In addition to these developments, on May 20, 2020, CFIUS notified practitioners that the Committee is transitioning to a new online portal and Case Management System for declarations and notices. We will not get into the details of this process here, but rest assured that the V&E CFIUS Team will be registered and ready to handle all of our clients’ CFIUS filing needs.

Highlights of Annual Report for 2018 and Statistics for 2019

CFIUS is catching up on its annual reports. In November 2019, CFIUS released an Annual Report covering two years, CY 2016 and 2017. Below we summarize key takeaways from the report for CY 2018 and statistics for CY 2019.

1. Annual Report shows a sustained upward trend in the number of CFIUS filings.

CFIUS continued to see “a sustained upward trend” in the number of CFIUS filings from 2010 to 2018, with the number of notices increasing from 93 in 2010 to 229 in 2018. Although the number of CFIUS “notices” filed dropped to 229 in 2018 from 237 in 2017, the total number of CFIUS filings actually increased, as CFIUS accepted 21 short-form “declarations” in 2018 after the CFIUS Pilot Program mandating filings for certain foreign investments involving companies with “critical technologies” went into effect.

In a separate table of statistics covering 2015 through 2019, CFIUS reports that there were 231 notices filed in 2019. While an official figure has not been released for the number of declarations filed in 2019, we estimate that 110 declarations were filed.

2. Investigations declined after FIRRMA extended the initial review period from 30 to 45 days.

The number of covered transactions that went to a second-stage “investigation” following the initial “review” by CFIUS can be looked at from two different timeframes in 2018. Notices filed before August 13, 2018, had a 30-day statutory review period, and 76% proceeded to investigation in 2018, up slightly from 73% in 2017. Notices filed after August 13, 2018, had a 45-day statutory review period that took effect with the passage of FIRRMA, resulting in 53% proceeding to investigation, a substantial reduction. Taking the two timeframes together, the total number of investigations decreased slightly from 2017, from 172 (73%) in 2017 to 158 (69%) in 2018. The number of investigations further declined to 111 investigations (48%) in 2019.

3. The clearance rate for initial CFIUS Pilot Program declarations for critical technology transactions was very low.

The Annual Report provides limited information on the CFIUS Pilot Program for critical technology transactions, as the Pilot Program only began in November 2018. Of the 21 declarations filed, CFIUS cleared only two transactions on the basis of the declaration (i.e., without a follow-on filing of a full CFIUS notice), making the clearance rate for declarations only 9.5 percent. CFIUS requested that 5 of the 21 declarations be filed as notices, determined that it could not conclude action on 11 declarations, and found that one declaration was not subject to the Pilot Program’s jurisdiction.

The Pilot Program combined some of the most sensitive cases from a national security perspective (i.e., those involving critical technologies) with a shorter timeframe for CFIUS to assess each case, which presumably made it difficult for CFIUS to fully assess some of the Pilot Program cases in the allotted 30-day period. Looking forward, we expect that the percentage of cases that clear on the basis of a declaration will improve dramatically now that “voluntary” declarations are permitted, because less sensitive cases now will be filed as declarations. Prior to February 2020, only transactions subject to the mandatory filing requirements under the Pilot Program could be filed as declarations.

4. Chinese filings remained predominant in 2018.

From 2016 to 2018, Chinese investors filed the largest number of CFIUS notices for covered transactions (i.e., transactions that are subject to CFIUS jurisdiction), with 169 filed notices, constituting approximately 26.5% of all covered transactions during this period. Investors from Canada were a distant second with just 73 filed notices (11.4%) over that period. Japanese investors had 64 transactions (10%), and investors from France had 43 (6.7%). In 2018 alone, Chinese investors had 55 out of a total of 229 notices. The Annual Report only addressed “notices” in its analysis of covered transactions by country, excluding the 21 declarations. The number of notices involving Chinese investors fell only slightly to 55 in 2018 from 60 in 2017, despite the marked drop in overall Chinese investment in the United States during that period.

5. A large percentage of notices were withdrawn and abandoned in 2018, but withdrawals declined significantly in 2019.

In 2017 and 2018, there was a significant increase in the number of transactions that were withdrawn. In the period between 2010 and 2016, the percentage of notices withdrawn averaged just over 10%. In 2017, this increased to 31.2%, and remained high in 2018 with 28.8% withdrawn. While the reasons for withdrawals can vary (e.g., some notices are refiled or abandoned for business reasons), in 2017, 24 notices (10.1% of notices filed) were withdrawn and abandoned due to CFIUS-related national security concerns, and in 2018, 18 notices (7.9% of notices filed) were withdrawn for national security concerns.

According to a table released by CFIUS that includes statistics for 2019, the number of withdrawals decreased substantially in 2019, to only 30 notices (13%) withdrawn and only eight notices (3.4%) withdrawn and abandoned due to national security concerns.

6. CFIUS adopted mitigation measures in connection with 12.6% of CFIUS notices in 2018.

The use of mitigation measures to address national security concerns in 2018 further increased over prior years with 29 of 229 notices (12.7%) resulting in mitigation in 2018. Information on mitigation measures compiled from prior annual reports and the latest report is provided below.

