Recently, the Committee on Foreign Investment in the United States ("CFIUS"), a multi-agency regulatory body empowered to review transactions involving a foreign person and a U.S. business that may affect U.S. national security, delivered its unclassified Annual Report to Congress for the calendar year 2010 ("Annual Report"). In accordance with the legal prohibition against public disclosure of such information, the Annual Report contains no information with respect to specific transactions. Nonetheless, it remains a remarkable window into the reach and operation of CFIUS, and its impact on transactions involving U.S. defense contractors, as well as aerospace, high technology, industrial, and energy companies.
As in previous years, and as required by the Foreign Investment and National Security Act of 2007 ("FINSA"), the Annual Report summarizes CFIUS's activities during the covered period, including the number and disposition of CFIUS notices, the nature and prevalence of mitigation arrangements, and the geographic source and sector concentration of covered transactions. In addition, the Annual Report describes its 2010 calendar year activities in comparative and cumulative perspective for the years 2008-2010.
We have set forth below a brief summary of the key data points of the Annual Report.
Key Data Points
Notices
In 2010, 93 CFIUS notices were filed and determined to describe "covered transactions," or transactions within CFIUS's regulatory purview. The number of notices filed in 2010 represents an increase in filings as compared to the 65 such notices filed in 2009. This notable increase is most likely the result of improving market conditions for merger and acquisition activity, and not a shift in CFIUS's regulatory vigor or private sector concern over adverse action under FINSA.
Withdrawn Notices
Of the 93 transaction notices filed, 12 (or 13%) were voluntarily withdrawn from CFIUS consideration during the initial 30-day review or subsequent 45-day investigation phase. According to the Annual Report, the parties resubmitted new notices in 5 cases, abandoned the transaction in 5 cases, and withdrew the transaction in the remaining 2 cases and re-filed the CFIUS notice in 2011.
Investigations and Presidential Review
In 2010, 35 (or 38%) of the 93 notices for "covered transactions" went beyond the initial 30-day review and into the 45-day investigation phase. The percentage of notices moving into the investigation phase remained stable from 2009 (38%) to 2010 (38%).
- The parties ultimately withdrew their notices in 6 of the 35 cases that went to investigation.
- Notably, the President did not block or prohibit any transactions in 2010.
Mitigation Measures
In 2010, 9 covered transactions were approved by CFIUS subject to the acceptance of mitigation arrangements. These mitigation arrangements were negotiated by CFIUS in connection with transactions in the software, telecommunications, and energy sectors.
Pursuant to these arrangements, the subject parties are required to take one or more of the following actions:
- Comply with specified guidelines for handling existing U.S. government contracts and customer information;
- Notify relevant U.S. government agencies of any material introduction, modification, or discontinuation of any products or services, as well as any security incidents; and/or
- Establish a Corporate Security Committee.
In addition, it's important to note that CFIUS member-agencies have taken a number of steps to enhance their ability to monitor compliance with the mitigation arrangements they may require, including:
- Assigning staff responsibility for compliance monitoring; and
- Designing tracking systems to monitor required compliance reports.
Industry Sectors
As in previous years, notices were filed in connection with transactions in a wide variety of sectors, with the bulk of transactions in the manufacturing and the finance, information and services sectors. The notices filed in 2010 were divided among four industry sectors as follows: manufacturing (39%); finance, information, and services (38%); mining, utilities, and construction (14%); and wholesale and retail trade (10%).
Notices Filed by Country of Origin
Transaction notices were filed by prospective acquirers from 22 different countries. In 2010, the following countries accounted for the highest number of notices:
- United Kingdom (26);
- Canada (9);
- Israel and Japan (7 each); and
- China and France (6 each).
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