The Committee on Foreign Investment in the United States (“CFIUS,” or the “Committee”) has issued the public version of its annual report to Congress for calendar year 2015 (the “Report”). The relevant statute requires CFIUS to prepare an annual report to Congress and prepare a public version of the annual report. The Report: (i) identifies the number of transactions notified to CFIUS in 2015, as well as the number of transactions reviewed, investigated, withdrawn, abandoned, and rejected in that same year; (ii) provides specific, cumulative, and trend data for transactions, withdrawals, and investigations from 2009 to 2015; (iii) reports on mitigation measures and the perceived adverse effects of covered transactions; (iv) assesses transactions pertaining to critical technologies; and (v) comments on whether there has been any evidence of a coordinated strategy to acquire U.S. critical technology companies and evidence of foreign governments using espionage to obtain commercial secrets relating to U.S. critical technologies. Further, the Committee provided a table reporting on the number of transactions notified, reviewed, investigated, withdrawn, abandoned, and rejected in 2016.
Even though the Report is dated, several conclusions can be drawn from the Report, including:
- In 2015, the Committee began identifying three additional national security risks that it had not disclosed in the past: (i) the potential disclosure of substantial pools of personal information; (ii) the potential loss of one of only a few U.S. suppliers; and (iii) the potential loss of U.S. technological advantages;
- Increased scrutiny of semiconductor transactions, particularly for Chinese acquirers;
- Increased concern regarding coordinated efforts to acquire U.S. critical technologies;
- Providing complete and accurate information is critical because CFIUS has access to information sources that can identify inaccuracies or incompleteness with filings that will result in such filings being rejected;
- There is a continued trend of increased numbers of notified transactions, investigations (meaning longer reviews), and transactions requiring mitigation; and
- Additional mitigation measures.
The following provides additional detail on the trends highlighted above.
Identification of additional national security factors. The Report identified three national security risk factors that the Committee has not identified in the past. First, whether the transaction involves a U.S. business that possesses “substantial pools of potentially sensitive data about U.S. persons and businesses that have national security importance.” This risk is not limited to information related to U.S. Government employees. Thus, an acquisition of U.S. businesses containing a great deal of private information may pose a national security risk. These may include businesses in the financial, healthcare, and insurance sectors.
Second, the Report highlights transactions in fields with significant national security implications in which there are few alternative suppliers. This likely would be particularly important where the U.S. Government is concerned about U.S. supply chain issues or the ability to prioritize U.S. Government business.
Third, the loss of U.S. technological advantages that would be detrimental to U.S. national security. Increasingly, the U.S. Department of Defense and Congress are concerned about the U.S. losing its technological leadership, particularly through the foreign acquisition of companies developing emerging technologies. This is one of the key reasons Congress is considering the Foreign Investment Risk Review Modernization Act (the “Act”). The Act would expand CFIUS’ authority to review transactions, add to the list of national security factors (including the loss of emerging technologies and personal information), and require additional notifications to CFIUS (and require certain parties to notify transactions, e.g., state-owned-enterprises).
Increased scrutiny of semiconductor transactions, particularly for Chinese acquirers. The Report shows that, similar to 2009, parties are submitting a substantial number of notices to CFIUS involving the semiconductor industry. CFIUS annual reports show that between 2009 and 2013, the maximum number of semiconductor transactions notified to CFIUS in a given year declined steadily from a high of 20 in 2009 to a low of 6 in 2013. However, semiconductor-related transactions notified to CFIUS rebounded to 12 in 2014 and increased to 18 in 2015.
What appears to be more significant is the treatment of semiconductor transactions, particularly by Chinese acquirers. While CFIUS notifications are not public, we track the filings to the extent possible. From the information available to us, at least two semiconductor-related transactions involving Chinese acquirers were “cleared” by CFIUS in 2015 (OmniVision Technologies, Inc., which was acquired by a consortium composed of Hua Capital Management Co., Ltd., CITIC Capital Holdings Limited, and GoldStone Investment Co., Ltd., and Integrated Silicon Solution, Inc., which was acquired by Uphill Investment Co.).
