This week the Committee on Foreign Investment in the United States (CFIUS) released its Annual Report to Congress for calendar year 2021 (the Report). The Report reflected a nearly 40% increase in overall CFIUS filings in 2021 from 2020. Notwithstanding this substantial increase in volume, the metrics indicate that CFIUS has mostly maintained, and in some cases slightly improved, its efficiency in dealing with filings. Moreover, there were not significant increases in the percentage of transactions requiring mitigation or abandoned based on CFIUS concerns, though some cases requiring mitigation took longer to resolve. CFIUS also identified more non-notified transactions compared to the prior year, but ultimately requested fewer total filings. Overall, while parties are notifying substantially more transactions, CFIUS continues to approve the vast majority of cases without mitigation, and the Report also reflects a number of other continued encouraging trends for transaction parties. Below we highlight our key findings from the Report.
- CFIUS filings increased significantly in 2021. In a 39% leap from 2020, CFIUS filings reached all-time highs in the first full year in which the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) was implemented. There were 436 total filings in 2021 (including both notices and declarations)—averaging 1.2 filings per calendar day. This tracked with a notably busy year overall in M&A. There were 272 notices filed in 2021, six of which were for real estate transactions. This was up 45% from 2020 (which saw 187 notices), and was the largest number of annual notices filed in more than 30 years. We note, however, that this number also includes 52 notices that were withdrawn and refiled (sometimes more than once) during 2021. Thus, the total number of transactions notified to CFIUS was substantially fewer than 272. There were 164 "fast track" declarations, the short-form filing, in 2021—a 30% increase from the 126 declarations filed in 2020. This increase is not surprising given the improved clearance statistics in 2020 and the timing and cost advantages of successful declarations, particularly since 2021 was the first full year that any transaction notified to CFIUS could be filed via a declaration.
- Declarations were successful in most cases—CFIUS cleared 73% of declarations and requested a notice in just 18% of cases. Over 73% of declarations cleared in 2021, an increase from 64% in 2020. Slightly fewer declarations resulted in a request for a notice in 2021—18% compared with 22% the prior year. The number of "shrugs"—where CFIUS does not clear the transaction or request a notice—also declined, from 13% in 2020 to 7% in 2021. Overall, the Report's data on declarations is encouraging for transaction parties. We still caution, however, that parties should carefully assess the form of filing for a given transaction. Notably, several CFIUS officials from the US Department of Defense, a CFIUS member agency actively involved in many reviews, expressed concerns several months ago at a CFIUS conference about the number and types of transactions—particularly control deals—being notified by declaration.
- Despite increased case volume, CFIUS's efficiency in reviewing cases remained mostly consistent —though some cases involving mitigation are taking longer. In 2021, 48% of cases proceeded to the 45-day investigation period, which is generally consistent with historical percentages since FIRRMA's enactment (47% in 2020 and 49% in 2019). The Report also shows some signs of increasing efficiency within the Committee, a goal Treasury officials recently stated at CFIUS's inaugural conference in June. CFIUS improved its turnaround time for pre-filing comments on draft notices (on average six business days in 2021, down from nearly eight business days in 2020) and for accepting formal notices (on average six business days, down from nine business days in 2020). The Report also confirms that parties should plan for declaration assessments, reviews, and investigations to take the full statutory time period allotted to CFIUS (though some investigations end more quickly). The one notable part of the Report indicating a decline in CFIUS's efficiency pertained to transactions that were withdrawn and refiled, which is likely due to more time being needed to negotiate mitigation measures, as discussed below.
- More filings were withdrawn in 2021, but fewer deals were stopped by CFIUS. In 2021, 27% of notices were withdrawn—a significant increase from just under 16% in 2020. The percentage of withdrawn cases that were refiled, however, increased substantially from 72% in 2020 to 85% in 2021. At the same time, the percentage of notices resulting in transactions being blocked went down slightly in 2021, with approximately 3.3% of notices abandoned based on CFIUS determining its concerns could not be mitigated or parties being unwilling to accept mitigation requirements. For the first time since 2015, there were no presidential block orders. In both 2020 and 2019, approximately 4% of notices were either abandoned or resulted in a presidential block based on CFIUS concerns. Additionally, the Report notes that most of the notices were withdrawn after CFIUS determined the transaction posed a national security risk in order to allow the parties additional time to consider CFIUS's mitigation terms. Accordingly, and consistent with our experience, negotiation of mitigation measures in some cases is taking longer than the statutorily imposed 90-day review and investigation periods, sometimes necessitating more than one withdrawal and refiling. As a result, parties in transactions that seem likely to require mitigation measures should allow additional time in the deal schedule for mitigation negotiations.
- Mitigation was required in a slightly higher percentage of notices, but the vast majority of notified transactions continue to clear without mitigation. In 2021, 9.6% of notices were cleared with mitigation, up slightly from 8.6% in 2020 and down from 12% in 2019. However, given the increase in withdrawals and resubmissions to negotiate mitigation measures, the percentage of transactions filed via a notice requiring mitigation was higher. Also of note, the Report advised that CFIUS agencies are currently monitoring 187 mitigation agreements, and that eight mitigation agreements were terminated in 2021 (with four others materially modified). CFIUS did not take any enforcement actions or issue penalties related to ongoing mitigation in 2021. This reflects that CFIUS continues to actively oversee mitigation compliance but has generally focused on working with companies to remediate any issues rather than take punitive action.
