The U.S. Foreign Investment Committee (CFIUS) is reviewing a record number of transactions for national security risks, according to a recently released annual report to Congress for calendar year 2021.
Amid a bipartisan focus on national security threats stemming from foreign direct investment, understaffed and understaffed, and armed with expanded powers following the passage of a 2018 law, the Committee stepped up scrutiny of transactions in the whole economy, with a focus on businesses in the financial, information and services sectors and in the manufacturing sector, CFIUS told Congress.
Released publicly on August 2, 2022, the Annual Report examines the Committee’s activities for the first full year since the finalization of the regulations implementing the Foreign Investment Risk Review Modernization Act of 2018 (SIGNATURE), which expanded the mandate of the CFIUS.
The annual report comes just as the White House announced support for a bipartisan bill that would substantially deepen the US government’s role in regulating private investment by establishing an inter-agency committee to complement the CFIUS to review some impacting outbound investments. on the security of the supply chain, on internal production and production capacities.
Businesses should expect more government control of investments by and in foreign entities in the coming years.
CFIUS is an inter-agency committee chaired by the United States Department of the Treasury that examines certain foreign investments in the United States and certain real estate transactions by foreign persons to determine their impact on United States national security. With the exception of certain transactions subject to a filing obligation, the parties to the transaction voluntarily submit abbreviated form declarations or longer form voluntary joint notifications (JVNs) to CFIUS.
CFIUS reviews the statements during a 30-day evaluation period, after which it may require parties to file a JVN. CFIUS reviews of JVNs can normally last longer than three months: a 45-day “review period” followed by a 45-day “investigation” period that the government may order. CFIUS may also review pending or completed transactions even when the parties have not filed a notice, if CFIUS believes the transaction is subject to its jurisdiction and may raise national security concerns.
At the end of the process, CFIUS can determine that there are no unresolved national security issues, allowing the investment to proceed without incident; can recommend to the President that the President stop the operation; or it may order that the parties to the transaction take mitigation measures to protect the interests of US national security.
With overwhelming bipartisan support (a vote of 85-10 in the Senate and 400-2 in the House of Representatives), Congress approved SIGNATURE in 2018 and substantially expanded the jurisdiction of CFIUS, including requiring mandatory filing if a transaction involves certain technologies and provided support for a bureaucratic bureaucracy to conduct such reviews.
Record-breaking reviews in 2021
The results of these changes are evident in the CFIUS 2021 Annual Report, which shows explosive growth in CFIUS reviews. Over the course of 2021, CFIUS reviewed 164 declarations and 272 JVNs, the largest number of transactions ever analyzed and equal to year-over-year jumps of 30% and 45% respectively.
Of these 272 notices, 130 (or 48%) led to an “investigation phase” and 74 (27%) were withdrawn during the review or investigation phase. Of the 74 withdrawn notices, the parties in 63 cases filed a new notice, in 2021 or 2022. In nine of these cases, the parties withdrew the notice and abandoned operations after CFIUS informed the parties that they were not in able to identify mitigation measures that would solve its national security problems, or after the parties refused to accept the mitigation measures proposed by the CFIUS. In two of these cases, the parties withdrew the notice and abandoned the transaction for commercial reasons.
CFIUS required mitigation measures to resolve national security issues about 10% of the time (in 26 of 272 alerts). The CFIUS took mitigation measures to address residual national security concerns in relation to two notices that were voluntarily withdrawn and abandoned. No presidential action was taken on the transactions in 2021.
CFIUS has the authority and staff to review and investigate transactions that have not been notified to the Committee and to request filing. In 2021, the Committee considered 135 transactions identified through the non-notified process and requested their filing in eight.
The Committee looked at transactions involving buyers from around the world, although investors from the UK, Canada, China and Japan were among the last most common filers. Canadian investors accounted for the majority of the statements filed in 2021 and the majority of the statements filed from 2019 to 2021, with 14% (54 statements). Japanese and UK investors filed 11% (43 statements) and nearly 9% (33 statements), respectively, of all filed statements from 2019 to 2021.
