CFIUS 2016-2017 Annual Report
CFIUS Stopped Over 9% of Transactions Reviewed from 2017-2018 on Average as Data Shows Increase in Length of Process
On November 22, 2019, the Committee on Foreign Investment in the United States (CFIUS) belatedly released a consolidated annual report covering the calendar years 2016 and 2017. CFIUS has also released a subset of annual report data for 2018. The annual report principally serves a historical purpose—especially in light of the pending implementation of most of the CFIUS reforms enacted in the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA)—but still offers some valuable insights into how CFIUS functions and how parties should approach the process.
- CFIUS activity increased. CFIUS reviewed 172 notices in 2016, 237 in 2017, and 229 in 2018; all well above the number of notices received in any year since the 2008 financial crisis.
- CFIUS process took longer. In 2016, 79 CFIUS cases (46 percent of the total) required extension of the process beyond the initial 30-calendar day review period to a second-stage, 45-calendar day investigation period. In 2017, 172 cases (73 percent) required a second-stage investigation period, and in 2018, 159 cases (69 percent) went to investigation.
- Notably, these statistics do not reflect the length of the “intake” period when CFIUS comments on draft filings and accepts formal filings addressing those comments; again, based on anecdotal evidence, we believe the intake period lengthened during 2016 and 2017, leading to FIRRMA’s limits on the duration of these elements for filings in which the parties are willing to stipulate to certain matters.
- The CFIUS process can also be extended if the parties agree to administratively withdraw and refile notices, effectively “restarting the clock.” This may be advisable if CFIUS needs more time to complete its diligence or to negotiate risk mitigation conditions either internally (since CFIUS generally acts by consensus) or with the parties. In 2016, withdrawal/refile scenarios took place 15 times (including four refilings in 2017); in 2017, the number of such scenarios increased to 44 (including nine refilings in 2018), and in 2018, the number increased again to 45 (including an unspecified number in 2019). The jump in 2017 may have reflected the desire of parties to extend the CFIUS process while President Trump filled senior positions in CFIUS agencies in the hope that the new officials might view the parties’ transactions favorably. We are also aware of some transactions that were withdrawn and refiled more than once; as a result, the statistics may have been slightly skewed.
- CFIUS objected to more transactions. In each of 2016, 2017 and 2018, one transaction was blocked by the President on the advice of CFIUS. Most transactions that fail as the result of a CFIUS filing, however, are not formally blocked. Instead, after having identified national security concerns that either cannot be mitigated or can only be mitigated on terms unacceptable to the parties, CFIUS issues a “soft block” where it advises the parties of its intent to make an adverse recommendation to the President. In most cases, the parties respond by withdrawing their CFIUS filing and abandoning the transaction. In 2016, this scenario took place only three times. By comparison, 24 transactions (10 percent) were subject to “soft blocks” by CFIUS in 2017, and 17 transactions (7 percent) were abandoned in the face of CFIUS objections during 2018.
- CFIUS mitigation increased. If CFIUS identifies national security risks arising from a transaction, it can seek to place conditions on the transaction that would adequately mitigate the risk. According to the annual report, CFIUS was able to clear transactions subject to mitigation conditions 18 times (10 percent) in 2016 and 29 times (12 percent) in 2017 (figures for 2018 are not yet available). By comparison, mitigation conditions were used in only 11 (8 percent) of the 143 cases filed in 2015.
- CFIUS insisted that parties meet process requirements. Four times in 2016 and twice in 2017, CFIUS notices were withdrawn because the parties failed to meet CFIUS’s process requirements. The annual report did not specify how the parties did not meet these requirements, but it most likely related to providing truthful information required by CFIUS as part of the notice or in response to follow-up questions from CFIUS. CFIUS has previously reported the rejection of a filing on this basis, and two rejections also took place in 2018.
In the future, we expect CFIUS to issue annual reports for 2018 and 2019 that reflect the initial implementation for three of FIRRMA’s provisions: (i) extension of the initial 30-calendar day review period to 45 calendar days, (ii) mandatory “pilot program” CFIUS filings for certain transactions involving critical technologies, and (iii) the use of short-form declarations for pilot program filings in lieu of full-length CFIUS notices.
We especially look forward to CFIUS’s annual report for 2020-the first year in which all of FIRRMA’s provisions will have been implemented. Of particular interest will be unprecedented new disclosures required by FIRRMA, including:
A list of all notices filed, and all reviews or investigations completed during the period, with basic information on each party to the transaction, the nature of the business activities or products of all pertinent persons, along with information about any withdrawal from the process, and any decision or action by the President under this section.
These disclosures, even if delayed, will add greatly to the transparency of the CFIUS process.