Key Takeaways from the CFIUS Annual Report for 2021

On Tuesday, August 2, 2022, the Committee on Foreign Investment in the United States (“CFIUS” or “the Committee) released its Annual Report to Congress for calendar year 2021.[1] The report, replete with charts, tables, and graphs visualizing the data and comparing it to prior years, broadly details the work the Committee has done in the past year concerning oversight of foreign investment transactions in areas deemed critical to U.S. national security. There are several key takeaways from the report that are particularly important to international businesses looking to invest in the United States.

Background: Authority, Composition, and Process

CFIUS, under the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”) and section 721 of the Defense Production Act of 1950, is an interagency body comprising the Departments of the Treasury (chair), State, Defense, Justice, Commerce, Energy, and Homeland Security; the Office of the United States Trade Representative; and the Office of Science and Technology Policy within the Executive Office of the President, that has the authority to review foreign-investment transactions (including certain real estate transactions),[2] referred to as “covered transactions,” to address national security. CFIUS regulations are codified at title 31 of the Code of Federal Regulations.

With the exception of certain transactions subject to mandatory filing requirements, parties to foreign-investment transactions submit voluntary declarations or notices of transactions to CFIUS. Notably, though, CFIUS may review pending or completed transactions even when the parties have not filed a notice or declaration, if it has reason to believe that the transaction is subject to CFIUS jurisdiction and/or may raise national security concerns.

The regulations require CFIUS to complete a review of a notified transaction within 45 days,[3] and allows for an additional 45-day investigation period if CFIUS deems it necessary.[4] In the alternative, parties may submit a declaration of a transaction, which is an abbreviated notification allowing for a 30-day assessment period.[5] After a declaration, CFIUS may (1) request the parties submit a notice; (2) inform the parties that it is unable to conclude action on the basis of the declaration and that the parties may file a notice; (3) initiate a unilateral review; or (4) notify the parties that it has concluded all action with regard to the transaction.[6] When CFIUS concludes all action on a transaction, it has determined the transaction does not pose any unresolved national security risks, that any national security concerns are adequately addressed by other laws, or that mitigation measures will address such risks.

“Covered transaction” includes any of: “a covered control transaction; a covered investment; a change in the rights that a foreign person has with respect to a U.S. business in which the foreign person has an investment, if that change could result in a covered control transaction or a covered investment; or any other transfer, agreement, or arrangement, the structure of which is designed or intended to evade or circumvent the application” of FIRRMA.[7] Additionally, CFIUS has the authority to review certain real estate transactions (referred to as “covered real estate transactions,”) as necessary to mitigate national security that may arise from such transactions (for example, by a piece of real estate’s proximity to a U.S. military base).[8]

Key Takeaways

Declarations

CFIUS conducted an assessment and took action (as discussed above) with respect to 164 declarations of covered transactions submitted in 2021. Only one of these was a real estate transaction.

• 47 were subject to mandatory filing requirements;
• CFIUS requested that parties to 30 declarations file a written notice;
• CFIUS informed the parties to 12 declarations that it was unable to conclude action;
• CFIUS notified the parties to 120 declarations that it had concluded all action; and
• CFIUS rejected two declarations. In one of these instances, the parties refiled as a notice.

The countries with the highest numbers of declarations in 2021 were: Canada (22); Germany (11); Singapore (11); South Korea (11); and United Kingdom (10). These are all close allies and/or trading partners of the United States.

Notices

2021 saw 272 notices filed with and accepted by CFIUS for review, the most of any year since 2012.

• The highest number of these (147 notices, or 55%) were in the Finance, Information, and Services sector. The Manufacturing sector accounted for the second highest amount (74 notices, or 28%);
• CFIUS conducted investigations into 130 of those 272 notices (the third highest in any year);
• Filers withdrew 74 of the 272 notices. In 63 of these instances, the parties filed a new notice, 52 of which parties refiled in 2021 and 11 in 2022; and
• CFIUS did not reject any notices in 2021.

The countries with the highest number of notices in 2021 were: China (44); Canada (28) Japan (26); Cayman Islands (18) France (13); Singapore (13); South Korea (13); and United Kingdom (13).

Mitigation Measures and Conditions

CFIUS adopted or imposed mitigation measures as follows:

• CFIUS concluded action after adopting mitigation measures to resolve national security concerns with respect to 26 of the 272 notices.
• CFIUS adopted mitigation measures to address residual national security concerns with respect to two notices that were voluntarily withdrawn and abandoned.
• In one notice, CFIUS imposed measures to mitigate interim risk.

Noteworthy mitigation measures included:

• prohibiting or limiting the transfer or sharing of certain intellectual property, trade secrets, or technical information;
• establishing a corporate security committee, voting trust, and other mechanisms to limit foreign influence and ensure compliance, including the appointment of a U.S. Government-approved security officer and/or member of the board of directors and requirements for security policies, annual reports, and independent audits [see our podcast episode discussing this];
• security protocols to ensure the integrity of products or software sold to the U.S. Government;
• assurances of continuity of supply to the U.S. Government for defined periods; and
• divestiture by the foreign acquirer of all or part of the U.S. business.

Non-Notified Transactions

Through various means, including referrals and tips, and other intelligence gathering, CFIUS identified 135 non-notified/non-declared transactions for consideration, and requested filings from eight of those.

Critical Technologies

While CFIUS does not release most information on critical technology to the public (for national security purposes), it did tabulate foreign acquirers of critical technology by country. The highest number of parties were from Germany (16); United Kingdom (16); Japan (15); and South Korea (13). Again, these are all allies of the United States, so it is not surprising that they represent the most prominent home countries of acquirers of critical technologies.

Conclusions

The bulk of transactions that CFIUS reviewed and approved were those involving acquirers based in friendly countries. This reflects the trend of “friendshoring,” or relocating supply chain nodes to trading partners with similar values. The outlier in this regard is China, which constituted the largest country from which foreign acquirers filed notices of covered transactions. Despite rising political and trade tensions, China remains a major trading partner with the United States (it is the United States’ largest goods trading partner, totaling $559.2 billion in 2020).[9] China also represented the single largest jump in notices of transactions year-over-year from 2020, when parties submitted only 17 notices. Contrast this with the United Kingdom, which submitted 14 notices in 2020 and one fewer, 13, in 2021.

For mitigation measures, these reflect ongoing and prominent national security considerations: intellectual property misappropriation and illicit technology transfer and limiting foreign interference in U.S. operations (both commercial and political).