However, based on publicly available information, in 2016 and 2017 the outcomes for Chinese acquirers were less than favorable. For example, in 2016 President Obama prohibited the proposed acquisition of Aixtron SE, a German semiconductor company with a U.S. subsidiary, by a Chinese-owned German company, Grand Chip Investment GmbH. In addition, CFIUS declined to “clear” Dutch company Philips NV’s proposed $3.3 billion sale of Lumileds, a manufacturer of lighting components and LEDs, which are forms of semiconductors, to a consortium that included several Chinese firms (e.g., GSR Ventures and Nanchang Industrial Group ). Also, San’an Optoelectronics Co., Ltd., announced that its subsidiary, Xiamen San’an Integrated Circuit Co., Ltd., had agreed with the Taiwan publicly traded company GCS Holdings to abandon their proposed merger, which would have brought GCS Holdings’ wholly owned subsidiary Global Communications Semiconductors, LLC, in California into the San’an Group of companies. Finally, Fairchild Semiconductor International, a U.S.-based semiconductor chip manufacturer, rejected a $2.49 billion acquisition offer from China Resources Microelectronics Ltd. and Hua Capital Management Co., Ltd. due to CFIUS concerns. And, in 2017 President Trump prohibited the proposed $1.3 billion acquisition of Lattice Semiconductor Corporation, a publicly traded semiconductor manufacturer headquartered in Oregon, by Canyon Bridge Capital Partners, a U.S.-headquartered private equity fund whose sole investor reportedly is owned and controlled by the Chinese government.1
Just last week, however, CFIUS reportedly “cleared” Beijing-based Naura Microelectronics Equipment Co. Ltd.’s deal to buy U.S. semiconductor manufacturing equipment company Akrion Systems LLC. It is not readily apparent how CFIUS distinguished this case from those described above, but one possibility is that CFIUS may be focusing on the technology currently being developed by U.S. firms more than existing semiconductor technology, including as embodied in manufacturing equipment. It also shows that CFIUS is not challenging all Chinese transactions.
Coordinated efforts to acquire U.S. critical technologies. The Report suggests that there is some continued concern that state actors were coordinating to acquire critical technology. Prior to 2014, CFIUS annual reports suggested the risk of such coordination was unlikely. In contrast, the 2014 annual report stated “the U.S. Intelligence Community (USIC) believes there may be an effort among foreign governments or companies to acquire U.S. companies involved in research, development, or production of critical technologies for which the United States is a leading producer.” The Report now states only that: “A meaningful summary of the U.S. Intelligence Community (USIC) assessment cannot be provided on an unclassified basis. However, the USIC considered the unclassified data included in this section in conducting its analysis.” Based on this unreported assessment and our experience, we believe there is some level of coordination (or attempted coordination) that is of concern to CFIUS and its member agencies.
Second consecutive year in which a notice was rejected. According to the 2015 Report, CFIUS rejected a notice, apparently based on the fact that “information c[ame] to light that contradict[ed] material information provided in the notice by the parties.” CFIUS similarly rejected a filing in 2014. This should serve as a reminder to parties to a transaction notified to CFIUS that the agencies involved in reviewing and investigating a transaction have access to a wide breadth of public and non-public information, and any material errors in a notice are likely to be discovered with the consequence being outright rejection by the Committee.
Increases in the number of notices and investigations and the number and type of mitigation measures. The most obvious recent trend is the increasing number of transactions notified to CFIUS. According to the Report, CFIUS received notices for 143 transactions in 2015, four transactions shy of the total number for 2014, and 172 notices in 2016. And we understand that CFIUS received substantially more than 200 transaction notices in 2017.2 Staffing levels at the Committee, however, have not increased proportionally, and key senior CFIUS agency positions remain unfilled, which has caused delays in the CFIUS process. Delays due to insufficient staffing increases the difficulty of predicting national security risk because lack of staffing can be confused with substantive risk. We note, however, that in our recent experience transactions with little national security risk have been “cleared” within the initial 30-day review period. We have also seen CFIUS time its review to the termination date in the applicable purchase and sale agreement. If we are correct in our inference, the use of such contractual timing provisions demonstrates the stress on the CFIUS process.
The Committee’s increased workload, however, has not led to any decrease in the amount of attention shown to individual transactions. The number of secondary, 45-day CFIUS investigations has increased in absolute terms every year since 2009, and 2015 and 2016 were no different. For 2015, CFIUS investigated 66 transactions. That is 15 more investigations than the Committee initiated in 2014, despite four fewer total notified transactions. The statistics for 2016 again show an increase in CFIUS investigations. CFIUS reports that it initiated 79 investigations in 2016. The increasing reliance on investigations likely is attributable to the workload and staffing issues detailed above, but may also reflect a greater degree of scrutiny, even for transactions that previously might have been characterized as innocuous given the nature of the business being acquired or the identity and nationality of the acquirer. The table below shows that the percentage of notifications going to the investigation stage has been between 46 percent and 49 percent for three of the last four years. Accordingly, transaction parties are advised to allow for an elongated CFIUS clearance process, particularly when negotiating financing arrangements that may include “ticking” fees.
The increased number of CFIUS investigations for 2015 only corresponded with a moderate increase from 2014 in the number of transactions cleared upon implementation of some form of mitigation, approximately 8 percent of the total notified transactions. But the Report reflects the Committee’s growing toolbox of mitigation measures. Specifically, the Report noted that CFIUS is requiring transaction parties: (i) to notify customers about the change of ownership; (ii) to implement security protocols to ensure the integrity of goods or software sold to the U.S. Government; (iii) to assure the continuity of supply for defined periods, as well as to notify and consult with the U.S. Government prior to taking certain business decisions; and (iv) to exclude certain sensitive assets from transactions. In addition, during 2017, we are aware of CFIUS mitigation that imposed mandatory CFIUS notification requirements on a party, even for transactions that would not be subject to CFIUS jurisdiction.