CFIUS 2022 Annual Report – Rough Seas Ahead for Investors

The Committee on Foreign Investment in the United States (“CFIUS”) has released its annual report for calendar year 2022.  Although a difficult macroeconomic landscape led to a sharp decline in dealmaking in 2022, overall CFIUS’s case volume remained consistent, with 436 total reviews (declarations and notices) in 2021 and 440 in 2022.  However, the relatively flat growth in number of CFIUS cases hides a much more dynamic situation within the Committee.  

Key Takeaways

• In one out of three cases that parties filed a declaration, CFIUS asked for a notice.  The case for submitting a declaration is strongest where it is a low complexity deal with investors familiar to CFIUS and where the investor may not have filed at all, but for the filing being mandatory.  In most other cases, filing a declaration (rather than notice) merely adds time and expense to the process.
• Despite fewer deals from higher-risk countries, over half of all CFIUSnotices moved to a second-stage investigation.  The broader scope of U.S. businesses perceived to have national security sensitivity, an apparent lowering in practice of the threshold for CFIUS to seek mitigation, and a process where interagency consensus is challenging to achieve even within FIRRMA’s 90-day clock all likely contribute to this trend.  A very rough estimate using available data is that almost one-quarter of all transactions filed with CFIUS involve a remedy—either mitigation or abandonment.  Investors can continue to expect a more onerous CFIUS process with higher time, financial, and operational costs.
• CFIUS is continuing to intensify its monitoring and enforcement efforts, with increased on-site visits and enforcement guidelines announced during the last year.  With CFIUS having used its increased resources to make its way through the historical transactions (particularly Chinese transactions) that were within CFIUS’s jurisdiction but not notified, it is likely that those resources will be redeployed to identify current transactions that are not notified and to monitor and enforce mitigation agreements.  Assessment of whether a filing is warranted on a voluntary basis and meticulous mitigation compliance, therefore, will be of increasing importance to avoid unwelcome CFIUS visits.

Deeper Dive into the 2022 Annual Report

• The number of short-form declarations CFIUS reviewed decreased year-over-year, but the number of declarations resulting in a request for notice nearly doubled in relative terms.

With a 30-day review period, lighter information requirements, and option for CFIUS to issue a “no action” letter rather than a formal clearance, declarations were intended to function as a form of an express lane for low-risk transactions.  However, they come with the risk that CFIUS may request at the end of the declarations process that a notice be filed.

The below table provides data on four key metrics included in the annual report: (1) the total number of declarations, (2) the number of declarations resulting in a request for a notice, (3) the number of declarations resulting in a no-action letter, and (4) the number of declarations resulting in a clearance.

The 2022 numbers suggest that parties have not yet recognized how narrow the window is to get a transaction through using the declarations process: the number of declarations that resulted in clearances decreased from 2021 to 2022 by 20% while the number of declarations that resulted in CFIUS requesting a formal notice during the same period increased by approximately 77%.  These numbers are consistent with comments by CFIUS member agencies that it can be difficult to review a deal and obtain the necessary leadership approvals to clear it in 30 days.    

Key takeaway: A request for notice following a declaration generally is a bad outcome for investors because it adds both time and expense to the CFIUS review.  The 2022 numbers clearly demonstrate that parties should generally go into the declarations process expecting either a clearance or a request for a notice, not a no-action letter and, further, that they should submit a declaration only for low complexity deals involving investors familiar to the Committee.  In most cases, this will mean that a declaration makes most sense where the investor would not have filed the transaction but for the filing being mandatory.

• Despite seeing fewer deals from higher risk countries, CFIUS took longer to complete its review and required remedies at an increasing rate.

The number of notices involving Chinese and Russian investors dropped from 51 to 37 between 2021 and 2022.  Meanwhile, notices submitted by Singaporean investors increased sharply (up from 13 to 37), accounting for the highest number of notices from a single jurisdiction or about 13% of all notices (perhaps reflecting the 21% increase in inward FDI flows from Singapore and concern over diversion of Chinese investment through Singapore).  The decrease in reviews involving Chinese investors likely was the result of CFIUS already having worked through its backlog of closed transactions that it called-in for review and the continued challenging environment for Chinese investors.  As is typically the case due to their overall high level of investment in the United States, Canada, Japan, and the United Kingdom were among the top jurisdictions subject to reviews (although the number of notices submitted for each dropped between 2021 and 2022).

Nevertheless, the number of cases undergoing comprehensive investigation saw a significant surge, increasing around 25%.  Even more notably, the number of notices cleared with mitigation measures jumped, as did the number of transactions withdrawn or abandoned due to CFIUS national security concerns.  Though the published data allows for only a very rough estimate (due to the fact that a single transaction may account for two notices where the transaction was the subject of a withdrawal and refiling), the number of unique transactions reviewed by CFIUS that involved remedies—either mitigation or abandonment—jumped from approximately 17% in 2021 to 24% in 2022.

