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Chinese and U.S. flags are set up for a meeting at China's Ministry of Transport in Beijing, China April 27, 2018. REUTERS/Jason Lee
September 8, 2021 - The Committee on Foreign Investment in the United States (CFIUS) Annual Report to Congress for Calendar Year 2020 (the Report) shines a light on the expanded national security review process for foreign investments in U.S. businesses.
In addition to providing useful metrics on declarations and notices submitted by investors, the Report is the first with information on CFIUS reviews following final implementation of regulatory amendments under the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA)—legislation that greatly expanded CFIUS jurisdiction and imposed mandatory declaration requirements.
The Report also highlights some interesting trends, such as declining Chinese investments following increased scrutiny under the Trump Administration.
CFIUS is an interagency committee chaired by the U.S. Department of Treasury. Pursuant to authority conferred under Section 701 of the Defense Production Act of 1950, as amended (Section 701), CFIUS has the power to review, suspend, modify, prohibit, and unwind mergers, acquisitions, and divestures of U.S. businesses by foreign persons. CFIUS can take these actions regardless of whether a party to a covered transaction submits a declaration or notice to CFIUS.
A CFIUS "covered transaction" includes transactions that would provide a foreign person with control over a U.S. business. It also includes certain non-controlling investments that would afford a foreign person certain access, rights, or involvement in a U.S. business that has critical technology, is involved in certain critical infrastructure activities, or that handles sensitive personal data. CFIUS also has the power to review covered real estate transactions that implicate national security concerns.
In many cases, a declaration or notice to CFUIS is mandatory or otherwise advisable. CFIUS reviews can follow a three-phase process: (1) initial assessment; (2) national security investigation; and (3) presidential determination.
CFIUS prepares its annual reports pursuant to Section 701. Consistent with Section 701 and prior CFIUS annual reports, the Report provides details and summaries on notices and declarations received, processing times, conditions of mitigation, and other useful metrics. Moreover, the Report is of particular note as the first describing the CFIUS national security review process after full implementation of regulatory amendments under FIRRMA.
Before FIRRMA, CFIUS did not exert jurisdiction over non-controlling acquisitions. There was no such thing as a declaration, and investor submissions were voluntary, although the Committee could initiate its own review where no notice was filed. FIRRMA changed this status quo and, among other things, imposed mandatory declaration requirements and notice filing fees on parties to certain controlling and non-controlling investments. The declarations are essentially abbreviated forms of notices that do not require a filing fee and to which CFIUS must assess and respond within 30 days.
FIRRMA also extended the time, from 30 days to 45 days, for CFIUS to complete its assessment of a notice. Following this initial assessment phase, CFIUS can initiate the national security investigation phase, which extends the time for review by an additional 45 days. In extraordinary cases, Section 701 allows CFIUS to further extend time by an additional 15 days to allow the Presidential review of transactions that pose unresolved national security concerns.
Certain FIRRMA amendments, such as the 45-day review period for notices, were effective immediately upon FIRRMA's enactment. The mandatory declarations for investments involving critical technologies were established under a 2018 pilot program (Pilot Program). The implementation of fees and other amendments, to include those to allow use of declarations for voluntary submissions, took effect in 2020.
The Report reflects a productive year by a busy government agency. There were a total of 313 investor submissions to CFIUS in 2020, consisting of 187 notices and 126 declarations. Of the notifications, 29 were withdrawn, of which 15 were the subject of new notices in 2020.
Investigations are experiencing a downward trend, from 172 investigations (73%) in 2017, 158 investigations (69%) in 2018, to 113 investigations (49% ) in 2019, and 88 investigations (47%) in 2020. This change likely resulted from a decrease in Chinese investors and FIRRMA's change from 30 to 45 days for review of notices, which allows more time for CFIUS to complete assessments.
No investigations were subject to a 15-day extension after the investigation period. However, President Trump issued an executive order in 2020 ordering divestment of Musical.ly, a former social media platform, by ByteDance Ltd. — making 2020 the fifth year in a row with a single presidential order exercising Section 701 authority.
The Report also provides comparative data from other annual reports. These show that unlike years prior, Chinese investors are no longer the largest source of submissions. Rather, there is clearly a downward trend in Chinese investment, a likely byproduct of enhanced government scrutiny of Chinese investors, particularly during the President Trump administration.
The number of overall notices is also trending downward, with a nearly 20% decrease from the 231 notices submitted in 2019. In sharp contrast, the 126 declarations in 2020 represent a nearly 35% increase from the 94 declarations submitted in 2019 under the Pilot Program. This trend is somewhat understated because declarations on a voluntary basis were not allowed until Feb. 13, 2020. According to the Report, CFIUS believes that introducing declarations as a method for filing any type of transaction caused the declining number of notices and surge in transactions reviewed by CFIUS.
The declaration form is shorter, requires less information than a notice, and does not require payment of a filing fee; the 30-day review process for declarations is substantially shorter than the 45-day assessment and potential 45-day investigation phases for notices.
There are, however, risks to investors using a declaration instead of a notice. The clearance rates previously reported by CFIUS for declarations were low, there is no guarantee of a safe harbor letter, and prior annual reports show that CFIUS requests declaration parties to submit a full notice in a quarter of declarations — thereby adding substantial time and expense to the review process.
Critical to a proper assessment of whether to use the declaration or notice process, the Report identifies outcomes for declarations submitted in 2020 as follows:
•Party stipulations accompanying declarations show that just 34 declarations (27%) were submitted under the mandatory submission requirements. The declaration process is therefore being used more for voluntary disclosures than mandatory disclosures.
•CFIUS requested that parties to 28 declarations (22%) file a written notice. This number represents a slight decrease from 2019 (28%) and 2018 (24%), indicating a continued trend of CFIUS requesting a notice in a quarter of declarations submitted.
•CFIUS notified parties to 81 declarations (64%) that it had completed all action under Section 721, clearing the transactions. The clearance rate has trended upward from 10% of the 21 declarations submitted in 2018, and 37% of the 94 declarations submitted in 2019.
As further detailed in the Report, in 2020, CFIUS did not reject any declarations and as noted above, completed reviews of declarations within 30 calendar days, on average. These metrics and the trends identified in the Report support reasoned decisions to submit declarations for lower risk transactions.
Because of the shortened reviewed period, declarations are generally not suitable for more complex transactions, military and intelligence critical technologies, or transactions with investors from China and other countries implicating more sensitive national security concerns. This dynamic was reflected in country and economic data in the Report. Of investors from 34 countries who filed declarations in 2020, Canadian investors accounted for the most declarations by a single country in 2020, at 20 declarations (16%), closely followed by Japan (14%), and then the United Kingdom (9%), Germany (8%), and Sweden (5%), with only five declarations (4%) involving Chinese investors.
Overall, the Report shows CFIUS hard at work following full implementation of the FIRRMA amendments, with efficient submission processing and a declaration process that benefits both CFIUS and industry. Because many of the trends observed likely result from a decrease in transactions with Chinese investors, it is reasonable to assume that future changes to the distribution of investor nationalities may substantially impact agency efficiency. Given this, practitioners advising investors should not overlook the trends identified in CFIUS annual reports.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. Westlaw Today is owned by Thomson Reuters and operates independently of Reuters News.
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