Committee on Foreign Investment in the United States: 2021 Annual Report to Congress

1.      Increase in filings related to China

During calendar year 2021, there was a striking uptick in the number of Notices for transactions by Chinese companies. Last year, Chinese acquisitions resulted in 44 Notices, up from just 17 in 2020 and 25 in 2019. Chinese investors in 2021 outpaced their counterparts from Canada (28 Notices filed) and Japan (26) by a hefty margin. This represents a departure from recent history. Over the two prior years (2019 and 2020), Japanese companies led the way with 65 total Notices filed, compared to just 42 total Notices filed by Chinese companies. Looking back slightly farther, however, this can be seen as a reversion to the norm. From 2016 to 2018, for instance, Chinese investors filed the largest number of CFIUS Notices for covered transactions.

This uptick in filings by Chinese companies may reflect an effort by Chinese investors to test whether the Biden administration, which began in early 2021, would be less hostile than the previous administration to acquisitions by Chinese companies. Coupled with a decrease in the number of Declarations filed by Chinese investors (Chinese investors submitted only one Declaration in 2021 compared to five in 2020), the increase in Notices for Chinese investments may also result from the CFIUS bar and Chinese investors recognizing that CFIUS is unlikely to clear Chinese investments based on a Declaration.

Despite the uptick in filings by Chinese investors, the report does not suggest that foreign investors from other countries should stray from the standard expectation that any involvement in a transaction by Chinese companies is a significant risk factor that will almost certainly draw scrutiny from the Committee.

2.      A substantial percentage of 2021 Notice filings proceeded to investigation, and a majority of filings in the investigation phase ended in withdrawal

Nearly half of the Notices filed in 2021 failed to clear during the first stage review and went into the second stage investigation phase. Notably, over half of the filings that went into investigation were ultimately withdrawn. Specifically, of the 272 Notices filed in 2021, 130 — nearly 48 percent — proceeded to the investigation phase. Of those 130 Notices that proceeded to the investigation phase, 72 — slightly more than 55 percent — were withdrawn.

The report explains that Notices are withdrawn for a number of reasons, including in cases where the parties are unable to address all of the Committee’s outstanding national security concerns, so refiling allows the Committee to continue its review. But of the 74 cases withdrawn (72 during the investigation phase, two during the initial review phase), the parties refiled the Notice in 63 instances, meaning that withdrawal merely served as a method to restart and, therefore, extend the review period for the transaction. In nine cases, the parties withdrew their Notices and abandoned their transactions due to the Committee’s inability to identify mitigation measures that would adequately resolve the national security concerns raised by the transaction or due to the parties unwillingness to comply with the mitigation measures proposed by the Committee. In the remaining two cases, the parties withdrew and abandoned for commercial reasons.

3.      Uptick in Notice filings in the Finance, Information, and Services sector.

Consistent with CFIUS’s increased focus on Sensitive Personal Data transactions, transactions in the Finance, Information, and Services sector made up the majority of filed Notices. This trend of increased Notice filings in this sector is likely to continue given President Biden’s recent Executive Order, which instructs CFIUS to stay current with threats posed by advances in technology and to assess whether a U.S. business has access to Sensitive Personal Data, particularly when the foreign investor or its third-party partners will seek or have the ability to exploit U.S. persons’ sensitive data to the detriment of national security.

As reflected in the chart below, the Annual Report measured CFIUS Notice filings’ relevant sectors by North American Industry Classification System (“NAICS”) Code, which serves as a helpful reminder on the utility of such codes during the CFIUS process.

4.      Continued rise in number of Declarations filed

Declarations, unsurprisingly, are more common where the nationality of the acquirer is less likely to raise national security concerns. Canada (54), Japan (43), and the United Kingdom (33) led the way for total number of Declaration filings in the last three years, followed by Germany (28), South Korea (24), and Singapore (18). For 2021 specifically, the top home countries for foreign investors in Declaration filings were Canada (22), followed by a four-way tie between Germany, Japan, Singapore, and South Korea (all 11). The continued rise in Declarations filed shows that what was once a “pilot program” for certain low-risk transactions is now a common tool for businesses that want to minimize the cost of CFIUS compliance.

Vinson & Elkins has extensive experience advising clients on the legal, policy, and practical dimensions of CFIUS reviews. We are well-positioned to assist clients in understanding how the new regulations may affect their mergers, acquisitions and investments. Visit our website to learn more about V&E’s National Security Reviews (CFIUS) practice.

If you have any questions concerning CFIUS reform or reviews, please contact the following Vinson & Elkins lawyers: Rick Sofield, John Satira, or Michael McCambridge. Law clerk Cynthia Karnezis also contributed to this update.

*Cynthia Karnezis is a law clerk in our Washington office.