In July 2020, the Committee on Foreign Investment in the United States (“CFIUS”) released its Annual Report to Congress for Calendar Year (“CY”) 2019. The Annual Report, which fulfills certain statutory reporting requirements, provides information on covered transactions filed with CFIUS during 2019. Among other things, the 2019 Annual Report provides some initial data and other insights into CFIUS’s administration of the Foreign Investment Risk Review Modernization Act (“FIRRMA”), which expanded the jurisdiction of CFIUS and included new reporting requirements.
A number of facts and data from the 2019 Annual Report may be of interest:
- Filing figures and timeliness: About half of CFIUS filings were completed in roughly 65 calendar days from the time a draft notice is submitted, which would cover a 20-day period for reviewing and perfecting a draft notice, and a 45-day review period without further investigation by CFIUS. The number of notices filed have remained steady over the last three years, whereas the number that resulted in investigations have decreased. The report attributes this decrease in investigations to FIRRMA’s extension of the statutory review period from 30 days to 45 days.
- CFIUS “vetoes” are down: 2019 saw a significant decrease in withdrawals of filings where CFIUS could not identify mitigating measures or proposed measures that the parties chose not to accept, causing the parties to withdraw the filing prior to CFIUS making a recommendation to the President that the transaction be blocked. The number of cases in this category was reduced from 18 in 2018 to 8 in 2019, suggesting that CFIUS has chosen to effectively “veto” fewer transactions.
- China is involved in fewer transactions: In 2017 and 2018, Chinese investors were the most frequent filers of notices, representing roughly one-fifth of all notified covered transactions with 55 and 60 transactions, respectively. In 2019, this number dropped to 25, representing roughly one-tenth of all notified covered transactions. Fewer Chinese acquirers filing notices in 2019 may help explain the decrease in CFIUS effective vetoes in 2019.
- Japan’s representation is increasing: In conjunction with a decrease in Chinese acquirers filing notices, Japanese acquirers have increased from 20 notices filed in 2017 to 31 in 2018. Japan is now the top acquirer home country with 46 notified covered transactions in 2019, roughly 20 percent. Japan is also by far the largest foreign acquirer of critical technology in 2019, with the next-highest country being Germany. By comparison, in 2018, Japan, China, and Canada were roughly equal top-acquirers of critical technology in 2018.
- Semiconductor manufacturing is the most-represented sector: Semiconductor and Other Electronic Computer and Electronic Product Component Manufacturing was the largest business sector represented, with 25 notices, representing over 10 percent of all filings. This is a substantial increase from the 10 notices filed in 2018.
- CFIUS requested one in four companies participating in the Pilot Program to file notices: Roughly one in four companies that submitted short-form declarations under the Pilot Program were asked to file notices, meaning time and money spent on those declarations did not result in an overall savings in either. In another roughly 30 percent of cases, CFIUS did not require the parties to submit a notice, but also did not clear the transaction on the basis of the declaration, leaving the parties in a somewhat ambiguous situation.
The Annual Report also covers information on foreign direct investment by countries that boycott Israel or do not ban terrorist organizations, which include the United Arab Emirates (UAE), Saudi Arabia, Qatar, Kuwait, and Lebanon, among others. The most-represented countries in 2019 were the United Arab Emirates (UAE), with 40 transactions involving UAE-investors, and Qatar, with the highest aggregate value of known transactions ($15.2 million).
Notices Filed and Withdrawn
Data on notices filed and withdrawn in 2019 demonstrate that most of CFIUS’s activities remain consistent with prior year trends. However, the decrease in the number of investigations and in the number of transactions that were effectively vetoed in 2019 are notable.
In 2019, 231 notices were filed with CFIUS with 113 resulting in subsequent investigations. The proportion of notices proceeding to investigation in 2019 was approximately 49 percent, down considerably from approximately 69 percent of notices in 2018. Over the past three years, the number of notices filed has remained consistent around 230 and the number of investigations has steadily decreased over the past three years from 172 and 158 in 2017 and 2018, respectively, down to 113 in 2019. The report attributes the decreasing number of investigations to the fact that the statutory review period was extended from 30 to 45 days after the enactment of FIRRMA on August 13, 2018.
