The US Department of the Treasury (Treasury), as Chair of the Committee of Foreign Investment in the United States (CFIUS or the Committee), recently announced New Zealand and the United Kingdom will retain their status as excepted foreign states (EFS) and excepted real estate foreign states (EREFS) under CFIUS regulations. This determination solidifies each of the Five Eyes countries' special status and exempts certain investors from Australia, Canada, New Zealand, and the United Kingdom from CFIUS's jurisdiction over certain noncontrolling transactions, real estate transactions, and from the Committee's mandatory filing requirements.
CFIUS is an inter-agency body through which the US government monitors and reviews foreign investment in the United States to identify national security concerns. The Foreign Investment Risk Review Modernization Act (FIRRMA), enacted in 2018, authorizes CFIUS to exempt certain investors from EFS countries from CFIUS's jurisdiction over certain noncontrolling transactions, real estate transactions, and from the Committee's mandatory filing requirements. To qualify as an EFS, a foreign state must meet the requirements of 31 C.F.R. § 800.218(a)-(b), including that the foreign state:
(a) is identified by the Committee as an eligible foreign state; and
(b) is a foreign state that the Committee has determined has established a foreign investment screening mechanism similarly robust to that of Committee and has agreed to coordinate with the United States on matters related to investment security.
Australia and Canada were granted EFS status on February 13, 2020, followed by the United Kingdom on February 13, 2020, and New Zealand on January 5, 2022. At the time the United Kingdom and New Zealand were added, CFIUS had only identified each country as eligible under criterion (a) above but had not yet made a determination under criterion (b). A final rule published on January 6, 2022 pushed back the deadline for having in place a foreign investment screening mechanism to remain an EFS until February 13, 2023. CFIUS's latest determination confirms New Zealand and the United Kingdom have now fulfilled the criterion (b) qualifications.
Moving forward, any other country must simultaneously meet both the 31 C.F.R. § 800.218(a) and (b) qualifications to be granted EFS status. Notably, investors from EFS countries, while exempt from CFIUS's jurisdiction over certain noncontrolling transactions, real estate transactions, and from the Committee's mandatory filing requirements, are still subject to CFIUS jurisdiction with respect to their investments that would give them control over a US business.
Indications of CFIUS's Focus on Certain Types of Investments
CFIUS's evolving role in US national security was highlighted by the release of CFIUS's Annual Report for Fiscal Year 2021, which provides an overview of the state and trends of foreign investment in the United States.
As documented in the Annual Report, CFIUS reviewed 164 declarations in 2021-up 30 percent from 2020. US allies topped the list, with Canada representing the largest proportion of declarations, followed by South Korea, Singapore, Japan, and Germany. Meanwhile, the Committee conducted an initial 45-day review of 272 notices of covered transactions with 130 requiring a subsequent 45-day investigation. Of those 272 notices, Chinese investors accounted for 44 notices, the most of any other country in 2021. This does not necessarily indicate an increase in Chinese foreign investment, but may reflect an awareness by Chinese investors of CFIUS's sensitivities and a desire to notify the Committee of their transactions by foregoing a short-form declaration and opting for the lengthier notice process. Consistent with previous years, the majority of CFIUS filings involved the finance, information, and services (55 percent) and manufacturing (28 percent) business sectors.
Meanwhile, CFIUS reviewed 184 covered transactions involving the acquisition of US critical technologies companies, as well as certain kinds of investments in such companies-a 51 percent increase from the previous year. The majority of those transactions were undertaken by US allies with CFIUS only reviewing ten by Chinese investors-behind Germany (16), the United Kingdom (16), Japan (15), South Korea (13), the Cayman Islands (12), and Israel (11).
However, one case in particular highlights CFIUS's growing interest in reviewing certain investments "outside of the defense industrial base," such as the biotechnology industry. The Committee delayed for almost nine months the $161 million acquisition of US-based pharmaceutical company, F-star Therapeutics, by Chinese Sino Biopharmaceutical's subsidiary, invoX Pharma. In December 2022, CFIUS put a hold on the acquisition citing unresolved national security risks as the parties actively negotiated with the Committee to determine a clear mitigation agreement. CFIUS officially cleared the deal on March 7, 2023.
Further highlighting this interest, President Biden issued Executive Order 14083 (EO), "Ensuring Robust Consideration of Evolving National Security Risks by [CFIUS]." This EO, issued a month after CFIUS published its 2021 Annual Report, directed the Committee to consider additional national security factors in its review, such as (1) a transaction's effect on the resilience of critical US supply chains; (2) a transaction's effect on US technological leadership in several key areas such as biotechnology and biomanufacturing, and quantum computing, among others; and (3) a transaction's risk to US persons' sensitive personal data.
The Committee later published its first-ever Enforcement and Penalty Guidelines, providing clarity on CFIUS enforcement measures and signaling the Committee's perceived intent to enhance its enforcement efforts to address specific national security concerns. More information about these guidelines can be found in a previous Arnold & Porter Advisory, available here.
Each of these actions illustrate the Committee's efforts to assert its expanded authority and provide increased transparency regarding how it may respond to certain kinds of investments in the future. Companies contemplating foreign investments in US businesses should carefully review the national security factors outlined in EO 14083 along with the trends identified in CFIUS's Annual Report, as they may shed light on what formal and informal dealings with CFIUS could look like in the future.
Investment Screening Beyond CFIUS
Looking beyond the United States, several other countries are devoting significant resources to building their own foreign investment screening bodies as governments become increasingly more interested in foreign investment screening mechanisms as a national security tool. In April 2022, the European Commission called on each of the European Union Member States to develop their own screening processes. At the time, 18 member states had already implemented their own national screening mechanisms, but at least three more-Belgium, Ireland, and Estonia-will come into effect in 2023. In addition to inbound investment, several countries are contemplating introducing outbound investment screening mechanisms, albeit with more narrowly tailored mandates. Indeed, the United States has tasked Treasury and other relevant agencies in drafting a report for Congress outlining a potential outbound investment review mechanism and the resources needed to implement such a policy. Meanwhile, the European Commission is also contemplating similar measures.
Due to growing worldwide interest in investment review mechanisms, investors can expect increasing due diligence, especially with respect to sectors involving defense and security, critical infrastructure, advanced technologies, and sensitive personal data. Furthermore, the United States and its allies will likely continue to share information between one another as they identify industries of special concern.
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