- Canada remained the lead investor country in declarations, though investors in a diverse range of countries utilized the fast-track filing option. For the second year in a row, Canada led among investor countries in declarations, totaling 22 declarations in 2021 (up from 20 declarations the previous year), or 13.4% of total declarations. This is not surprising given Canada's status as an excepted foreign state and strong US ally—Canadian investors are generally likely to present a threat profile conducive to successful declaration outcomes. After Canada, a wide range of investor countries were represented in declarations, with Japan, Germany, South Korea, and Singapore all tied for second (6.7% or 11 declarations each), followed by the United Kingdom (6% or 10 declarations), France and Guernsey (5.5% or 9 declarations), and Australia (5% or 8 declarations).
- Chinese entities filed the most notices, though this likely reflects an increase in non-notified transactions and Chinese investors otherwise being more inclined to file. China—with 44 notices (16.2%)—overtook Japan, which fell to third place after Canada, as the lead investor country in notices. China had occupied the number two spot for the previous two years. However, we do not believe this increase in notices necessarily represents a significant influx of foreign direct investment (FDI) from China into the United States. More rather, it reflects a combination of factors. First, the figure likely includes non-notified transactions, including some counted multiple times due to withdrawals and resubmissions and some involving transactions that closed prior to 2021. Second, even though there was not a notable increase in overall Chinese FDI into the United States in 2021, more Chinese investors may be inclined to notify their transactions given known CFIUS sensitivities to China and the more aggressive non-notified process making a call-in generally more likely. Third, Hong Kong's inclusion in the China count since July 2020 likely contributed to the uptick. Fourth, Chinese investors are more likely to file notices than declarations, so Chinese transactions are disproportionately represented in the notice figures (e.g., there was one Chinese declaration compared to 44 notices, whereas Canadian filers were more balanced with 22 declarations and 28 notices). Nonetheless, since there have not been correlating spikes in blocked deals or mitigation, this indicates CFIUS has cleared certain Chinese deals—likely those involving more benign US businesses.
- Most CFIUS notifications continue to be voluntary. Though FIRRMA introduced mandatory filings for the first time in 2018, most CFIUS filings continue to be voluntary. The Report stated that only 29% of declarations (47) were filed on a mandatory basis in 2021 based on stipulations. This number does not, however, include transactions subject to mandatory notification that were instead disclosed in a full notice, so the total number of mandatory filings is higher (and not specified in the Report). Overall, CFIUS's increased efforts to identify and review non-notified transactions should cause parties to evaluate more closely the risk when determining whether to voluntarily notify a transaction.
- Very few filings are made under the real estate regulations. FIRRMA's implementing regulations include separate regulations for investment and real estate transactions, and a single transaction cannot fall under both sets of regulations. Unlike the investment regulations, the real estate regulations do not include mandatory filing requirements. Fewer than 2% of the CFIUS filings made in 2021 were pursuant to the real estate regulations, and thus the statistics discussed in the Report pertain almost entirely to filings under CFIUS’s investment authorities. While nearly all CFIUS filings are made under the investment regulations, the real estate regulations are useful for investment transactions as they provide parameters for assessing whether a target’s US locations could raise national-security concerns based on their proximity to sensitive US Government facilities. This assessment is particularly important when a transaction involves investors from higher-threat countries.
- CFIUS continued active efforts to identify non-notified transactions, but did not request many filings. As we reported last year, CFIUS has been expanding its efforts to identify and review non-notified transactions of interest. In 2021, CFIUS considered more non-notified transactions (135) than it had the prior year (117 in 2020, the first year in which CFIUS reported on non-notified transactions), though it only requested notices for eight non-notified transactions (6%) compared to 17 requests (15%) in 2020. Even though CFIUS did not request as many formal filings in 2021 as in 2020, the number of non-notified transactions that CFIUS considered did increase, which also happened in parallel with the large spike in notified transactions. We ultimately do not view the decrease in non-notified filing requests as an indication that CFIUS's pursuit of such transactions has slowed, particularly given the increase in resources devoted to such efforts. The numbers do, however, confirm that being contacted by CFIUS in relation to a non-notified transaction does not necessarily mean that CFIUS will ultimately request a filing—indeed, this is consistent with our experience advising clients who have received non-notified outreach from CFIUS. This underscores the importance of engaging experienced counsel to help navigate the non-notified process and increase the odds of achieving a favorable result, as well as the overall importance of thorough due diligence and careful transaction planning when determining whether to voluntarily notify a new deal. More than ever, there is an increased risk that CFIUS will learn of a transaction and make inquiries if it perceives a potential national-security risk.
Brittany Henderson (White & Case, Associate, Washington, DC) and Michael Crowley (White & Case, Law Clerk, Washington, DC) contributed to the development of this publication.
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