The Committee on Foreign Investment in the United States (CFIUS) recently released the unclassified version of its annual report to Congress for transactions notified to CFIUS during calendar year 2014. While the data contained in the report is over a year old, the trends evidenced and the insights into CFIUS's focus are important tools for parties to consider when a foreign person may acquire control over a U.S. business. Most notably, the report indicates:

1. a continued increase in the number of transactions notified to CFIUS;
2. an increase in the number of transactions that progressed to investigation;
3. an increase in the number of transactions withdrawn;
4. an increase in the number of notifications by Chinese-controlled acquirers;
5. an increase in the number of covered transactions with targets in the manufacturing sector; and
6. continued concerns by the U.S. government regarding the likelihood of a coordinated strategy by foreign governments or companies to acquire U.S. critical technology.

CFIUS Authority and Procedures

CFIUS is a U.S. government interagency committee authorized to review transactions that could result in a foreign government, entity, or person obtaining control of a U.S. business (otherwise known as a "covered transaction"). A covered transaction can be a merger, takeover, asset acquisition, investment, or acquisition of a controlling interest, including a minority interest, in a U.S. business. CFIUS has the power to review such transactions to determine their impact on U.S. national security, and takes a very broad view of the types of transactions that may raise U.S. national security concerns. CFIUS's national security review generally focuses on whether the transaction raises issues related to homeland security and/or national defense, including whether U.S. critical infrastructure and/or critical technologies are involved. CFIUS member agencies include the Departments of Treasury, Defense, Justice, Homeland Security, State, Commerce, Energy, and Labor, as well as the Office of the U.S. Trade Representative and the White House's Office of Science and Technology Policy.

The formal CFIUS process begins with the initial 30-day review period, which commences the business day following CFIUS's acceptance of the parties' Joint Notice. Within that period, CFIUS must determine whether to clear the transaction or to initiate an investigation because the transaction presents national security concerns and those concerns have not been mitigated. If CFIUS does not clear the transaction within the 30-day review period, it will initiate a 45-day investigation phase. During the investigation, CFIUS has 45 days to decide whether or not to clear the transaction, impose mitigation, or recommend to or request a determination by the president to block or unwind the transaction. Presidential determinations are rare, and most parties withdraw the notice prior to it being forwarded to the president, after which they abandon or restructure the transaction and potentially refile with CFIUS.

Increases in the Number of Covered Transactions, Investigations, and Withdrawals

CFIUS's caseload broadly tracks the level of merger and acquisition activity in the marketplace. This trend continued in 2014, as the total number of covered transactions increased significantly from 2013 to 2014—there were 147 transactions reviewed in 2014, compared to 97 in 2013. The number of transactions reviewed in 2014 was very close to the record high of 155 transactions reviewed in 2008.

The increase in transactions reviewed brought with it an increase in the number of cases that proceeded to the 45-day investigation period. CFIUS sent 51 transactions into investigation in 2014—an increase from 48 transactions the year before. Though the overall quantity of investigations increased, the percentage of cases sent to investigation decreased to 35 percent from 50 percent in 2013.

2014 also saw an increase in the number of transactions withdrawn from CFIUS review, with three notices withdrawn during the review period and nine withdrawn in the investigation period, for a total of 12 withdrawals. The number of withdrawn notices did not differ significantly from that observed in the prior year. Of the 12 withdrawn notices, in only one instance did the parties submit a new notice. CFIUS does not and cannot disclose why notices were withdrawn.

CFIUS also imposed mitigation measures in nine transactions, which is consistent with its actions in prior years. Specific mitigation imposed included creating a Corporate Security Committee, including the appointment of a security officer approved by the U.S. government; implementation of security policies and independent audits; implementation of policies and procedures for handling U.S. government business and the related data; requiring that certain activities and products remain in the United States; and agreeing that the U.S. government has the authority to review and object to certain business decisions.

Number of Chinese-Controlled Acquirers Continues to Climb

Since 2012, China has claimed the top spot among acquirers in covered transactions. In 2014, China again led the pack with 24 covered transactions, or roughly 16 percent of notices submitted. The annual report also indicates that Chinese investment remained concentrated in the manufacturing sector. Following China, acquirers came most often from the United Kingdom (21 transactions), Canada (15 transactions), and Japan (10 transactions).

Manufacturing Transactions Remain Dominant, Semiconductor Transactions on the Rise

As has been the case for several years, manufacturing sector transactions continue to dominate. In 2014, CFIUS reviewed 69 transactions in the manufacturing sector, which represented approximately 47 percent its total caseload—a significant increase from 36 percent in 2013. Although transactions in the manufacturing sector primarily involve computer and electronic products, the increase in percentage was driven primarily by a rise in the number of transactions in chemical and plastics or rubber manufacturing. Computer and electronic product manufacturing transactions primarily involved the manufacture of semiconductor and electronic components, which doubled to 12 transactions in 2014 from the six transactions reviewed by CFIUS in 2013. Navigational, measuring, electromedical, and control instruments manufacturing also made up a substantial number of transactions, with nine covered transactions in 2014. Other well-represented industries included electric power generation, transmission, and distribution (seven transactions) and software publishers (nine transactions).

U.S. Intelligence Community Concludes Likely Existence of Coordinated Strategy to Acquire Critical Technology Companies

Consistent with its finding in 2013, the U.S. Intelligence Community (USIC) again indicated its belief in the existence of an effort among foreign companies and governments to acquire U.S. companies involved in the research, development, or production of critical technologies for which the United States is a leading producer. Critical technologies include technologies subject to certain export controls administered by the Department of State, Department of Commerce, and Department of Energy. Of the 147 covered transactions in 2014, CFIUS identified 108—or nearly 75 percent—as concerning critical technologies. This statistic is not surprising, as "critical technologies" is a broad category covering technologies that are controlled for export to almost all countries, as well as those controlled only for export to embargoed countries. Further, parties are generally less likely to file with CFIUS when a transaction does not involve export-controlled technologies, software, or products.

Conclusion

The latest report confirms that CFIUS review is becoming more significant in foreign investment in U.S. businesses. To successfully navigate the CFIUS process, it is important to have a well-coordinated strategy with the other party to the transaction and have experienced CFIUS counsel involved at all stages of the process, including during (1) the development of an investment strategy within the United States, (2) negotiations of specific transactions, (3) drafting and submission of the CFIUS notifications, and (4) the CFIUS review process.

For further information about CFIUS, its annual report, or any related matter, please contact Donald Vieira or Melissa Mannino.

Kate McCarthy also contributed to the preparation of this WSGR Alert.