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Focus on Regulation

CFIUS Annual Report Highlights Period of Increased Scrutiny for Foreign Investments

In 2015, the Committee on Foreign Investment in the United States (CFIUS), a U.S. Government interagency committee that conducts national security reviews of foreign investments, maintained a heavy case load, reviewing 143 transactions, according to CFIUS’s recently published annual report to Congress. Although the report covers transactions reviewed two years ago, it offers important insights about the Committee’s views on the growing national security risk of foreign investments.

We highlight below certain key features of CFIUS’s annual report:

Continued high volume of cases. CFIUS’s high volume of cases continued in 2015, with the Committee reviewing 143 transactions, only four fewer than in 2014.  The next two years’ annual reports – for 2016 and 2017 – will show even higher numbers. In 2017, CFIUS already has accepted more than 170 cases for review.

China remains atop the list of CFIUS filers. For the fourth consecutive year, Chinese investment accounts for the largest percentage of notices filed with CFIUS, rising modestly as a percentage of the total number of notices from approximately 16 percent in 2014 to approximately 20 percent in 2015.

Longer reviews suggest greater overall scrutiny. The number of cases proceeding to a second-stage investigation, which can extend CFIUS’s review from 30 to 75 days, rose from 35 percent in 2014 to 46 percent in 2015. The rise is likely attributable to greater CFIUS scrutiny of foreign investments generally, the complexity of the transactions, including the ownership structures of the buyers and the technologies of the U.S. companies, and CFIUS’s heavy case load. The longer reviews in 2015 cannot be attributed solely to CFIUS’s scrutiny of Chinese investments – a topic that garners significant press attention – because the percentage of Chinese cases in 2015 did not increase substantially over 2014 levels. This trend of longer reviews has continued through 2017, meaning that parties should continue to assume that any CFIUS review might last 75 days.

Transactions abandoned over national security concerns. As in past years’ reports, the 2015 report identifies the number of cases that were withdrawn (13), and, of those, the number that were re-filed (9). This year’s report specifies that three of the withdrawn cases involved transactions that the parties abandoned after (i) CFIUS informed the parties that it was unable to identify mitigation measures that would resolve its national security concerns or (ii) CFIUS proposed mitigation measures that the parties declined to accept. In another withdrawn case, the parties re-filed their notice in 2016 but ultimately withdrew the notice and abandoned the transaction before CFIUS had completed its review, suggesting that national security concerns might have driven the second withdrawal. Similarly, in 2017, several transactions – most involving Chinese investors – have been abandoned based on CFIUS’s national security concerns.

One filing outright rejected. In one 2015 case, CFIUS rejected the parties’ notice because information they had provided in the notice contradicted other information in the U.S. Government’s possession, and the parties ultimately abandoned the transaction. This case highlights the importance of transparency and accuracy in providing information to the Committee and serves as a reminder that CFIUS has multiple sources of information, including the U.S. intelligence community.

Additional mitigation measures identified. The report identifies certain mitigation measures that CFIUS employed in 2015, including ones that had not been identified in previous annual reports, such as security protocols to ensure the integrity of hardware and software sold to the U.S. Government and notifications to customers about the underlying foreign acquisition. Although in many cases CFIUS had imposed these mitigation measures prior to 2015, CFIUS might have chosen to include them in the report because the Committee (i) had begun to use these measures with greater frequency or (ii) wanted to make companies aware that these types of restrictions might be imposed in future cases that raise serious national security concerns.