United States: Trends in National Security Review: A More Active CFIUS

V&E CFIUS and National Security E-communication, January 14, 2011

The Committee on Foreign Investment in the United States (CFIUS) has released its Annual Report to Congress for 2009. CFIUS is the U.S. government inter-agency committee that examines inbound foreign investment for national security concerns. The purpose of the Annual Report is to provide insight into CFIUS's caseload, and this recent report reveals certain notable trends. CFIUS is conducting longer, in-depth national security investigations in a higher percentage of cases than in the past, increasing from 4 percent of cases in 2007, to 15 percent in 2008, and jumping to 39 percent of cases in 2009. While not in the report, a development in 2010 indicates that CFIUS is more likely to assert its little-used authority to investigate when parties have not voluntarily notified CFIUS of a transaction. In a high-tech deal involving a Chinese acquirer, CFIUS asked the parties to file a notice of their transaction six months after closing. In contrast, there has been significant foreign investment in U.S. oil and gas exploration with little CFIUS involvement, and Chinese investment in the U.S. generally seems to be increasing without significant constraints being imposed by CFIUS.

The Annual Report compiles and compares data on CFIUS notices for the years 2007 - 2009. The report does not contain detailed information on specific transactions, but the summaries offer valuable insights.

• More Investigations. Upon receiving notice of a transaction covered under the regulations, CFIUS conducts a 30-day national security "review." If CFIUS determines that there are national security concerns, CFIUS conducts an additional 45-day national security "investigation." One striking trend displayed in the Annual Report is that the percentage of transactions being investigated increased significantly between 2007 and 2009, as described above. While the Annual Report does not specify any reason for the growth in investigations, one possible explanation for the increase is that the Foreign Investment and National Security Act of 2007 directed CFIUS to undertake an investigation in any transaction involving "critical infrastructure" or a foreign government-controlled acquirer. An investigation can be avoided in such cases only if the Deputy Secretary of the Treasury and the deputy head of the designated lead agency jointly determine that the covered transaction "will not impair the national security of the United States."
• Key Industries. Almost half of CFIUS notices filed from 2007 to 2009 were for transactions in the manufacturing sector, with the largest percentage of those being from the computer and electronic products subsector. One third of CFIUS notices were in the information sector, and nearly two thirds of those notices were from the subsector for professional, scientific, and technical services. These are all industries that have traditionally drawn interest from CFIUS. The mining, utilities, and construction sector placed third, at 15 percent of notices filed. Half of those notices were from the utilities subsector, with the largest set being related to electric power generation, transmission, and distribution. These industries have come under scrutiny from CFIUS since the September 11, 2001, attacks. In fact, CFIUS now reviews almost every transaction involving the electric grid.
• Acquirers' Nationalities. Investors from the United Kingdom filed 97 of 358 notices over the three-year period, the largest number for any country. Investors from other friendly countries including Australia, Canada, France, the Netherlands, and Israel filed significant numbers of notices, and together accounted for one third of notices filed (119). Investors from China and Japan filed 13 notices each. Few of the Chinese investments have received significant scrutiny by CFIUS, and those closely examined appear to directly implicate national security concerns. Investors from Middle Eastern countries other than Israel filed a total of 24 notices, with investors from the United Arab Emirates alone filing 11 of those. It may come as a surprise to some that firms resident in countries considered friendly to the U.S. would be making CFIUS filings. Typically, these firms have made CFIUS filings because their transactions involved acquisitions in the national defense or homeland security industries.
• Mitigation Measures. When there are national security concerns about a transaction, CFIUS can require the parties to take mitigation measures. Such measures are designed to eliminate the national security concern, and they range from complex, formal national security agreements to simpler letters of assurance. From 2007 to 2009, CFIUS required mitigation measures in 21 transactions. In 2009, parties in deals involving energy, computer software, and telecommunications were required to adopt mitigation measures including establishment of a Corporate Security Committee, compliance with guidelines for handling U.S. government contracts, and notification of material changes in products or services.
• Withdrawn Notices. With permission from CFIUS, parties can withdraw notice of a transaction. Parties have done so when they were unable to resolve national security concerns within CFIUS's timelines, when they abandoned the transaction, or when they materially changed the terms of the transaction. The percentage of withdrawn notices remained relatively steady during the three-year period, with 11 to 15 percent of cases being withdrawn each year, most often in the initial review phase.

Overall, the number of CFIUS notices is down from previous years. After reaching a high of 155 notices in 2008, transacting parties filed only 65 notices in 2009. This drop is likely due to the economic downturn and does not reflect any restriction in CFIUS's jurisdiction. When deals involve foreign direct investment in the United States, it is wise to consider filing a notice with CFIUS.

This material is not intended to create, and does not create, an attorney-client relationship between you and Vinson & Elkins L.L.P., and you should not act or rely on any of this information. As legal advice must be tailored to the specific circumstances of each case, nothing provided herein should be used as a substitute for advice of competent counsel. These materials do not constitute legal advice, do not necessarily reflect the opinions of Vinson & Elkins L.L.P. or any of its attorneys or clients, and are not guaranteed to be correct, complete, or up-to-date. Vinson & Elkins L.L.P. assumes no liability for the use or interpretation of information contained herein. This publication is provided "AS IS" WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR NON-INFRINGEMENT. Unless otherwise indicated, V&E attorneys listed are: not Certified by the Texas Board of Legal Specialization. None of the attorneys listed on this website is certified as an "expert" or "specialist" pursuant to any authority governing the practice of law in New York. Vinson & Elkins is a registered limited liability partnership. Principal office-Houston.