Proposed Changes to Mandatory Filing Requirement for Foreign Investments in Critical Technologies

In our summary of the CFIUS regulations implementing FIRRMA that went into effect on February 13, 2020, we noted that CFIUS indicated its intent to undertake further rulemaking to update the mandatory filing requirement for transactions involving critical technology. CFIUS has now released the proposed rule to make these changes.

The current requirements regarding mandatory filings for critical technologies were implemented initially as a Pilot Program pursuant to an interim rule that went into effect in November 2018. The Pilot Program ended when the new CFIUS regulations went into effect in February, but the requirement to file transactions involving foreign investments in critical technologies was maintained in the new CFIUS regulations. As currently structured, a filing with CFIUS is mandatory for any transaction that is a “covered investment” (i.e., a non-controlling investment that affords the foreign investor certain access, rights or involvement) in, or that could result in foreign control of, a TID U.S. business that produces, designs, tests, manufactures, fabricates, or develops one or more critical technologies:

1. Utilized in connection with the TID U.S. business’s activity in one or more industries identified in appendix B to this part by reference to the North American Industry Classification System (NAICS); or

2. Designed by the TID U.S. business specifically for use in one or more industries identified in appendix B to this part by reference to the NAICS, regardless of whether the critical technology also has application for other industries.

The proposed rule would replace the industries identified by NAICS Code in sections (1) and (2) above with an analysis of whether export licensing requirements apply. The new requirement will require an assessment of whether certain U.S. regulatory authorizations (i.e., export control licenses and authorizations) would be required to export, re-export, transfer (in country), or retransfer the critical technology produced, designed, tested, manufactured, fabricated or developed by the TID U.S. business to certain transaction parties and foreign persons in the chain of ownership. The proposed rule relies on the four main U.S. export control regimes:

• the International Traffic in Arms Regulations (“ITAR”), administered by the Department of State;
• the Export Administration Regulations (“EAR”), administered by the Department of Commerce;
• the nuclear export controls regulations at 10 C.F.R. Part 810, administered by the Department of Energy; and
• the nuclear export controls regulations at 10 C.F.R. Part 110, administered by the Nuclear Regulatory Commission.

The analysis of whether an export control authorization would be required must (a) be based on the foreign person’s principal place of business (or such person’s nationality or nationalities for individuals); (b) view the foreign person as the “end user,” as applicable; and (c) must disregard any potentially applicable exemptions under the ITAR or exceptions under the EAR, except for specific elements of the following EAR exceptions:

• License Exception TSU (Technology and Software Unrestricted);
• Paragraph (b) of License Exception ENC (Encryption Commodities, Software and Technology); and
• Paragraph (c)(1) of License Exception STA (Strategic Trade Authorization).

The following entities or individuals in the transaction or the chain of ownership must be analyzed for export licensing purposes:

1. Any foreign person that could directly control the TID U.S. business as a result of the covered transaction;
2. Any foreign person that is directly acquiring an interest that is a covered investment in the TID U.S. business;
3. Any foreign person that already has a direct investment in the TID U.S. business and has rights that are changing in a way that will result in control of the TID U.S. business or in a covered investment;
4. Any foreign person that is a party to any transaction designed to circumvent CFIUS; or
5. Any foreign person that individually, or as part of a group of foreign persons, holds a “voting interest for purposes of critical technology mandatory declarations” in a foreign person described in the four paragraphs above. CFIUS has defined the new term “voting interest for purposes of critical technology mandatory declarations” to mean, for purposes of this export licensing analysis, “a voting interest, direct or indirect, of 25 percent or more.” The proposed rule further clarifies that “[i]n the case of a foreign person that is an entity whose activities are primarily directed, controlled, or coordinated by” a general partner or equivalent, the relevant 25 percent voting interest must be in the general partner. Further, any interest of a parent will be deemed a 100 percent interest in any entity of which it is a parent.

Clarification of Definition of “Substantial Interest” for Determining Whether a CFIUS Filing Is Mandatory

The proposed rule also clarifies the definition of “substantial interest” that was implemented in the February 13, 2020 CFIUS regulations. A CFIUS filing is mandatory if a foreign government-owned entity will acquire a “substantial interest” in a TID U.S. business. A “substantial interest” is defined as a voting interest, direct or indirect, by a foreign person of 25 percent or more in a TID U.S. business, where the national or subnational governments of a single foreign government have a voting interest, direct or indirect, of 49 percent or more in that foreign person. As with the “voting interest” concept discussed above for the analysis of critical technologies transactions, the proposed rule clarifies that:

• In the case of an entity “whose activities are primarily directed, controlled, or coordinated by or on behalf of a general partner, managing member, or equivalent,” the foreign government will be considered to have a substantial interest in the entity only if it collectively holds 49 percent or more of the interest in the general partner. This clarifies the scope of the role the general partner must have, otherwise the CFIUS analysis may pierce the veil of a fund and consider whether a foreign limited partner must file with CFIUS. The language in the existing rule requires only that the entity have a general partner.

• Any interest of a parent, not just the voting interest, will be deemed a 100 percent interest.

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In this changing landscape of CFIUS regulations, anyone contemplating a transaction of any size should seek CFIUS counsel if the deal involves a non-U.S. investor and critical technology or infrastructure, sensitive personal data, real estate involving airports, maritime ports, or near military or other sensitive government facilities.