Chinese investors filed the largest number of JVNs, totaling 44 (16%) in 2021, more than doubling the 17 notifications filed by Chinese investors in 2020. Investors from Canada and Japan filed the second and third numbers highest than JVN in 2021 (10% or 28 alerts and nearly 10% or 26 alerts, respectively). For the three-year period 2019 to 2021, the largest number of notices came from Japanese investors (13% or 91 notices), followed by Chinese and Canadian investors (13% or 86 notices and 9% or 62 notices, respectively).
In 2021, similar to 2020, the largest number of transactions took place in the finance, information and services sector, accounting for more than half of the transactions (147 notices or 55% of those filed). And, as in 2020, the manufacturing sector accounted for the second largest number of notices filed in 2021 (74 notices, or 28%).
Similarly, of the hedged transaction notices filed with CFIUS over the past decade, from 2012 to 2021, about three-quarters concerned the financial, information and services sectors (726 notices or 40%) or the manufacturing sector. (691 notices or 38%). The remainder of the notices concerned the mining, utilities and construction sector (257 notices or 14%) and the wholesale, retail and transport sector (149 notices or 8%).
The annual report notes that CFIUS acted alacrity when reviewing many transactions. The Committee cleared nearly 60% of its cases (an all-time high) in the 30-day evaluation period for a statement or in the initial 45-day review period for a notice.
Increase in outbound CFIUS screening requests
The CFIUS’s intensified review of inbound foreign direct investment is underway as Congress and the White House push for new legislation that requires U.S. companies to notify the government before investing in some critical sectors overseas, most notably in China.
The latest congressional effort to create what is called a “reverse CFIUS” process is led by US Senators Bob Casey (D-PA) and John Cornyn (R-TX) and representatives Rosa DeLauro (D-CT), Bill Pascrell Jr. (D-NJ), Michael McCaul (R-TX), Brian Fitzpatrick (R-PA) and Victoria Spartaz (R-IN). Although their legislation, the National Critical Capabilities Defense Act of 2022, has not yet been formally submitted to Congress, a draft under discussion would establish a “National Critical Capabilities Committee (NCCC) to conduct ongoing supply chain security reviews,” of national production and production capacity of identified national critical capabilities ”, according to a summary of the bill, which intends to replace a previous bill introduced in 2021 (HR 6329).
The NCCC would be co-chaired by the departments of Commerce and Defense and would include representatives from a wide range of federal agencies. It would define “national critical capabilities” as systems, services, and resources vital to US national security, including agricultural security, health security, homeland security, energy security, infrastructure security, and natural resource security. It would consider critical services of “national critical capabilities” and the production of medical supplies, medicines, personal protective equipment, materials for power grids and items critical for building infrastructure after natural or man-made disasters.
The bill would require companies operating in critical sectors to report outbound investments in certain overseas markets, including China. If the NCCC were to discover that a transaction would pose a national security risk, it would recommend that the President take corrective action “including procurement, use of authorities to increase production, creation of federal programs to support production, or any other action the Committee. deems it appropriate, which may provide for the suspension of the transaction “, according to the summary.
While much remains to be clarified as this or similar legislation proceeds, the Biden administration has already expressed support for the underlying principle. “The administration supports the bipartisan and bicameral effort in Congress to provide greater transparency on US investment in China and other troubling countries, particularly for transactions in critical sectors that could undermine American national security by mitigating our technological advantage or undermining our supply chain resilience, National Security Advisor Jake Sullivan said in a July statement.
In summary, regulatory oversight of foreign investment in the United States has been on the rise for several years and reached new heights in the first year of the Biden administration. Businesses should prepare for ongoing oversight of foreign transactions for national security threats and prepare for the eventual establishment of an innovative outbound investment review process that will significantly increase regulatory exposure.