In 2019, 30 notices were withdrawn during the investigation phase, roughly half as many as in each of the previous two years (64 in 2018 and 70 in 2019). Of the 30 notices filed in 2019 that were withdrawn, half (15) resulted in parties filing new notices in 2019 and 3 resulted in parties filing new notices in 2020.
In eight instances parties abandoned the transaction after CFIUS either informed them that it was unable to identify mitigating measures or proposed measures that the parties chose not to accept. This category—along with instances in which the President rejects a transaction (which occurred once in 2018 and once in 2019)—represents U.S. government actions that effectively prevent a transaction from moving forward. In 2018, CFIUS effectively prevented 18 transactions from moving forward.
For notices filed in 2019, the average number of business days that elapsed between the date of submission of a draft notice and the date on which the Committee provided written comments on the draft notice was 10.6 business days. The average number of business days that elapsed between the date of submission of a formal written notice and the date on which the Committee accepted the formal written notice was 7.8 days. This latter number is down from 9 days in 2018.
The average time to complete reviews, post-FIRRMA has remained consistent at 44-45 calendar days. However, the time to complete investigations increased in 2019, with the average time being 85 calendar days, up from 74 in 2018 and the median time being 91 calendar days (this extends beyond 90 days because if the last day of the review or investigation period is a weekend or holiday the period extends to the next business day), up from 75. Again, this may be explained by the extension of the review period to 45 days, which may have allowed more of the simpler transactions to be resolved without an investigation.
In light of the fact that about half of filings were completed at the review stage, it can be said that half the filings in 2019 were completed in around 18 business days, plus 45 calendar days, from the time the draft notice was submitted.
The Annual Report provides information on the sectors and subsectors within which the transactions fall. In 2019 the relative proportions of notices in each sector did not change dramatically. The greatest number of transactions occurred in the Manufacturing sector, accounting for 44 percent of transactions, compared to 35 percent of transactions in 2017 and 2018. The proportion of notices in the Finance, Information, and Services sector remained relatively constant at 39 percent. The proportion of notices in the Mining, Utilities, and Construction sector decreased from 21 percent in 2018 to 9 percent in 2019. The proportion of notices in the Wholesale Trade, Retail Trade, and Transportation sector remained the lowest, at 8 percent in 2019. Over the past nine years, the number of covered transactions in the Manufacturing and Finance, Information, and Services sectors has steadily risen, whereas the number of covered transactions in Mining, Utilities, and Construction, and Wholesale Trade, Retail Trade, and Transportation have only slightly increased.
Within the Manufacturing sector, the subsector with the most notices remained Computer and Electronic Product Manufacturing, accounting for 38 percent (39 notices) (up from 35 percent in 2018). Other significant subsectors included Electrical Equipment, Appliance, and Component Manufacturing, accounting for 16 percent (16 notices) (up from 9 percent in 2018), and Transportation Equipment Manufacturing, accounting for 14 percent (14 notices) (up from 10 percent in 2018).
Within the Finance, Information, and Services sector, Professional, Scientific, and Technical Services continued to be the largest subsector, accounting for 42 percent (37 notices) (up from 29 percent in 2018), with Telecommunications, accounting for 12 percent (11 notices) (down from 17 percent in 2018).
Utilities accounted for accounted for 71 percent (15 notices) of the Mining, Utilities, and Construction sector, a small increase over its 66 percent share in 2018. Within the Wholesale Trade, Retail Trade, and Transportation Sector, the Merchant Wholesalers, Durable Goods and Support Activities for Transportation subsectors remained the largest, accounting for 26 percent (5 notices) each. Merchant Wholesalers, Durable Goods had a modest decline from 44 percent in 2018. The other significant subsector was Pipeline Transportation, accounting for 16 percent (3 notices).
