Marking the 45th year since its establishment with the publication of its 2020 Annual Report to Congress, the Committee on Foreign Investment in the United States (CFIUS) evinces a mature and agile governmental agency. It is setting the world’s standard for balancing openness to cross-border capital flows and mitigating risks arising from foreign direct investment from states whose objectives or conduct are deemed to undermine US. national security.
Indeed, the latest report’s data reveal the impact of the “whole-of-government” approach the US is taking on CFIUS’s operations and decisions as a direct result of the nearly unanimous passage by the legislative branch of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) and the subsequent implementing regulations developed by the CFIUS agencies in the two years following its enactment.
These data also illustrate how foreign investors from the countries in the crosshairs of FIRRMA and CFIUS have adjusted their expectations about the prospects of being able to consummate direct investments in the US unless they and their home governments reform certain practices seen as posing risks to U.S. national security.
Origins of CFIUS and its annual reports
It will surely come as a surprise to the uninitiated that CFIUS’s origins trace back to a 1975 Executive Order of President Gerald Ford mandating an assessment of how certain foreign investments could undermine US national security.
The subsequent passage of the “Exon-Florio Amendment” in the Omnibus Trade Act of 1988 gave CFIUS the authority to require modification or even blockage of such transactions. At that time the perceived major threat to US national security stemmed from the technological superiority of Japan – not that of China. It was a concern I recall well from my role working on the 1988 law as a Senate Committee professional staff member.
It was the passage of the Foreign Investment and National Security Act of 2007 (FINSA) that required CFIUS to transmit annual reports to Congress, which received classified versions while unclassified reports were made public.
The drive for, and impact of, FIRRMA
Over its multi-decade lifespan, CFIUS’s evolution has not been without teething problems. This has been punctuated by the extant technological rivalry to which the US (and other advanced democracies) have become increasingly exposed due to the rise of China – now the world’s second largest economy and one whose underlying fabric is fundamentally characterised by state-dominated enterprises and financial institutions, including those without de jure state ownership.
Recurring teething problems are, of course, to be expected from regulatory regimes such as that executed by CFIUS in as much as they need to align with the dynamics of the global economy. The enactment of FIRRMA, however, provides substantial footing to guide such changes.
Prior to FIRRMA, parties generally submitted notifications of proposed transactions involving a controlling interest by foreigners to CFIUS on a voluntary basis. Under FIRRMA, apart from certain transactions that are required to file with CFIUS, CFIUS must complete its review of notified transactions within 45 days (15 days longer than before), and if it deems necessary, CFIUS can undertake a formal investigation that could extend an additional 45 days (the same duration in existence prior to FIRRMA).
Importantly, however, FIRRMA also provides for a party to make a declaration, which is a briefer form of a notification. CFIUS must respond to such declarations within a 30-day assessment period.
It should be noted that both pre- and post-FIRRMA, CFIUS has possessed the authority to review both pending or already completed (i.e., non-notified) transactions unilaterally. The outcome of a CFIUS review may be (i) completion, where no action is taken (tantamount to a no-objection); (ii) suspension or prohibition, generally requiring presidential action; (iii) implementation by the parties of specific CFIUS-defined mitigation measures; or (iv) the parties’ transaction is subject to third-party monitoring.
Transactions for which CFIUS has concluded all actions receive a safe harbour, which means absent certain exceptional circumstances, CFIUS (or the president) will not subject such a transaction to review again.
One of the more important changes induced by FIRRMA is that CFIUS will review certain investments and real estate deals where foreigners only have a non-controlling interest. Moreover, FIRRMA and its implementing regulations stipulate transactions involving specific critical technologies and other sectors will be subject to more intensive assessments and possibly prohibitions.
Overview of key data included in CFIUS’s 2020 public Annual Report
The statistics presented by CFIUS in its unclassified report for calendar year 2020 provide a historical and contemporary snapshot of its activities. The focus here is on some of the key findings drawn from that report illustrating the impact FIRRMA has been having on the scope and nature of CFIUS’ administrative operations and its decisions.
At the same time, both the enactment of FIRRMA, itself, and CFIUS’s resulting actions, of course, are likely to affect how certain foreign investors in specific sectors are navigating changes in the US regulatory regime governing inbound foreign investment. The data in the report for 2020 yield some insights along those lines – although since many variables are at play, it is difficult to draw hard and fast conclusions on cause and effect in this regard.
