The Committee on Foreign Investment in the United States (CFIUS), an inter-agency committee headed by the Department of the Treasury, has released its annual report for 2018. CFIUS is authorized to review transactions that could result in the control of U.S. businesses by foreign persons or companies, as well as non-controlling investments by foreign persons or companies in certain U.S. businesses, 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. The Defense Production Act of 1950, as amended in August 2018 by the Foreign Investment Risk Review Modernization Act (FIRRMA), requires CFIUS to provide an annual report to Congress containing various cumulative and summary information related to transaction filings.
The report notes that for 2018, CFIUS conducted a first-stage review of 229 notices of covered transactions, and that more formal second-stage investigations were undertaken with respect to 158 of those 229 notices. CFIUS concluded action on 29 of the 229 notices (approximately 13% of the notices filed) after adopting mitigation measures in order to resolve national security concerns. This equals the number of mitigation measures implemented in 2017, and continues the significant uptick in CFIUS agencies’ interest in assuring national security provisions are implemented when necessary as the 2017-2018 mitigation actions total all of those taken from 2013 to 2016.
Ultimately, the parties to 66 of the 229 transactions withdrew their notices, with 34 parties later refiling a new notice in 2019. The report notes that for 18 of the withdrawn notices, the parties either abandoned the transaction after either CFIUS informed them that it was unable to identify mitigation measures that would resolve its national security concerns or it proposed mitigation measures that the parties chose not to accept. For 2018, CFIUS referred one transaction to President Donald Trump, in which the president issued an order prohibiting the acquisition of Qualcomm Incorporated by Broadcom Limited.
The overall data provided in this annual report shows a continuing upward trend in the number of notifications filed with CFIUS from 2010 to 2018. The number of notices subject to CFIUS jurisdiction increased from 93 in 2010 to 229 in 2018; however, the filings in 2018 represent a slight decrease from the 237 notices filed in 2017. Since CFIUS notices are highly confidential, the report provides only cumulative data on various industry sectors (and based upon NAICS codes) and notes that for 2018: 35% of the filings involved manufacturing; 38% related to finance, information and services; 21% involved mining, utilities and construction; and, 7% involved entities in the wholesale trade, retail trade or transportation.
Unsurprisingly, acquisitions involving Chinese investors accounted for the largest proportion of CFIUS notices filed in 2018, accounting for 55 of the 229 notices filed. Investments from Japan (31), Canada (29), France (21) and Germany (12) rounded out the top five foreign investor countries. For the 29 notices in which mitigation measures were put in place and agreed to by the involved parties in 2018, a wide variety of specific and verifiable mitigating actions were taken. These actions range from prohibiting or limiting the transfer or sharing of certain intellectual property and ensuring that only U.S. citizens handle certain products and services, to excluding certain sensitive assets from a transaction or even requiring the divestiture of all or part of the involved U.S. business.
The pilot program implemented pursuant to FIRRMA requiring declarations for certain transactions involving critical technologies was in place only in November and December of 2018. A declaration is a short form filing, for which CFIUS is not required to make a definitive determination. Parties facing a mandatory declaration may choose to submit a full notice. During this time, the annual report notes that CFIUS conducted an assessment on 21 declarations that were filed. CFIUS cleared two transactions, requested the parties to five transaction declarations to file a full written notice, determined that it could not conclude action on 11 transaction declarations, and found that one declaration was not subject to the jurisdiction of the pilot program. The parties withdrew one declaration for business reasons. Investors will continue to watch the treatment of declarations in the coming year in order to determine whether this is a viable alternative to submitting a full notice.