and that such cases are increasingly taking longer to resolve. Further, it appears that CFIUS likely will scuttle a record number of deals in 2017.
All of this has led to a change in the CFIUS risk calculus, with many advisors revisiting how they weigh the various benefits and risks of going through the CFIUS process.