The Committee on Foreign Investment in the United States (CFIUS) was established decades ago to identify and recommend responses to threats to US national security posed by acquisitions by non-US entities of controlling stakes in US businesses. CFIUS recently delivered its Annual Report to Congress on all notices filed with CFIUS in 2013 and all reviews or investigations completed during the year. The report holds important insights for non-US entities contemplating acquisitions and other investments in the United States.
Background on CFIUS
CFIUS is an interagency committee principally comprising nine members, chaired by the Secretary of Treasury, tasked with reviewing transactions that could result in control of a US business by a non-US person (“covered transactions”) in order to determine the effect of such transactions on the national security of the United States. CFIUS operates pursuant to the Defense Production Act of 1950, as amended by the Foreign Investment and National Security Act of 2007 (FINSA), which defines a “covered transaction” as “any merger, acquisition, or takeover… by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States.”
Upon receipt of a complete notice of a covered transaction, CFIUS commences a 30-day review and is authorized to conduct an additional 45-day investigation if warranted. The CFIUS may also negotiate an agreement with any party to a covered transaction to mitigate perceived threats to national security. Once CFIUS completes its review and at any time during a subsequent investigation, CFIUS may conclude that national security concerns raised by a transaction have been addressed. If such concerns remain unaddressed at the conclusion of an investigation, CFIUS refers the transaction to the President for a decision. The President enjoys broad discretion in taking actions deemed appropriate to suspend, prohibit, or unwind a covered transaction when acting based on credible evidence, but must announce a decision within fifteen days.
Highlights from CFIUS’ 2013 Report
In 2013, a total of 97 notices of covered transactions were filed with CFIUS. During the three years prior, CFIUS received 93, 111 and 114 notices, respectively, so the 2013 figure does not appear to indicate any particular trend.
The 2013 report indicates that CFIUS continued to review transactions across a wide range of industrial sectors, with a particular focus on businesses involved in electronics and utilities. Consistent with prior years, transactions involving US businesses in the manufacturing sector accounted for the largest number of notices filed with CFIUS in 2013 (35 of the 97 total notices, 12 of which related to US businesses in the computer and electronic products manufacturing subsector). 32 of the 97 notices in 2013 involved the finance, information and services sector, while 20 notices involved US businesses in the mining, utilities and construction sector. Transactions involving the wholesale, retail and transportation sector accounted for the remaining 10 notices filed in 2013.
The geographic composition of the filings remained consistent with prior years, but there are important shifts. Acquisitions by investors from China and Japan were the largest source of notices received by CFIUS in 2013. Notices of acquisitions by investors from major European countries remained stagnant or declined in 2013 compared to 2012.
A Higher Rate of Investigations
CFIUS conducted “investigations” of covered transactions – resulting in an additional review period of up to 45 days – at a higher rate in 2013 than in prior years. Of the 97 notices of covered transactions filed, CFIUS investigated approximately half (48) in 2013. Over the previous four years, CFIUS investigated approximately 37 percent of such notices (145 investigations out of 383 notices). CFIUS has now “investigated” more covered transactions each year than in the prior year for five consecutive years. This trend suggests that parties filing notices of covered transactions have less reason to expect CFIUS to conclude its review at the end of the initial 30-day review period and should expect instead that CFIUS also will make use of some or all of the subsequent 45-day investigation period.
Greater Insistence on Mitigation Measures
During the review and investigation phases, CFIUS might ask questions of one or both transaction parties (and the parties must respond within three business days, unless additional time is authorized by CFIUS). In addition, during either phase, CFIUS might request that the buyer (and perhaps also the seller) agree to certain terms mitigating any perceived threats to national security as a condition of receiving CFIUS clearance. Such terms typically will be in written form and may constitute a “national security agreement” between, on the one hand, one or both of the transaction parties, and, on the other hand, one or more CFIUS member agencies.
In 2013, 11 of the 97 covered transactions were resolved pursuant to the parties’ acceptance of mitigation agreements under which the US Government required measures to be imposed to mitigate perceived US national security concerns. This reflected an increase from 8 such mitigation agreements (out of 114 notices) in 2012 and another 8 (out of 111 notices) in 2011. CFIUS negotiated such mitigation agreements in transactions involving investors in the telecommunications, software, mining, oil and gas, manufacturing, consulting, and technology industries.
The annual report provided examples of mitigation measures negotiated and adopted in 2013 that required businesses involved to take specific and verifiable actions, including:
- Ensuring that only authorized persons have access to certain technology and information.
- Establishing a Corporate Security Committee and other mechanisms to ensure compliance with all required actions, including the appointment of a USG-approved security officer or member of the board of directors and requirements for security policies, annual reports, and independent audits.
- Establishing guidelines and terms for handling existing or future USG contracts, USG customer information and other sensitive information.
- Ensuring only U.S. citizens handle certain products and services, and ensuring that certain activities and products are located only in the United States.
- Notifying security officers or relevant USG parties in advance of foreign national visits to the U.S. business for approval.
- Notifying relevant USG parties of any awareness of any vulnerability or security incidents.
- Providing the USG with the right to review certain business decisions and object if they raise national security concerns.
The report went on to describe ways in which U.S. Government agencies with national security responsibilities monitor and enforce compliance by the companies that are subject to mitigation measures, including:
- Periodic reporting to USG agencies by the companies;
- On-site compliance reviews by USG agencies;
- Third-party audits when provided for by the terms of the mitigation measures; and
- Investigations and remedial actions if anomalies or breaches are discovered or suspected.
If CFIUS and the transaction parties cannot conclude negotiations regarding such an agreement during the investigation phase, the parties might “voluntarily” withdraw and then re-file their notification with CFIUS’ approval. This serves to initiate a new period of review and, if necessary, investigation and in this manner permits additional time for negotiations with CFIUS. The number of notices of covered transactions withdrawn during review or after investigation (eight total) in 2013 remained consistent with most prior years, but was down from 22 such withdrawals in 2012. CFIUS noted that one of the eight parties that withdrew during review in 2013 filed a new notice in 2014.
In September 2012, President Obama issued an historic order – the second of its kind in U.S. history – mandating the unwinding of an investment under review by CFIUS, on the grounds that the transaction threatened to impair the national security of the United States (in a manner that could not be remedied by a national security agreement). The investor, Ralls Corporation, a Delaware corporation ultimately owned by Chinese nationals, subsequently challenged the President and CFIUS’ decision in Federal Court. CFIUS’ annual report did not include discussion of the Ralls case, as it occurred in 2012. Our analysis of Ralls’ court challenges and lessons for foreign investors may be found in Gone With the Wind: The Ralls Transaction and Implications for Foreign Investment in the United States: editions I, II, and III. No such divestment orders were issued in 2013.
How Dechert Can Assist
The key lesson from CFIUS’ annual report for foreign investors is that they should avail themselves of the voluntary notification process. Dechert has represented many clients through CFIUS reviews, including major players in the energy, telecommunications, high technology, defense, and infrastructure industries. We regularly advise foreign and domestic entities (“buyers” and “sellers,” as well as other interested third parties) through the CFIUS review process, helping them determine whether or not to bring a transaction before the committee, to assemble the required information and materials for a voluntary filing, and then (as necessary) to negotiate national security agreements with CFIUS in a manner that minimizes both delay and the imposition of conditions that might threaten the transaction. We also give counsel on strategies for identifying and addressing political and policy considerations that may arise.