The Committee on Foreign Investment in the United States (CFIUS), an inter-agency committee headed by the Department of the Treasury, is authorized to review transactions that could result in the control of U.S. businesses by foreign persons or companies in order to determine the effect of such transactions on the national security of the United States. CFIUS has become more widely known in the past decade amid growing concern over foreign investment in the United States and the potential security implications of certain foreign entities owning and controlling U.S. companies and/or technology.
In August 2018, the Foreign Investment Risk Review Modernization Act (FIRRMA) became law, making certain amendments to the CFIUS review process and further increasing the need for U.S. companies to consider filing a CFIUS notification when contemplating a merger or acquisition involving foreign direct investment (see Trump and Trade Updates of August 16, 2018, October 19, 2018 and September 24, 2019).
The recently released CFIUS Annual Report to Congress for Calendar Years 2016 and 2017 describes the review process before FIRRMA but nevertheless indicates several interesting trends:
- During 2016, CFIUS conducted a 30-day review of 172 notices and conducted further – more formal – 45-day investigations of 79 of these proposed transactions. CFIUS referred one proposed transaction to the president for review. In a transaction involving the acquisition of the U.S. business of Aixtron SE, a Germany company, by Grand Chip Investment GmbH, another German company, whose ultimate parent was Fujian Grand Chip Investment Fund LP, a Chinese company, the president issued an order prohibiting the acquisition.
- During 2017, CFIUS conducted a 30-day review of 237 notices and conducted further investigations of 172 of these proposed transactions. CFIUS referred one proposed transaction to the president for review. In a transaction involving the acquisition of Lattice Semiconductor Corporations by Canyon Bridge Merger Sub, Inc., a U.S. company ultimately owned by China Venture Capital Fund Corporation Ltd, a Chinese corporation owned by several state-owned entities, the president issued an order prohibiting the acquisition.
The overall data provided in this annual report shows a continuing upward trend in the number of notifications filed with CFIUS. For the 2016-2017 period, the number of filings in the finance, information and services sectors amounted to the greatest number of voluntary notifications, while the number of filings covering the manufacturing sector decreased slightly. Unsurprisingly, acquisitions involving Chinese investors accounted for the largest proportion of CFIUS notices filed for the 2015-2017 period, amounting to almost 26 percent of all filed notices (143 filings). Investments from Canada, Japan and the United Kingdom accounted for the second, third and fourth most notices, respectively.
It appears that the use of mitigating measures to obtain CFIUS approval is increasing. In 2016, CFIUS and the involved parties entered into mitigation agreements involving 18 transactions and, in 2017, mitigation agreements were issued for 29 transactions. Mitigation measures are adopted when the involved CFIUS agencies feel that certain procedures and processes must be put in place to ensure compliance and to mitigate any potential risk to U.S. national security. Another interesting trend for this two-year period was the number of withdrawn notices. In 2016, of the 172 notices, six were withdrawn during the review period and 21 were withdrawn in the more formal investigation phase of CFIUS review. In 2017, these numbers increased to seven and 67, respectively. In some instances, the parties filed a new, revised notice, but in other instances, the parties abandoned the proposed transaction after they were unable to satisfy CFIUS concerns or when proposed mitigation measures were unacceptable.
The number of CFIUS notices in 2018, reportedly 229 filings, was similar to the number of filings in 2017. With the enactment of FIRRMA, and its full implementation in 2020, CFIUS filings are expected to continue to increase – particularly since non-controlling investments in critical technology and investments in certain real estate transactions will now require CFIUS notification.