The Annual Report further breaks down transactions by business sector. Between 2018 and 2019, the number and proportion of notices involving semi-conductor related transactions have grown substantially, and the number and proportion of transactions in the electric power generation and transmission and distribution sector have correspondingly decreased.
In 2019, the top subsectors represented were Semiconductor and Other Electronic Component Manufacturing (25 notices), Electric Power Generation Transmission and Distribution (14 notices), Scientific Research and Development Services (12 notices), Computer Systems Design and Related Services (12 notices), and Other Electrical Equipment and Component Manufacturing (12 notices).
In 2018, the top subsectors represented were Electric Power Generation Transmission and Distribution (30 notices), Computer Systems Design and Related Services (11 notices), Software Publishers (11 notices), Semiconductor and Other Electronic Component Manufacturing (10 notices) and Wired or Wireless Communications (9 notices). See Annual Report for Calendar Year 2018.
Between 2017 and 2019, acquisitions by investors from China accounted for 20 percent (140 notices), the largest proportion of notices filed. Investors from Japan, Canada, and France ranked second, third, and fourth, respectively, in terms of the number of notices filed from 2017 to 2019 with 13.9 percent, 10.6 percent, and 6.9 percent (97, 74, and 48 notices). In 2019, the highest number of notices were from Japanese investors, accounting for 19.9 percent (46 notices). In 2019, China no longer represented the highest number of notices, reflecting more than a 50 percent decrease as compared to the notices filed in 2018. Notices from Canada, China, and Japan, which together accounted for approximately 45 percent of the notices from 2017 to 2019, were generally consistent with this distribution across sectors.
Critical Technologies Pilot Program
The Pilot Program commenced on November 10, 2018, and had two purposes. First, the Pilot Program expanded the scope of transactions subject to review by CFIUS to include certain non-controlling investments by a foreign person in an unaffiliated Pilot Program U.S. business that afford the foreign person certain access, rights, or involvement with respect to the Pilot Program U.S. business. Second, the Pilot Program implemented FIRRMA’s mandatory declarations provision for transactions that fall within the specific scope of the Pilot Program.
During the reporting period, declarations were mandatory for control transactions and certain non-controlling investments in U.S. businesses that produce, design, test, manufacture, fabricate, or develop one or more critical technologies, consistent with the definition set forth in FIRRMA, and in connection with certain identified industries (listed in appendix A to 31 C.F.R. part 801).
Upon receiving a declaration under the Pilot Program, CFIUS could take four actions: (1) conclude all action with respect to a transaction (i.e., clear it to proceed); (2) determine that CFIUS is unable to conclude action; (3) request that the parties to the transaction file a CFIUS notice; or (4) unilaterally file a CFIUS notice.
In 2019, 94 declarations were submitted under the Pilot Program. CFIUS requested that the parties to 26 of these declarations file a written notice. In other words, roughly one in four parties were required to go through both the short-form declaration process and the long-form notice process. CFIUS informed the parties to 32 of the 94 declarations that the Committee was unable to complete action, and notified parties to 35 declarations that the Committee had completed all action under Section 721. The parties for one declaration withdrew for business reasons.
Investors from Japan accounted for the largest proportion of declarations for the two-year period with 16.7 percent (19 declarations). Japanese investors also accounted for the most declarations each year. Investors from Canada and the United Kingdom accounted for the second- and third-most declarations from 2018 to 2019 with 12.2 percent (14 declarations) and 10.5 percent (12 declarations), respectively. Chinese investors made no declaration in 2018 and 3 declarations in 2019.
In addition to the Pilot Program, the Annual Report lists the originating countries for acquisitions of U.S. critical technology companies reviewed by CFIUS in 2019. Of the 92 covered transactions involving critical technology, Japan was the home country of the foreign acquirer for 20 transactions, followed by Germany (11), France (7), Canada (7), and the UK (6). In 2018, top five home countries were Japan (9), Canada (9), China (8), France (7), and Germany (7).
The substantive provisions of the Pilot Program have since been largely incorporated into the new, post-FIRRMA CFIUS regulations. See our prior advisory on those regulations here.