Recent CFIUS developments: Annual Report for 2021 & new executive order

Annual Report for 2021

We highlight below 7 key takeaways from the Report:

• Significant increase in numbers of filings in 2021.  CFIUS reviewed 272 notices (long-form filings) and 164 declarations (short-form filings), for a total of 436 overall filings in 2021 (an all-time record), up approximately 39 percent from 187 notices and 126 declarations, for a total of 313 overall filings, in 2020.  Of note, the number of notices in the “Finance, Information, and Services” sector, significantly increased from 80 to 147 between 2020 and 2021, a roughly 84 percent increase. 

• Canada remained the top acquirer home country in terms of declarations filed, while China regained its top spot in terms of notices filed.  Not surprisingly, U.S. allies appear to be using the declaration process frequently – Canada held the top spot for declarations with 22 in 2021, and Canada, Japan, the United Kingdom, and Germany have filed the most declarations from 2019 to 2021.  Notably, China regained its position as the country from which the most notices were filed.  Specifically, of the 272 notices reviewed in 2021, 44 notices (roughly 16 percent) involved Chinese investments.  Canada held second place with 28 notices (roughly 10 percent), with Japan following as a close third with 26 notices.  The 2021 ratio of Chinese declarations to notices (1:44) likely reflects Chinese investors’ recognition that their transactions are unlikely to be cleared during a declaration’s 30-day assessment period.

• Few declarations and notices involved covered real estate transactions.  Out of the 272 notices and 164 declarations that CFIUS reviewed in 2021, only 6 notices and one declaration were filed under CFIUS’s real estate regulations. 

• An uptick in “cleared” declarations.  Of the declarations submitted in 2021, 73 percent (120 out of 164) were “cleared” (i.e., CFIUS notified the parties that it had concluded all action under the applicable statute), up from 64 percent (81 out of 126) in 2020.  This increase compares favorably to the 37 percent (35 out of 94) cleared in 2019 and likely shows that (i) parties are becoming more adept at assessing which transactions are appropriate for a declaration versus a notice and (ii) CFIUS has streamlined its declaration assessment process.  Declarations that resulted in a “no action” letter (in which CFIUS neither requests a notice nor clears the transaction) also decreased slightly between 2020 and 2021. 

• Certain key metrics were stable.  In 2021, the percentage of notices whose reviews proceeded to the investigation stage (approximately 48 percent), the number of transactions whose clearances were conditioned on mitigation (approximately 10 percent), and the number of transactions abandoned on the basis of national security concerns raised by CFIUS (approximately 3 percent) remained at approximately the same levels as in 2020.

• CFIUS continues its aggressive pursuit of non-notified transactions.  One of the most notable developments in recent years is CFIUS’s focus on non-notified/non-declared transactions (transactions for which filings were not made but for which CFIUS initiates an inquiry).  In 2021, CFIUS increased the number of non-notified/non-declared transactions for which it initiated an inquiry – 135 in 2021 compared with 117 in 2020.  Nevertheless, only eight of the transactions in 2021 resulted in a request for a filing, as opposed to 17 in 2020, suggesting that CFIUS continues to judiciously consider whether such transactions are subject to its jurisdiction and raise national security concerns. 

• Focus on multiple acquisitions by foreign persons.  The Report added a new national security consideration, i.e., “[a]cquisitions or investments by foreign persons that . . . make multiple acquisitions or investments in a single sector or in a supply chain with national security implications, including raw materials, research and development for relevant technologies, tools and equipment, and manufacturing capabilities.”  This addition suggests that CFIUS likely views a repeat acquirer focused on a specific sector or supply chain as a potential national security concern and is consistent with President Biden’s new CFIUS executive order discussed below and with the administration’s increased scrutiny on supply chain security generally (e.g., President Biden’s Executive Order 14017 “America’s Supply Chains” from February 2021).

New CFIUS Executive Order

With the goals of “preserving U.S. technological leadership, protecting Americans’ sensitive data, and enhancing U.S. supply chain resilience," President Biden issued an E.O. on 15 September 2022 that provides guidance to CFIUS on national security factors to consider during its review of transactions.

The E.O. identifies these five factors:

• The effect on supply chain resilience and security (i.e., the ability to withstand future supply disruptions), both within and outside of the defense industrial base;
  • Examples: The degree of diversification through alternative suppliers across the supply chain (including suppliers located in allied or partner countries), supply relationships with the U.S. government, and the concentration of ownership or control by the foreign person in a given supply chain.
• The effect on U.S. technological leadership in areas affecting U.S. national security;
  • Identified areas/sectors: Microelectronics, artificial intelligence, biotechnology and biomanufacturing, quantum computing, advanced clean energy, and climate adaptation technologies.
  • Examples: The likelihood of a transaction leading to future advancements and applications in technology that could undermine national security, and the risk that ties between a foreign person involved in the transaction and third parties might pose a threat to U.S. national security.
• The effect of a transaction on national security viewed in the context of multiple acquisitions or investments in a single sector or in related sectors;
• The potential for a transaction to provide a foreign person (or third parties) access to capabilities or information databases and systems on which to conduct cyber intrusions or other malicious cyber-enabled activities; and
• The potential for a transaction to result in a foreign investor (or the parties to whom the foreign investor has ties) exploiting a U.S. business’s sensitive personal data to the detriment of U.S. national security.

The E.O. does not alter the jurisdiction of CFIUS or its mandatory filing programs.  CFIUS’s reviews reflect that the Committee already is focused on the factors identified in the E.O., but the E.O. might cause CFIUS to more closely examine these factors in certain transaction reviews.  The E.O. should also lead some parties whose transactions implicate these factors to more seriously consider whether the submission of a voluntary filing to CFIUS is warranted.

Next steps

For further information or assistance regarding transactions potentially subject to CFIUS's jurisdiction or general CFIUS trends, please contact any of the Hogan Lovells attorneys identified below.

Authored by Brian Curran, Anne Salladin, Zachary Alvarez and Hao-Kai Pai.