Formal notifications submitted to CFIUS for covered transactions between 2018 and 2020 decreased from 229 to 187 – an 18% decline; at the same time, the number of declarations (the new, abbreviated notification option under FIRRMA) over the same period increased from 20 to 126 – almost a sixfold rise.
Moreover, of the 126 filed declarations in 2020, CFIUS completed its review for 81 (64%); it requested formal notifications for 28 (22%); it was unable to complete its review for 16 (13%); and one transaction (one percent) was withdrawn.
All other things equal, this points to parties availing themselves of the new, more efficient review route offered by CFIUS.
At the same time, CFIUS has stepped up its scrutiny of non-notified transactions, that is, past deals for which the parties did not file with CFIUS.The intelligence process pursued by CFIUS in this regard includes securing referrals from a wide range of sources: “executive branch agencies; tips from the public; media reports; commercial databases and Congressional notifications.”
Critically, the number of non-notified transactions reviewed by CFIUS was substantial in 2020: 117. (This compares to 231 transactions for which CFIUS received notifications.) Of the 117, CFIUS requested formal notification for 17 transactions (15%). The message CFIUS is trying to send through its aggressive pursuit of non-notified transactions and the need for ex ante compliance with FIRRMA is clear: companies face the risk of being forced to unwind their transactions – the costs of which can be substantial, both to the firms themselves and their shareholders.
CFIUS reviews of China-related transactions have continued their decline in the aftermath of FIRRMA and of past CFIUS decisions of Chinese sourced investments – think TikTok; Broadcom/Qualcomm;Ant Group/MoneyGram; Canyon Bridge/Lattice; and Beijing Kunlun/Grindr. The data in the 2020 Annual Report make this clear: whereas CFIUS reviews of China-sourced deals accounted for 25% of total CFIUS notifications in 2017, in 2020 such transactions represented just only nine percent of notifications.
However, these data in and of themselves do not disentangle the extent to which the fall off observed in CFIUS reviews of Chinese deals is the result of US parties being more cautious about engaging with Chinese counterparts; Chinese investors, themselves, pulling back, being less willing to engage with the US; both sides being more selective in the types of investments they are willing to entertain in order to reduce the perception that US national security risks are being heightened; or a general retrenchment in Sino-U.S. investment due to macro factors arising from political economy tensions between Beijing and Washington DC.
See also: CFIUS report reveals impact of FIRRMA
What will be surprising to most observers is that the greatest number of notifications to CFIUS in 2019 and 2020 involved Japan-sourced deals. Indeed, apart from China and Japan, the capital-source countries with the highest incidence of transactions reviewed by CFIUS over 2018-2020 are Canada, the UK, Germany, France and Australia.
Moreover, the data in the report indicate that for 2020 the source countries with the largest number of notified transactions in CFIUS-specified critical technologies sectors are Japan, Sweden, and Canada. China ranks 7th, with just over a quarter of Japan’s amount of such deals. While these data do seem to suggest greater risk aversion or selectivity on the part of potential Chinese and US partners’ willingness to engage in certain transactions as result of FIRRMA and CFIUS per se, it is too difficult to draw such a conclusion based on this evidence alone.
The same conclusion about parties climbing the CFIUS learning curve also might be discerned from the report’s data on the number of transactions as a result of the CFIUS review process. Whereas as in 2017 and 2018, approximately 30% of transactions were withdrawn, in 2019 and 2020, such withdrawals were 13% and 16%, respectively, about only half as much.
While it might be presumed that in the wake of FIRRMA, US technology and other sensitive sectors would be targeted less frequently by foreign investors than has been the case, such an assumption is not borne out by the data in CFIUS’s 2020 annual report. The greatest number of declarations filed with CFIUS in 2020 involved transactions in (i) electrical power generation, transmission, and distribution; (ii) computer systems designs and related services; (iii) software publishing; (iv) aerospace products and parts manufacturing; (v) semiconductors and other electronic component manufacturing; and (vi) computer and peripheral equipment manufacturing.
The match between a veteran agency and an ambitious young statute is not always an easy one to make in Washington DC. In the case of CFIUS and FIRRMA, however, it appears that, to date, there has been a smooth integration. Of course, as is Congress’s want, amendments to FIRRMA are already being discussed, especially in light of the currently ruptured relationship between Beijing and Washington DC. Before such action is taken, both the legislative and executive branches would do well to dispassionately assess why and how any contemplated changes would enhance both the global competitiveness and national security of the US.
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