Key takeaway: The increase in investigations and mitigation measures points to a more rigorous and complex review process, potentially reflecting the broadening scope of U.S. businesses that CFIUS perceives as having national security sensitivity and a more cautious stance by CFIUS in assessing the potential national security risks linked to foreign investments.  It also reflects the fact that even with the increase in the length of the process from 75 to 90 days as a result of FIRRMA, it is still challenging for CFIUS to complete its review and achieve timely consensus with respect to transactions that pose national security risks.  In this environment, investors are likely to continue to face increasing time, financial, and operational cost and uncertainty, both while navigating the CFIUS process and post-closing.

• Intensity of mitigation monitoring is up, and while no penalties were issued, they may be around the corner.

CFIUS has 214 mitigation agreements in place that require monitoring and enforcement, constituting a significant burden for CFIUS, though many of these agreements, especially some of the older ones, impose limited obligations on the parties and limited monitoring burden on the Committee.  On a positive note, CFIUS leadership has noted in the past year that it terminates agreements when they are no longer needed, which is supported by the fact that CFIUS terminated 16 agreements last year.

The Annual Report also shows that increased CFIUS resources have allowed for more intensive monitoring in the form of mitigation monitoring visits.

The number of CFIUS monitoring agency visits to company sites rose noticeably from 29 in 2021 to 44 in 2022, an increase of nearly 52%.  Site visits involve highly detailed questioning of companies and can be very invasive, offering an opportunity to impress for companies that have their house in order and risk for companies that do not.  The significant growth in on-site monitoring suggests a more hands-on and rigorous enforcement strategy by CFIUS.  This is with the backdrop of CFIUS having released enforcement guidelines for the first time in 2022 and clear suggestions by CFIUS leadership over the past year that it can be expected to increasingly exercise its enforcement authority.  Interestingly, despite this intensified scrutiny, the penalties remained at zero for both years, though it may be that there were enforcement actions initiated in 2022 that may not have become final until 2023. 

Key Takeaway: The overall trends in mitigation monitoring visits underline an evolving focus on ensuring adherence to agreed-upon conditions.  It is hard to tell how much the balance of CFIUS monitoring and enforcement will tilt towards using a stick (i.e., penalties and other punitive actions) to encourage compliance, but the overall increase in emphasis on compliance and enforcement underscores the need for investors to ensure feasibility of any mitigation measures before agreeing to them and meticulous adherence in implementation.

• While the absolute number of transactions subject to CFIUS outreach may continue to drop, the risk to parties if they do not file may still be going up.

CFIUS has the authority to call-in transactions subject to its jurisdiction that have not been notified, reviewed, and cleared.  It can exercise this authority even with respect to previously closed transactions.  In some cases, CFIUS might reach-out to the parties and simply request that information be submitted voluntarily (often to assist CFIUS in making a jurisdiction determination).  In other cases, CFIUS might imply, expressly request, or require that the parties submit a formal filing.

The latest Annual Report unveils an interesting trend in non-notified transactions—notwithstanding the clear emphasis on enforcement, the total number of transactions that were subject to CFIUS outreach dropped significantly from 135 in 2021 to 84 in 2022, a decrease of about 38%.  According to the Annual Report, the volume of non-notified outreach may decrease, as CFIUS works through non-notified transactions that pre-dated CFIUS’s increased resources. 

As detailed in the Annual Report, CFIUS asked for a filing in 2022 with respect to 11 transactions that were the subject of outreach in 2022 and 8 that were the subject of outreach in 2021.  CFIUS clarified that these statistics do not reflect the full scope of what was formally reviewed by the Committee: there were instances where parties chose to file after CFIUS outreach without CFIUS having to formally request a filing.  The Annual Report does not indicate how frequently that occurred or the extent to which parties may file based on CFIUS signaling short of what it refers to as a “formal request,” but based on anecdotal information, the statistics may not be a reliable indicator. 

Key Takeaway: CFIUS has methodically worked through historical transactions (particularly Chinese and Russian transactions), with 80% of its work in 2020 focusing on historical transactions, 26% in 2021, and less than 1% in 2022.  While the rate of non-notified outreach may drop yet further in 2023, the resources freed up from historical lookbacks at the most obvious sources of risk may be increasingly devoted to identification of transactions that are mid-flight or have only recently been completed, with CFIUS reaching out on transactions that may not have previously raised enough apparent concern to justify outreach.  This, along with the increased rate of mitigation, increases the importance of companies, including companies from friendly jurisdictions, carefully assessing potential sensitivity of the U.S. business and whether a voluntary filing is warranted to avoid a post-closing knock on the door.

For transaction parties, these trends translate to a regulatory environment where early assessment of CFIUS considerations, close attention to the national security discussions within the U.S. government, strategic engagement with CFIUS, and careful adherence to mandatory filing and mitigation obligations are more vital than ever.