On July 26, 2021, the Committee on Foreign Investment in the United States (“CFIUS”) released its annual report for calendar year 2020 (the “Annual Report”). The Annual Report, which provides data on transactions filed with CFIUS in 2020, shows procedural improvements to the CFIUS process following full implementation of the Foreign Investment Risk Review Modernization Act (“FIRRMA”) on February 13, 2020. Short-form declaration filings are up by 35% from 2019 and CFIUS has cleared over 60% of declarations by the end of the 30-day review period. The number of notice reviews stretching into the second 45-day investigation period continues to decrease, with less than half of CFIUS notices going into investigation. Meanwhile, CFIUS flexed its monitoring resources in 2020, following up with parties to 117 un-notified transactions and requiring filings in 17 of the cases.
We have summarized below the key takeaways from the Annual Report.
- Total number of filings close to 2019, but a significant decrease in the number of notices. Parties to transactions have taken advantage of the declaration as a filing option for all transactions post-FIRRMA implementation. The total number of filings in 2020 slightly decreased from 2019 (313 total filings in 2020 v. 325 total filings in 2019 (-3.7%)). One hundred and eighty-seven notices were filed in 2020, a decline of approximately 19% from 2019’s 231 notices. However, the number of declarations that were submitted increased significantly, from 94 declarations in 2019 to 126 declarations in 2020 (+35%). This increase in the number of declarations can be partially attributed to expanded availability of the declaration as a filing option for all types of transactions, rather than just critical technology transactions within the scope of the Pilot Program following the implementation of FIRRMA, as more parties opted to file under the declaration process for low-risk transactions.
- Investors from US-allied countries took advantage of the declaration process. Investors from Canada (20), Japan (18), and the UK (12) led the declaration filings in 2020. Investors from China, which typically attract more scrutiny, filed under the declaration procedure only five times in 2020.
- Most declarations cleared at the conclusion of the review period. The Annual Report shows that in many instances the declaration process can be an effective option for securing CFIUS approval. CFIUS cleared the majority of declaration filings by the conclusion of the 30-day review period (~64%). However, CFIUS concluded nearly a quarter of declaration reviews with a request to file a full notice (~22%). CFIUS was unable to complete action with respect to approximately 13% of the declarations reviewed in 2020, leaving the parties the option to file a notice or to proceed without a definitive answer from CFIUS. The Annual Report’s data shows that the decision to file under the declaration procedure rather than a full notice can have a major impact upon the overall review timeline, as a significant number of declaration reviews continue to end with a request to file a full notice. In our experience, the declaration procedure, with its rigid time 30-day frame, is best suited for straightforward, low-risk transactions involving investors from US-allied countries and a US business that presents minimal national security vulnerabilities (e.g., no significant contracts with the US Government).
- Continued decline in the number of notices filed by Chinese investors. The number of notices filed by Chinese investors continued to decrease in 2020 as in recent years, likely reflecting a decrease in Chinese investment in the United States overall. Only 17 notices were submitted by Chinese investors in 2020, a decline from the 25 notices submitted in 2019. Investors from Japan, Canada, and France submitted the second, third, and fourth most notices respectively over the 2018-2020 period. In 2020, investors from Japan submitted highest number of notice (19), followed by China (17) and the UK (14). As expected, given the high level of scrutiny applied to Chinese investment in the United States and the recent trends in China outbound investment, the number of filings made by Chinese investors continued to decline. However, the Annual Report’s data also demonstrates that Chinese investments in US businesses continue to be approved by CFIUS.
- Decline in the proportion of notices reaching the investigation stage of review. The proportion of notices reaching investigation stage declined, likely as a result of the longer 45-day review period under FIRRMA. The proportion of notices reaching the investigation stage of review in 2020 was approximately 47%. This reflected a continued decrease in the proportion of notices reaching investigation from approximately 49% percent in 2019. The decline in the proportion of notices reaching the investigation stage may also be attributed to recent increases in CFIUS’ resources, as the Committee significantly expanded its staff in recent years to manage CFIUS’ broader authority under FIRRMA.
- Most withdrawn notices ultimately refiled. The Annual Report shows that most withdrawn notices were ultimately refiled with CFIUS. Only a small percentage of the total number of 2020 notices were withdrawn and abandoned. Twenty-nine notices were withdrawn in 2020. Seven of the withdrawn notices (approximately 3.7% of the total number of notices) were withdrawn and ultimately abandoned after CFIUS could not find any mitigation measures to resolve national security risks or the proposed measures were unacceptable to the parties. One notice was withdrawn and abandoned in 2020 for commercial reasons. The proportion of withdrawn notices that were ultimately abandoned is generally consistent with the proportion of withdrawn notices that were ultimately abandoned in 2019 (~3.46%).
- Proportion of transactions subject to mitigating measures similar to 2019. The proportion of transactions subject to mitigating measures and conditions was similar to the proportion in 2019. Twenty-three transactions were subject to mitigation in 2020 (~12%) versus 33 transactions in 2019 (~14%). CFIUS concluded action with respect to 16 notices (~9%) in 2020 after adopting mitigation measures to address national security concerns. CFIUS imposed mitigating conditions for three filings in letters issued by Treasury granting the parties approval to withdraw and abandon the transactions, but the transactions were not subject to National Security Agreements.
- Active monitoring on un-notified transactions. The Annual Report shows that CFIUS has been actively reviewing non-notified transactions. In 2020, CFIUS identified 117 transactions that previously closed without being notified to CFIUS. CFIUS requested a filing in connection with 17 of these non-notified transactions (~14%). We anticipate that CFIUS will continue to actively monitor un-notified transactions. As a general matter, CFIUS has jurisdiction to review covered transactions both pre- and post-closing, and the President has the authority to block or force divestiture of transactions presenting risks to US national security that cannot be mitigated. Due to the expansion of CFIUS’ staff and resources in recent years following FIRRMA’s implementation, CFIUS now has resources exclusively dedicated to monitoring and investigating un-notified transactions. As a result of these expansions to CFIUS’ capabilities, it is more likely that un-notified transactions will come to CFIUS’ attention nowadays, making robust CFIUS due diligence critical. Transaction parties that choose not to file with CFIUS on a voluntary basis should be prepared to engage with CFIUS if the transaction attracts CFIUS’ attention, even though not all inquiries regarding un-notified transactions ultimately result in a request to submit a filing.