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September 8, 2021 – The Committee on Foreign Investment in the United States (CFIUS) Annual Report to Congress for Calendar Year 2020 (the Report) Highlights the Expanded National Security Review Process for Foreign Investments in American companies.
In addition to providing useful metrics on statements and opinions submitted by investors, the report is the first to provide information on CFIUS reviews following the final implementation of regulatory changes under the 2018 Data Protection Act. Foreign Investment Risk Review Modernization (FIRRMA), legislation that significantly expanded the jurisdiction of CFIUS. and imposed mandatory reporting requirements.
The report also highlights some interesting trends, such as the decline in Chinese investment following increased scrutiny under the Trump administration.
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CFIUS is an interagency committee chaired by the US Department of the Treasury. Pursuant to the authority conferred under Section 701 of the Defense Production Act of 1950, as amended (Section 701), CFIUS has the power to review, suspend, vary, prohibit and to unwind mergers, acquisitions and divestitures of US companies by foreign persons. CFIUS may take these actions regardless of whether a party to a covered transaction submits a report or notice to CFIUS.
A “covered transaction” by CFIUS includes transactions that would give a foreign person control of a U.S. business. It also includes certain non-controlling investments that would give a foreign person certain access, rights, or involvement in a U.S. business that has critical technology, is involved in certain critical infrastructure activities, or processes sensitive personal data. CFIUS also has the authority to review covered real estate transactions that involve national security concerns.
In many cases, a statement or notice to the CFUIS is required or otherwise advisable. CFIUS reviews can follow a three-phase process: (1) initial assessment; (2) national security investigation; and (3) presidential determination.
CFIUS prepares its annual reports in accordance with Section 701. In accordance with Section 701 and previous CFIUS annual reports, the report provides details and summaries of notices and statements received, processing times, terms and conditions of mitigation and other useful measures. Additionally, the report is particularly noteworthy because it is the first to describe CFIUS’ national security review process after the full implementation of regulatory changes under FIRRMA.
Prior to FIRRMA, CFIUS did not exercise jurisdiction over non-controlling acquisitions. There was no declaration and investor submissions were voluntary, although the Committee could undertake its own review where no notice was filed. FIRRMA changed this status quo and, among other things, imposed mandatory reporting requirements and notice filing fees on parties to certain controlling and non-controlling investments. Statements are essentially abbreviated forms of notice that require no filing fee and which CFIUS must assess and respond to within 30 days.
FIRRMA also extended the deadline, from 30 days to 45 days, for CFIUS to complete its assessment of an advisory. Following this initial assessment phase, CFIUS may initiate the national security investigation phase, which extends the review period by an additional 45 days. In extraordinary cases, Section 701 allows CFIUS to extend the deadline for an additional 15 days to allow presidential review of transactions that pose unresolved national security concerns.
Some changes to FIRRMA, such as the 45-day review period for notices, went into effect immediately after FIRRMA was enacted. Mandatory declarations for investments involving critical technologies were established as part of a 2018 pilot program (Pilot Program). The implementation of fees and other changes, including those allowing the use of declarations for voluntary submissions, came into effect in 2020.
The report reflects a productive year for a busy government agency. There were a total of 313 investor submissions to CFIUS in 2020, comprising 187 notices and 126 statements. Among the notifications, 29 were withdrawn, of which 15 were the subject of new notifications in 2020.
Investigations are on a downward trend from 172 investigations (73%) in 2017, 158 investigations (69%) in 2018, to 113 investigations (49%) in 2019 and 88 investigations (47%) in 2020. This change probably resulted from a decrease in the number of Chinese investors and the change of FIRRMA from 30 to 45 days for the review of reviews, which allows more time for CFIUS to complete the assessments.
No investigation was extended for 15 days after the investigation period. However, President Trump issued an executive order in 2020 ordering the divestiture of Musical.ly, a former social media platform, by ByteDance Ltd. — making 2020 the fifth consecutive year with a single Executive Order exercising the authority of Section 701.
The report also provides comparative data from other annual reports. These show that, unlike in previous years, Chinese investors are no longer the main source of bids. On the contrary, there is clearly a downward trend in Chinese investment, a likely by-product of increased government scrutiny of Chinese investors, particularly under President Trump’s administration.
The total number of reviews is also trending down, with a decrease of almost 20% compared to the 231 reviews submitted in 2019. In contrast, the 126 reports in 2020 represent an increase of almost 35% compared to the 94 declarations submitted in 2019 as part of the pilot program. . This trend is somewhat underestimated as declarations on a voluntary basis were not allowed before February 13, 2020. According to the report, CFIUS believes that the introduction of declarations as a method of filing any type of transaction has resulted in the decline in the number of reviews and the increase in transactions. reviewed by CFIUS.
The declaration form is shorter, requires less information than a notice and does not require the payment of a filing fee; the 30-day review process for statements is significantly shorter than the 45-day assessment phases and 45-day potential investigation phases for notices.
There are, however, risks for investors who use a statement instead of a notice. Clearance rates previously reported by CFIUS for declarations were low, there is no guarantee of a letter of refuge, and previous annual reports show that CFIUS requires parties to the declaration to submit a full notice in a quarter of returns – adding considerable time and expense to the review process.
Essential to a proper assessment of whether to use the declaration or notification process, the report identifies the results of declarations submitted in 2020 as follows:
•The party stipulations accompanying the statements show that only 34 statements (27%) were submitted under the mandatory submission requirements. The reporting process is therefore used more for voluntary disclosures than for mandatory disclosures.
•CFIUS requested that the parties to 28 statements (22%) file a written opinion. This number represents a slight decrease from 2019 (28%) and 2018 (24%), indicating a continued trend for CFIUS to seek an opinion in a quarter of the returns submitted.
• CFIUS notified parties to 81 filings (64%) that it had completed all Section 721 actions, approving the transactions. The clearance rate has seen an upward trend, rising from 10% of the 21 declarations submitted in 2018 to 37% of the 94 declarations submitted in 2019.
As further detailed in the report, in 2020 CFIUS did not reject any statements and, as noted above, completed the review of statements within 30 calendar days, on average. These metrics and the trends identified in the report support reasoned decisions to submit reports for low-risk transactions.
Due to the shorter time period under review, disclosures are generally not suitable for more complex transactions, critical military and intelligence technologies, or transactions with investors from China and other countries involving more sensitive national security concerns. This dynamic is reflected in the national and economic data in the report. Among investors from 34 countries who filed reports in 2020, Canadian investors accounted for the most reports by a single country in 2020, with 20 reports (16%), followed closely by Japan (14%), then the United Kingdom (9%), Germany (8%) and Sweden (5%), with only five statements (4%) involving Chinese investors.
Overall, the report shows that CFIUS is working hard after full implementation of the FIRRMA Amendments, with efficient handling of submissions and a reporting process that benefits both CFIUS and the industry. Given that many of the observed trends are likely the result of a decrease in dealings with Chinese investors, it is reasonable to assume that future changes in the distribution of investor nationalities could have a substantial impact on agency efficiency. In this context, practitioners advising investors should not overlook the trends identified in the CFIUS annual reports.
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