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CFIUS Report Offers Valuable Lessons for Foreign Investors

Sept. 19, 2022, 8:00 AM

The 2021 annual report to Congress of the Committee on Foreign Investment in the US merits study for its important insights for foreign investors contemplating investments in US businesses. It also contains valuable information about CFIUS oversight of Chinese investors.

CFIUS is an interagency panel that reviews acquisitions of US businesses or controlling shares by foreign buyers.

The Aug. 2 report is the panel’s first since new regulations were adopted under the Foreign Investment Risk Review Modernization Act. FIRRMA regulations weren’t drafted and effective until Sept. 2020, so while FIRRMA was adopted in 2018, it didn’t take effect immediately.

Among the report’s notable findings was the high success rate of Chinese filings relative to proposed investments originating from other foreign countries, suggesting that proposed investments by China-based entities in US businesses are worth considering.

Meanwhile, President Joe Biden’s Sept. 15 executive order underscores political scrutiny on foreign investment in the US. It cites additional areas for CFIUS to weigh, including the effect on critical US supply chains and cybersecurity risks arising from a contemplated foreign investment or sale to foreign investors.

However, as CFIUS already had the authority to consider such factors, the EO’s aim appears to have been to publicly highlight CFIUS’ consideration of the factors than to introduce a substantive change.

Record High Filings

FIRRMA introduced several key changes to the CFIUS process. These include broadening the scope of reportable transactions, making the reporting of certain investments mandatory, and introducing declarations, a short-form reporting mechanism for certain transactions that can provide a faster route for CFIUS approval.

These changes, combined with a robust deal environment, lead to record-high filings—436 notices and declarations combined—in 2021.

However, despite the increased number of filings, in 2021 trends observed in the 2020 report generally continued, except for the significantly increased number of Chinese notifications filed.

Since the announced expansion of FIRRMA, followed by the Covid-19 pandemic reduction in activity, proposed investments from Chinese investors had fallen from 25 filed notices in 2019 to 17 in 2020.

In 2021, however, investors from China filed 44 notices of covered transactions, the most of any foreign country. Canada was second with 28, followed by Japan with 26.

Factors in Return to Robust Investment

Several factors appear to have been at work with a return to robust investment activity from China.

One factor, which applies to foreign investments from all countries, is CFIUS’ enhanced investigation of transactions where the notice was filed.

Investors generally may be more inclined to notify CFIUS of transactions, since the odds are higher that the committee will learn of the deal anyway.

Waiting to be asked by CFIUS to file a notice risks delaying or imperiling a closing. The committee has the power to force parties to unwind an already completed transaction, and such uncertainty is disfavored by both sellers and acquirers.

In addition, over the past two years, investigating non-notified transactions has become a point of emphasis, following up on interagency referrals, tips from the public, media reports, and commercial databases, among other sources.

Another consideration when analyzing the high number of Chinese notice filings is that China-based investors are much more likely to file notices in lieu of filing a short-form declaration.

In the 2021 report, Chinese transactions represent a significant number of notices compared to declarations. For example, Chinese investors filed only 44 notices and one declaration, compared to Canadian investors who showed a more balanced filing pattern (28 notices and 22 declarations).

Investors Anticipate More Scrutiny

The overwhelming prevalence of notice filings suggests that Chinese investors anticipated that their investments would be scrutinized more strictly than investors from other countries. They therefore filed the more extensive notification under the regular notice process instead of the declaration process.

This suggests that Chinese investors may have been concerned that declarations will ultimately result in CFIUS requesting a notice filing, which could ultimately delay approval, especially if the committee decides 30 days after receiving a declaration that the parties needed to submit a full notice.

The most important point to consider regarding CFIUS’s approach to reviewing Chinese investments in the US is the relative success of Chinese filings, among filings for proposed investments from all foreign countries.

President Biden did not block or unwind any transactions in 2021, and foreign investors abandoned only nine notified transactions in 2021 because of failure to obtain CFIUS approval.

Instead of rejecting proposed transactions, CFIUS seeks mitigation measures—such as carving out certain high-sensitivity assets from a sale or enhanced reporting and monitoring activities by the acquirer—if a proposed transaction raises foreign security concerns.

Investments Typically Succeed

Although the report does not include country-specific information about abandoned transactions, there are indications within the reported information that filings by Chinese investors typically succeed.

For example, CFIUS approved 10 acquisitions of critical technology—a defined statutory term for particularly sensitive technology—by acquirers from China in 2021. That was the seventh-highest total, tied with Canada and higher than acquisitions by investors from traditional US allies, such as France and Australia.

The report contains enough information about the success rate of Chinese investments to merit a reevaluation of proposed investments from Chinese investors.

The number of filed transactions, the success in reaching workable mitigation agreements, and the paucity of blocked or abandoned transactions suggest that proposed investments from Chinese-based investors merit consideration.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Author Information

Bakita Hill is an attorney in the Business Department at Tucker Ellis in Cleveland. Her practice focuses on mergers and acquisitions, investment advising, and general corporate law.

Tod Northman, a partner in the Cleveland office of Tucker Ellis, has practiced transactional law for 28 years. Besides mergers and acquisitions (where he specializes in antitrust and foreign investment analysis), his practice focuses on aviation and emerging technology, including autonomous vehicles.