CFIUS’s annual report spells trouble for dealmakers

October 2023 | SPOTLIGHT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

October 2023 Issue

On 31 July, the Committee on Foreign Investment in the United States (CFIUS) released its annual report providing statistics for calendar year 2022. With this latest report, CFIUS watchers now have two years’ worth of CFIUS statistics for the Biden administration, and the numbers are not good for dealmakers.

In 2022, CFIUS set a new record for the highest number of withdraw–refiles in a single year, indicating that CFIUS continues to struggle getting its work done within its 90-day statutory deadline. CFIUS also set a record for the highest number of mitigation agreements in a single year. Finally, it set a record for the highest number of notices requested for transactions that were originally filed as declarations, making the new declarations process less efficient.

CFIUS set these records even though Chinese companies are filing fewer transactions, which means CFIUS is spending more time and resources picking apart transactions from countries regarded as neutral, or even as partners and allies.

Overall, the annual report for 2022 shows that the CFIUS process is becoming more difficult to negotiate in a timely and predictable manner and, in some cases, transactions can get bogged down in the CFIUS quagmire for several months.

Transaction parties are submitting fewer transactions to CFIUS for review

The annual report for 2022 notes that CFIUS handled 286 notices and 154 declarations, for a total of 440 filings. By comparison, in 2021 CFIUS handled a total of 272 notices and 164 declarations, for a total of 436 filings. The numbers make it seem as if transaction parties filed more transactions with CFIUS in 2022 than in 2021, but that is not quite accurate.

According to the annual report, 64 notices filed in 2022 were not notices for new transactions but were rather notices for old transactions that were originally filed in either 2021 or 2022 and then refiled in 2022 to give CFIUS more time to complete its work. Moreover, the annual report notes that CFIUS requested notices for 50 transactions that were originally filed as declarations. That means that transaction parties decided to submit notices for approximately 172 new transactions in 2022. The reported number is 286 only because CFIUS forced transaction parties to refile many notices or file notices at the end of the declarations process, which artificially drives up the number of notices.

With this in mind, the annual report for 2022 shows that CFIUS handled approximately 172 notices and 154 declarations for new transactions, for a total of approximately 326 transactions. Analysing the annual report for 2021 in the same manner, it appears that in 2021 CFIUS handled approximately 184 notices and 164 declarations for new transactions, for a total of approximately 348 transactions.

Thus, the annual report for 2022 shows that the number of filings for new transactions actually went down from 2021 to 2022.

Every year, there is always some difference between the total number of filings and the total number of filings for new transactions because CFIUS always requests at least some withdraw-refiles. Moreover, every year since 2020, CFIUS has requested that transaction parties submit at least some notices for transactions originally filed as declarations.

This year, however, CFIUS required so many withdraw-refiles, and requested so many notices for transactions that were originally filed as declarations, that the number of total filings for the year increased from the prior year – making it appear as though parties were filing more transactions with CFIUS – while the number of filings for new transactions actually decreased. If anything, the numbers suggest parties are starting to grow wary of bringing new transactions to CFIUS.

CFIUS set a new record for the highest number of cases mitigated in a single year

Last year, CFIUS concluded action after adopting mitigation agreements with respect to 41 notices – the highest number of mitigation agreements in a single year in the history of CFIUS.

There is cause to believe that the mitigation numbers are high, at least in part, because CFIUS is mitigating national security risks that are more speculative in nature. This is particularly true for transactions where a foreign investor makes a minority controlling investment in a target US business. If the transaction before CFIUS does not give rise to a national security risk, and CFIUS provides the parties with a safe harbour letter, CFIUS knows that it will not be able to review the transaction again, even if the foreign investor acquires a larger stake in the target US business at a later date. If CFIUS believes that a future investment might create a risk to US national security, it appears that it is getting more comfortable requiring mitigation, even if the current transaction presents no risk, and even if there is no evidence that a future transaction is likely.

Future annual reports will be improved if they include a breakdown of the number of mitigation agreements signed by each CFIUS member agency. That would give congress and the public a better understanding of which CFIUS member agencies are demanding mitigation agreements, and congress can exercise more oversight over those agencies to ensure that mitigation agreements are supported by credible evidence and narrowly tailored.

The number of forced abandonments is up

As most CFIUS watchers are aware, CFIUS rarely sends a transaction to the president with a recommendation to block. In most cases, when CFIUS tells the transaction parties that it cannot identify any mitigation measures that will resolve its national security concerns and that it intends to send the transaction to the president, the transaction parties almost always walk away from the deal rather than incur the reputational damage of having a transaction publicly blocked by the president. Thus, by simply threatening to send a transaction to the president, CFIUS can effectively block a transaction, referred to here as a ‘forced abandonment’.

