The U.S. Department of the Treasury, in its role as chair of the Committee on Foreign Investment in the United States (CFIUS), released the public version of its Annual Report to Congress for Calendar Year 2021 (Annual Report) on Aug. 2, 2022. Notably, the 2021 Annual Report captures data for the first full calendar year in which its authority was expanded under the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA).1 New CFIUS regulations under FIRRMA of February 2020 put in action the broadened CFIUS jurisdiction over certain foreign investments in U.S. businesses involved in critical technologies, critical infrastructure, sensitive personal data (TID U.S. Businesses) and certain real estate transactions.
The Annual Report provides helpful insights into the largely confidential operations of CFIUS while making clear that companies should continue to prioritize diligent planning and adequate preparation in order to successfully navigate the CFIUS review process. This Holland & Knight alert identifies five important trends in the Annual Report that will be of interest to dealmakers.
1. A Record Number of Reviewed Transactions in 2021
CFIUS reviewed a record 436 transactions in 2021. This includes 164 declarations (an increase of 30 percent from the 126 declarations in 2020) and 272 notices (an increase of 45 percent from the 187 notices in 2020). The largest number of declarations involved Canadian investors (22), and the largest number of notices involved Chinese investors (44). These numbers include increasingly complex transactions across a variety of industry sectors. Notably, a combined 83 percent of the notices fell into either the Finance, Information and Services, or Manufacturing sectors. Additionally, unlike in prior years, no reviews were ended by presidential action. Overall, the Annual Report indicates that the number of transactions submitted for CFIUS review has been consistently increasing over the last few years and particularly since the enactment of FIRRMA.
2. Increased Use of the Short-Form Declaration
The use of the short-form declaration has been increasing consistently since its inception. Parties submitted 164 declarations in 2021, up from 126 in 2020, 94 in 2019, and 20 in 2018, the year when it was introduced. The declaration process provides for an expedited review, and the numbers suggest that most of the growth in overall transactions reviewed has been with respect to declarations.
Significantly, less than a third of declarations filed in 2021 were subject to mandatory requirements (47 of 164 total declarations), indicating that parties are increasingly seeing value in filing a voluntary declaration for clearing a transaction. The majority of these declarations involved investors from U.S.-allied countries (e.g., Canada, Japan, Germany, France, the United Kingdom, South Korea, Australia and New Zealand), indicating a perceived advantage for friendly nations in utilizing the declaration process, particularly for less complex transactions or repeat investments by the same investor.
Importantly, the clearance rate for declarations increased substantially from 64 percent in 2020 to 73 percent in 2021, indicating that CFIUS is becoming more comfortable with the processing of declarations (for perspective: CFIUS clearance of declarations increased from less than 10 percent in 2018, to 37 percent in 2019, to 64 percent in 2020, and to 73 percent this past year). The declaration process has many benefits for dealmakers, including fewer filing requirements, a shorter review timeline and no filing fees. Nevertheless, it is important to strategically consider whether to make use of the declaration process, as the filing option is not appropriate for all transactions and can entail risks for the parties, including the potential for CFIUS to invite the filing of a full notice at the conclusion of the declaration review period. Though the clearance rate for declarations in 2021 was 73 percent and the review timeline was expedited (30 days on average), CFIUS requested that the parties to 30 declarations file a full notice. Submitting a declaration and then having to file a full notice eliminates many of the perceived time and cost-related benefits of the declaration process. Several factors – including the activities of the U.S. business, the origin of the investor, the complexity of the transaction and whether the deal involves a controlling or non-controlling foreign investment – can affect whether CFIUS can review a deal and successfully address national security concerns within the 30-day review timeline. For this reason, dealmakers are advised to proceed with caution and think critically, including conducting a thorough CFIUS risk analysis, before pursuing a declaration.
