United States: The Long And Winding Road: Key Points From The CFIUS Annual Report

In July 2023, the Committee on Foreign Investment in the United States (CFIUS or the "Committee") released its Annual Report to Congress covering calendar year 2022. Although the Report's data lags a bit, given we are eight months into 2023, the Report confirms what many transaction parties saw, heard, and felt in 2022—the Committee is:

• Subjecting more transactions to investigation following its initial review;
• Requiring substantially more mitigation agreements; and
• Making declarations less appealing.

As result, it is taking longer, and transaction parties must do more, to successfully navigate the CFIUS process.

1. CFIUS Reviewed More Transactions and Subjected More of Them to Investigation.

In 2022, CFIUS formally assessed or reviewed 440 transactions, the highest number to date, comprising 286 full joint notices (a 5% increase from 2021) and 154 short-form declarations (a 6% decrease). Although the number of notices represents only a slight increase from 2021, CFIUS initiated investigations in a higher percentage of cases. For a full 57% of the notices reviewed in 2022, CFIUS used some or all of the investigation period, up from 48% in 2021.

2022 may be noteworthy as the first year that cases subject to investigation exceeded 50% since 2018. In August 2018, as a result of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), the initial review period was extended from 30 to 45 days, with the result that, subsequently, the majority of cases cleared in the review period and fewer went into the investigation period until now.

2. CFIUS Increasingly Seeks Mitigation Agreements and Monitors Compliance.

CFIUS adopted or required mitigation agreements with respect to 41 notices—approximately 23% of the notices filed in 2022. This represents a notable increase from the 26 mitigation agreements in 2021 (10% of notices) and 16 in 2020 (9% of notices), clearly continuing the trend of CFIUS requiring mitigation to clear cases more often.

CFIUS required mitigation agreements with respect to three notices that were voluntarily withdrawn and abandoned to address residual national security concerns and imposed conditions on the withdrawal and abandonment (which did not constitute a mitigation agreement) in five other cases—a stark reminder that CFIUS must approve requests to withdraw notices and that parties cannot always escape CFIUS by abandoning a transaction. CFIUS also imposed interim mitigation measures (i.e., interim orders) to mitigate risk during three cases.

CFIUS also reported that 214 mitigation agreements are currently being monitored and only 16 agreements were terminated in 2022. With 44 new agreements coming online and only a fraction going away, the additional resources and emphasis on oversight and monitoring will be necessary.

The Committee also expanded its list of mitigation measures and conditions reported to have been negotiated and adopted, with the Report noting that certain parties were required to restrict recruitment and hiring of personnel and clear with the U.S. government any changes to data storage locations, among other measures in 2022. The Committee also increased its focus on ensuring compliance with mitigation agreements and conducted 44 site visits in 2022, a 52% increase over the number conducted in 2021.

3. Prepare for More than 90 Days in Tough Cases.

In addition to more transactions requiring investigations, some transactions took more time than the full statutory period, which includes a 45-day review period and a 45-day investigation period.

In 2022, transaction parties withdrew 88 notices—31% of all notices filed, up from 27% in 2021. In 68 of these withdrawals, the parties filed a new notice in either 2022 (53 notices refiled) or 2023 (15 notices refiled). And in most instances, the notices were withdrawn after the Committee informed the parties that the transaction posed a national security risk and allowed the transaction parties to withdraw their notices to allow additional time to consider and negotiate CFIUS's mitigation terms.

With more transactions requiring investigations and many of those transactions needing more time to be investigated and completed, the length of time that is necessary for completion of transactions that are (or may be) investigated in the CFIUS process prior to clearance will inevitably increase. In addition, the Report indicates that the average days required to complete a review and investigation increased to 80.5 days, up from 65 days in 2021. However, this statistic understates the total days that a transaction may spend in the CFIUS process, as a notice withdrawal and refiling results in a new CFIUS case and restarts the clock.

These numbers show that the average statutory review and investigation periods are often not enough time to complete the process. And the expanded timelines likely reflect a heightened sensitivity by the Committee to potential vulnerabilities and threats, as well as administrative challenges in moving CFIUS cases through internal bureaucratic processes. Transaction parties should expect and account for potentially longer timelines associated with CFIUS approval or clearance.

In addition, transaction parties withdrew and abandoned transactions in 20 instances, either because CFIUS informed the parties that it was unable to identify mitigation measures that would resolve the national security risk or proposed mitigation measures or the parties chose not to accept (12 instances), or the parties abandoned the transaction for commercial reasons (8 instances). The 20 transactions abandoned for these reasons in 2022 show a significant increase from 11 in 2021 and 8 in 2020.

4. The Declarations Process Was a Less Appealing Option.

Of the 154 declarations assessed in 2022, CFIUS was able to clear (i.e., conclude all action) in only 58% of filings, a dramatic decrease from the previous year's 74%. The Committee also requested that parties to 50 (or approximately 32%) declarations file the full written notice (i.e., a joint voluntary notice)—the more comprehensive and costly filing option. In 2021, CFIUS requested notices in response to only 18% of 164 declarations submitted. In addition to 42% of declarations achieving something less than CFIUS clearance, the average number of calendar days that elapsed between the date a declaration was submitted (i.e., became complete) and the date on which the Committee accepted the declaration increased to 5.59 days. This is significantly longer than the numbers reported for calendar year 2020 and is equivalent to almost 20% of the total CFIUS assessment period. The upshot: parties to declarations are waiting longer for less helpful outcomes.

5. Non-Notified Transactions Continue to Be a Target, Despite Lower Numbers.

CFIUS analyzed 84 transactions that were the subject of CFIUS's non-notified transaction identification process. Although this represents a decrease from 2021, the Report notes and the numbers indicate that this is not the result of a decreased focus by the Committee. In prior years, CFIUS focused on pre-FIRRMA transactions, but the Committee is now more focused on recent investments. As a practical matter, CFIUS requested notices for a higher percentage—13%—of those transactions identified through the non-notified process. And the Report notes that some parties made a voluntary filing following CFIUS outreach rather than waiting for a CFIUS request, so the number of CFIUS requests understates the number of non-notified transactions ultimately filed. This indicates a continued focus and an evolution of the Committee's process and non-notified related skill set.

Given the foregoing, transaction parties should plan for the CFIUS process to take longer, be more intense, and have a higher likelihood of mitigation. Transaction parties also now need to think even harder at the decision to file a declaration.

Christie M. Lawrence, a summer associate in Morrison Foerster's D.C. office, contributed to this alert.