Increased sector scope and concerns around a more aggressive approach to identifying non-notified transactions is leading to rising numbers of filings
The signing of the Foreign Investment Risk Review Modernization Act (FIRRMA) into law in 2018 was the most significant update to CFIUS in more than a decade. For years leading up to the new legislation, there had been a rising vigilance around foreign investments into the US, but FIRRMA significantly expanded the committee's scope, enabling it to focus on more sectors and examine non-controlling investments.
The result has been that more cross-border transactions now fall under the US national security umbrella than ever before. Thirty years ago, CFIUS concerns mainly applied to energy, telecommunications and defense deals; today businesses across a variety of sectors need to file for review. This is in part driven by digitalization—a side effect of which is the ever-growing amount of personal data held by businesses. Indeed, deals involving data, as well as critical technologies or infrastructure, are among the most scrutinized, although companies in most sectors are increasingly filing—sometimes due to concerns raised by their supply chains.
More and more, parties to transactions or investments involving US businesses with even remote ties to US national security are opting to file voluntarily in a bid to reduce uncertainty. This applies across a variety of dealmaker types, including strategics and financial investors such as private equity and sovereign wealth funds.
A tougher stance on non-notified transactions
Some of this voluntary filing is being driven by the Committee's tougher stance on examining non-notified transactions. These have stepped up since 2018, as CFIUS increased its oversight and enforcement resources. Although these enforcement measures have mainly focused on live transactions, CFIUS has also taken action against many completed deals—including ones that had closed several years previous. Those with a connection to Russia or China are a particular target, reflecting rising geopolitical tensions and security concerns between these states and the US in recent years.
Foreign jurisdictions tighten scrutiny
Added to this is the fact that other governments are taking a similarly stringent approach to foreign investment in their own countries. In Germany, the Foreign Trade and Payments Act was updated in 2020 as was the Foreign Trade and Payments Ordinance in 2021. These changes have extended rules on overseas investment and now include health-related businesses in the country's list of sensitive sectors. There have also been similar moves in the UK, Italy, Spain, Australia and New Zealand, and China has enacted new foreign investment security review measures in the past year. And while the US regime has a specific focus on national security, some other states have broadened their objectives to include areas such as economic security, and public order and safety.
The effect of reforms in the US and elsewhere is to make cross-border transactions more complex, especially where they involve multiple jurisdictions. Dealmakers need to be increasingly aware of any requirements to file transactions for review—and potentially consider voluntary notifications—and prepare accordingly.
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