3. Substantial Increase in Filings from Chinese Investors
After a significant decrease in the number of reviewed transactions featuring Chinese investors from 25 in 2019 to 17 in 2020, the number of notices originating from China increased significantly to 44 in 2021.2 The large majority of these notices fell in the Finance, Information and Services, and Manufacturing sectors. While the relatively small number of reviewed Chinese transactions in recent years highlights growing scrutiny over Chinese acquisitions of U.S. businesses and Chinese exposure to U.S. supply chains, the reversal in direction also is indicative of a more nuanced approach to Chinese investment in the U.S. economy under the Biden Administration. Additionally, it appears that Chinese investors have gravitated towards industry sectors that may be less controversial. To contrast the increased number of notices, only one declaration filed in 2021 involved a Chinese investor, demonstrating that investors from high-risk jurisdictions like China continue to shy away from the declaration process, surmising correctly that is less likely for CFIUS to approve a Chinese investment through a declaration review.
4. Larger Number of Non-Notified Transactions Under Scrutiny
Since the enactment of FIRRMA, CFIUS has devoted substantial resources and hired dozens of staff to monitor and investigate non-notified transactions. This trend continued in 2021. The Annual Report notes that CFIUS employed a number of methods to identify non-notified transactions (e.g., interagency referrals, tips from the public, media reports, commercial databases and congressional notifications) and will likely continue to do so as CFIUS seeks improved and more coordinated tactics to identify such transactions. In 2021, CFIUS identified 135 non-notified transactions of interest, up from 117 in 2020. While CFIUS identified more non-notified transactions in 2021 compared to 2020 – fewer transactions resulted in a request for filing – 17 resulted in a request for filing in 2020 versus just eight requests for filing in 2021.
U.S. businesses with foreign investors should be aware of efforts by CFIUS to identify non-notified transactions, as there is no statute of limitations for CFIUS jurisdiction. And even if CFIUS ultimately decides not to request a filing following a non-notified inquiry, the time and cost associated with navigating the non-notified process can be significant. In light of enhanced scrutiny of non-notified transactions and the value of having an expert assessment in hand supporting a decision not to make a CFIUS filing, it is recommended that companies include CFIUS-related considerations in their standard due diligence process for all cross-border transactions and determine whether a CFIUS risk assessment is appropriate to fully vet all CFIUS considerations.
5. Continued Priority to Protect Critical Technologies
While CFIUS was unable to provide significant unclassified information regarding transactions involving critical technologies (a classified list was provided to the United States Intelligence Community, or USIC), it is clear that the protection of U.S. critical technology remains of utmost concern for CFIUS. Specifically, the Annual Report notes that much of the USIC believes that foreign governments are extremely likely to use a range of collection methods to obtain U.S. critical technologies. CFIUS reviewed 184 covered transactions involving acquisitions of U.S. critical technology companies in 2021, compared to 122 in 2020. Though the top critical technology acquirers in 2021 were U.S. allies, with Germany and the United Kingdom tied for first place with 16 covered transactions each, several deals involved investors from high-risk jurisdictions, including 10 deals coming out of China and five out of Russia. As greater emphasis is placed on the resilience and security of U.S. supply chains, as well as the expanded scope of "critical technologies" through regulatory changes by U.S. government agencies and the rise of geopolitical tensions with countries like China and Russia, it is anticipated that focus on such transactions by CFIUS will only increase.
Conclusion
Data from the CFIUS 2021 Annual Report confirms that the enactment of FIRRMA has undoubtedly brought more cross-border transactions for review by CFIUS. Consequently, it is essential that investors include evaluations of CFIUS jurisdiction and risk in their due diligence processes and that sellers consider their technology, critical infrastructure and data under the CFIUS regulations to help move a transaction to closing most efficiently and with the least disruption to the business objective of the parties.
Notes
1 For more information on the passing and subsequent enactment of FIRRMA, see Holland & Knight's previous alerts, "FIRRMA Expands CFIUS Jurisdiction in 2 Major Ways" (Aug. 16, 2018) and "New CFIUS Regulations Finally Take Effect" (Feb. 13, 2020).
2 Please note that data for China from 2021 includes notices involving investors from Hong Kong. Prior to 2021, notices involving investors from Hong Kong were included in a separate category.
