The Committee on Foreign Investment in the United States ("CFIUS") is 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. Transactions not properly structured to address U.S. national security concerns or otherwise deemed a threat to the national security may be blocked – or unwound – after a CFIUS review. In light of the expansive view of national security often taken by U.S. regulators, we highly recommend that M&A advisors, investors, and operating companies involved in international transactions be particularly mindful of CFIUS.

Recently, CFIUS delivered its unclassified Annual Report to Congress for the calendar year 2009 ("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 2009 calendar year activities in comparative and cumulative perspective for the years 2007-2009.

We have set forth below a brief summary of the key data points of the Annual Report.

KEY DATA POINTS

Notices

In 2009, 65 CFIUS notices were filed and determined to describe "covered transactions," or transactions within CFIUS's regulatory purview. The number of notices filed in 2009 represents a substantial decline in filings as compared to the 155 such notices filed in 2008. This decline has been widely attributed to anemic market conditions for corporate transactions in 2009, and not a shift in CFIUS's regulatory vigor or private-sector concern over adverse action under FINSA.

Withdrawn Notices

Of the 65 transaction notices filed, 7 (or 11%) were voluntarily withdrawn from CFIUS consideration during the initial 30-day review or subsequent 45-day investigation phase.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 3 cases, abandoned the transaction in 3 cases, and withdrew the transaction in the remaining case, with the declared intent of re-filing a CFIUS notice in 2010.

Investigations and Presidential Review

In 2009, 25 (or 39%) of the 65 notices for "covered transactions" went beyond the initial 30-day review and into the 45-day investigation phase. As compared with the previous year, this represents a substantially higher percentage of notices going to investigation and requiring a more exacting assessment of the proposed transaction by CFIUS.

  • The parties ultimately withdrew their notices in 2 of the 25 cases that went to investigation.
  • Notably, the President did not block or prohibit any transactions in 2009.

Mitigation Measures

In 2009, 5 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:

  • Establish a Corporate Security Committee;
  • Comply with specified guidelines for handling existing U.S. government contracts and customer information; and/or
  • Notify relevant U.S. government agencies of any material introduction, modification, or discontinuation of any products or services, as well as any security incidents.

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:

  • Increasing staffing levels and 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 largely distributed across five industry sectors – information technology, aerospace & defense, electronics, manufacturing, and energy.

Notices Filed by Country of Origin

Transaction notices were filed by prospective acquirers from 18 different countries. In 2009, the following countries accounted for the highest number of notices:

  • United Kingdom (16);
  • Canada (9);
  • France (7);
  • Israel (5); and
  • China, Japan, and the Netherlands (4 each).

Espionage

CFIUS determined that it was "extremely likely" that foreign governments would continue using various methods to obtain critical U.S. technology. CFIUS raised the level of likelihood to "extremely likely" in this Annual Report, representing a change from "highly likely" in 2008.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.