The Committee on Foreign Investment in the United States ("CFIUS") recently released its Annual Report to Congress. CFIUS is an interagency committee responsible for reviewing foreign acquisitions of U.S. businesses that may present national security concerns – including foreign acquisitions of non-U.S. companies that control U.S. businesses. The Report is limited to transactions reviewed in 2012.
Unprecedented Increase in Transactions by Chinese Acquirers
The number of transactions by Chinese acquirers more than doubled, from 10 in 2011 to 23 in 2012, which represented a fourfold increase over 2010. For the first time, acquirers from China accounted for the most notices filed with CFIUS, overtaking the traditional leader – the United Kingdom.
- The high volume of Chinese transactions reflects the general increase in the pace of Chinese foreign direct investment in the United States and, it appears, a greater appreciation by Chinese acquirers of the importance of filing with CFIUS.
- Chinese transactions were largely in the manufacturing, as well as the mining, utilities and construction sectors. Canada was also a major player in mining, utilities and construction transactions.
Heightened Scrutiny by CFIUS
The Report underscores heightened scrutiny by CFIUS, noting a
fourfold increase in the number of withdrawn transactions within
the investigation period. In all, 22 transactions were withdrawn,
and only 12 were re-filed, indicating that 10 transactions were
likely abandoned or had to be unwound – a large number for
one year. A review of the numbers
for the three years between 2009 and 2011 suggests that during that period, only eight cases were abandoned or unwound, including none in 2011.
- Pursuit of Non-notified Transactions; Second Presidential Veto. The high number of withdrawn and abandoned transactions in 2012 is coupled with heightened scrutiny across-the-board, including increased pursuit of "non-notified" transactions and, in the Ralls case – the second Presidential veto in CFIUS's history – President Obama's decision to block the Chinese acquisition of an Oregon wind farm project.1 The project was near a sensitive Navy installation.
- More Withdrawals and Abandonments. Although parties can abandon transactions for commercial reasons, the large number of withdrawals and abandonments in 2012 likely means that (1) those transactions required extensive mitigation discussions and terms that were ultimately unacceptable to the parties; or (2) CFIUS determined that the transactions should be referred to the President, with the result that the parties "voluntarily" abandoned or unwound the transactions. Overall, this information suggests that national security concerns plagued a greater number of transactions in 2012 than in prior years.
- Cybersecurity and Proximity to Military or other Sensitive Facilities. CFIUS required mitigation in the software, information, mining, energy and technology industries. These industries present some of the most challenging mitigation issues, including cybersecurity and proximity to military or other sensitive facilities – an increasingly important factor in CFIUS reviews given the fixed location of the assets.
- Mitigation Terms Include Termination of "Specific
Activities of the U.S. Business." For the first time,
termination of "specific activities of the U.S. business" as a mitigation condition, suggesting imposition of tougher requirements. Divestment or abandonment of key assets can undermine the rationale for a transaction where it changes, potentially materially, the anticipated economic benefits – even more so when the directive comes after closing.
- Scrutiny of Acquisitions by Foreign Companies. In recent years, there have been several high-profile cases in addition to the Ralls case, in which Chinese companies reportedly have encountered difficulties with CFIUS, including subsequent divestments.2 Other Chinese transactions – including the purchase by China National Offshore Oil Corporation of Nexen, Inc., with its U.S. operations, and the purchase by Shuanghui International Holdings Ltd. of Smithfield Foods Inc. – passed CFIUS muster and were approved in 2013. Although Chinese acquirers grab the headlines, our experience is that this scrutiny extends to acquirers from other countries as well.
Is There a Coordinated Strategy to Acquire Critical Technology?
By law, the Report must include the views of the U.S. Intelligence Community as to whether there is a coordinated strategy by foreign governments or companies to acquire U.S. critical technology. In 2011, the Report included such a finding. The current Report does not, but notes that foreign governments "are extremely likely to continue to use a range of collection methods to obtain critical U.S. technologies" and a coordinated strategy "may go unobserved due to limitations on intelligence collection, or may be hidden or misconstrued because of foreign denial and deception activities."
In contrast to 2011, when the most activity involving critical technology was in the machinery and equipment sector, activity in 2012 was focused in the aerospace and defense sector.
Increased Notices for Mining, Utilities, and Construction; Real Estate Transactions Listed for First Time
The Report reveals that CFIUS reviewed roughly the same number of notices in 2012 as it did in 2011 (114 in 2012 and 111 in 2011), the majority within the 30-day review period, with roughly the same share (almost 40 percent) resulting in an additional 45-day investigation. The Report also indicates that notices continued to represent a wide array of industries, with manufacturing, at 39 percent, again comprising the bulk of the transactions. There was, however, a jump in notices from the mining, utilities and construction sector. Four real estate transactions were listed in the Report, the first time such transactions have been listed in a CFIUS annual report.
Overall, CFIUS continues to approve the majority of transactions it reviews, demonstrating that the United States continues to welcome foreign direct investment, even from countries that are not among its closest allies. Given projections of increasing foreign direct investment by China, we expect a continuation of high numbers of notices from China, continued close scrutiny by CFIUS, and challenging mitigation discussions – particularly in the technology, telecommunication and energy sectors.
Importance of Considering CFIUS Filing at Early Stages of Structuring a Transaction
Given the heightened level of CFIUS scrutiny, acquirers
(particularly acquirers from China or other
countries lacking strong defense ties to the United States) are strongly urged to consider – at an early stage of structuring a transaction – whether a CFIUS filing is advisable.
Some contentious discussions in recent years have involved transactions that were closed without a CFIUS filing and were reviewed after closing. Although CFIUS filings are ostensibly voluntary, CFIUS monitors acquisitions in key sectors and can "invite" filings; it also has authority to undertake reviews on its own initiative. Post-closing reviews can produce unexpected and onerous mitigation conditions and can even require restructuring or unwinding transactions.
It is important that foreign and domestic buyers and sellers of businesses with any potential connection to U.S. national security – including critical infrastructure – consider engaging an experienced legal team to assist in planning and structuring the proposed acquisition, to ensure that their deals are properly prepared for CFIUS review.
For More Information
For a copy of the CFIUS Report, to learn more about the CFIUS process or to inquire about Stroock's National Security/CFIUS/Compliance Practice Group, please contact the authors.
- See "Foreign Investors Skip Government Review at
Their Peril: U.S. District Court Dismisses Challenge to
President's Authority," by Special Counsel
R. Brewster, Stroock Special Bulletin, Oct. 21, 2013: http://www.stroock.com/sitecontent.cfm?contentID=58&itemID=1407.
- See the disclosure by Lincoln Mining Corporation, a Canadian company, following a review by CFIUS, that Procon Mining and Tunnelling Ltd. and certain of its affiliates, including China National Machinery Industry Corporation, a Chinese state-owned enterprise, would unwind their investment in Lincoln Mining Corporation.
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