CFIUS only recently started publishing statistics identifying the precise number of forced abandonments. Over the years, the number of forced abandonments has been relatively low. Other than a spike in 2017 and 2018, forced abandonments have averaged less than 10 per year. In 2022, that number increased to 12.

CFIUS set a new record for the highest number of withdraw–refiles in a single year

In 2022, CFIUS forced transaction parties to withdraw and refile their transactions 68 times. The massive increase in withdraw–refiles over the last two years indicates that CFIUS is having serious problems completing its work within the 90-day statutory deadline. Transaction parties that voluntarily choose to go through the CFIUS process need to be aware that there is an increased probability that it will take longer than 90 days to obtain regulatory approval for a transaction.

Most declarations were submitted by partners and allies

The total number of declarations filed in 2022 was 154, which was 10 fewer than the previous year. The countries that submitted the most declarations in 2022 were, unsurprisingly, Canada, Japan, Germany, South Korea, Singapore, France and the UK. Chinese companies submitted only five declarations.

In the current geopolitical climate, it is a little surprising that Chinese entities attempted as many as five declarations. It is possible that, for these transactions, Chinese investors did not believe CFIUS had jurisdiction over their transaction and filed a declaration out of an abundance of caution so that CFIUS could review the jurisdictional issue.

Even though most declarations were submitted by partners and allies, CFIUS’s clearance rate dropped rather dramatically

At the end of the declarations process, CFIUS has three primary options: (i) clear the transaction; (ii) request a notice; or (iii) refuse to complete action, which means that it does nothing, neither clearing the transaction nor requesting a notice.

In 2020, the first year that CFIUS’s new regulations for declarations were effective, it cleared 81 out of 126 declarations, which is a clearance rate of 64 percent. In 2021, CFIUS cleared 120 out of 164 declarations, which is a clearance rate of 73 percent. This year, CFIUS cleared only 90 out of 154 declarations, and its clearance rate dropped to 58 percent. The drop in clearance rate is a surprise. If anything, given that China transactions were so low, the clearance rate should have increased. The fact that it did not means that CFIUS refused to clear dozens of declarations filed by partners and allies. If this trend continues, it is likely that transaction parties will file even fewer declarations in the future.

Most foreign investments in US critical technology companies are made by partners and allies

In 2022, the main countries of origin for critical technology transactions were Japan, France, Canada, the UK, South Korea and Sweden.

Although the annual report claims that China was involved in eight transactions involving US critical technology companies, there is reason to believe that number is inflated. The report states that the numbers do not represent ‘distinct transactions’, which means that if the same case was withdrawn and refiled multiple times, each refile would be counted. Based on this information, there is a reasonable possibility that China invested in fewer than eight US critical technology companies in 2022, and that those transactions had to go through multiple withdraw–refiles, which increased the number to eight.

China transactions are going down

The annual report for 2022 shows that the total number of China transactions has decreased from last year, from 45 to 41. However, 41 transactions seems high. The annual report does not break down these statistics, but it is reasonable to assume that a vast majority of the 19 or so transactions that were filed in 2022 at the request of the non-notified team involved China. It also seems reasonable to assume that the China transactions often involved multiple withdraw–refiles, which artificially inflates the number. Although the report is not clear on exactly how many times new transactions were filed by Chinese investors in 2022, it is fair to assume the number was low, probably much lower than 41.

Conclusion

For dealmakers, the main takeaways from the 2022 annual report are clear. If a CFIUS filing is mandatory, dealmakers need to be prepared for the CFIUS process to take longer than 90 days, even if the transaction does not involve Chinese parties. Moreover, dealmakers should be prepared for CFIUS to require mitigation in circumstances where the need for mitigation does not appear obvious.

On the other hand, if a CFIUS filing is not mandatory, the transaction parties should carefully evaluate whether it is better to finalise the transaction and take the risk that CFIUS’s non-notified team will subsequently identify the transaction and request a filing, or whether it is better to voluntarily disclose the transaction before closing and risk that CFIUS will delay the transaction unnecessarily or demand mitigation measures that may appear to be unreasonable to the parties.

Tyler McGaughey is a partner and David Houck and Tommy Leinenweber are associates at Winston & Strawn LLP. Mr McGaughey can be contacted on +1 (202) 282 5306 or by email: tmcgaughey@winston.com. Mr Houck can be contacted on +1 (202) 282 5219 or by email: dhouck@winston.com. Mr Leinenweber can be contacted on +1 (312) 558 3781 or by email: tleinenweber@winston.com.

Tyler McGaughey, David Houck and Tommy Leinenweber

Winston & Strawn LLP