Highlights From CFIUS' 2023 Annual Report To Congress

Key Takeaways:

• Despite a lower volume of filings, 2023 saw an unprecedented increase in enforcement activity by CFIUS.
• China remains the top filer of notices to CFIUS while the number of notices from investors from the United Arab Emirates doubled in 2023.
• CFIUS continues to review thousands of non-notified transactions annually but is only rarely reaching out to parties connected to those transactions for additional information.
• Voluntary filings related to real estate transactions continue to be minimal in number.

On July 23, 2024, the Committee on Foreign Investment in the United States (CFIUS) published its Annual Report to Congress for the Calendar Year 2023. The report provides key statistics on the CFIUS process and the transactions that were filed in 2023. Even though 2023 was a busy year for CFIUS, the number of declarations and notices filed decreased compared to previous years. Nevertheless, CFIUS demonstrated its commitment to increasing enforcement by imposing four penalties for violations of mitigation agreements.

1. 2023 by the Numbers

In 2023, CFIUS reviewed 109 declarations (short-form filings), around 30% less than the previous year (down from 154 in 2022) and 233 notices (full-length filings), the lowest since 2020, and around 20% less than the previous year (down from 286 in 2022), for a total of 342 filings. It also examined 60 non-notified/non-declared transactions (down from 84 in 2022), requesting filings for 13 such transactions. Out of 342 filings, CFIUS reviewed 153 that involved the acquisition of U.S. companies with critical technology, and only two notices that were related to real estate transactions.

A. Declarations

Of the 109 declarations, CFIUS cleared 83 (representing 76%, up from 58% in 2022), rejected none, determined that it was unable to conclude action for six, and requested that the parties submit a full notice for 20. It took CFIUS an average of four to five days to accept a submitted declaration at which point the statutory review period begins to run. The average and median number of days for CFIUS to complete assessment of declarations was 30 calendar days, which is the maximum review period allotted to CFIUS by the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA).

B. Notices

CFIUS conducted an initial "review" (with a maximum review period of 45 days) of 233 notices. It conducted a subsequent "investigation" (an additional 45-day review period) for 128 of the 233, then invoked a further 15-day extension for one notice. That CFIUS launched an investigation into more than half of all notices indicates that it continues to closely review such filings and, more often than not, is unable to complete this process in the initial 45-day period. CFIUS imposed mitigation measures and concluded all further action on 35 of the 233 notices (just over 10%). 57 notices were withdrawn. Of these, 14 were withdrawn and abandoned for commercial reasons or after CFIUS either informed the parties that it was unable to identify mitigation measures that would resolve its national security concerns or proposed mitigation measures that the parties chose not to accept. The remaining 43 were later refiled by the parties (34 in 2023 and eight in 2024), representing a substantial decrease from 2022, in which 68 notices were withdrawn and refiled. Only two notice transactions were rejected.

A transaction may be rejected due to incompleteness, a material change to the transaction, discovery of contradictory information regarding the transaction, or failure of the parties to respond to the Committee's requests for follow up information. Consistent with 2022, no presidential decisions were issued in 2023. The average and median days for CFIUS to review a submitted notice was 45 calendar days, the maximum review period under FIRRMA for this stage of CFIUS' review. For those notices that entered the "investigation" stage, it took an average of 85.5 calendar days for CFIUS to reach a determination, and a median of 90 days (again the maximum cumulative review period allowed under FIRRMA for the "review" and "investigation" stages).

C. Non-Notified Transactions

CFIUS identified and considered thousands of potential non-notified transactions in 2023. It opened inquiries on 60 transactions identified through the non-notified/non-declared process, 13 of which prompted a request from CFIUS for the parties to submit a filing, and three sets of parties voluntarily submitted a filing prior to receiving a formal filing request from CFIUS. These figures represent a decline in the number of non-notified/non-declared transactions identified by CFIUS in 2022 (84). However, slightly more transactions ultimately resulted in a request to file (up from 11 in 2022). CFIUS identified these transactions through interagency referrals, tips from the public, media reports, commercial and proprietary databases, congressional notifications, and voluntary self-disclosures. CFIUS states that it will continue to bolster processes for identifying non-notified transactions, including by expanding staff dedicated to reviewing such transactions, identifying and evaluating additional commercial tools and datasets, and increasing interagency attention to the issue.

2. Key Countries

A. Declarations

Despite a 30% drop in the number of declarations submitted in 2023 (109 compared to 154 in 2022), the short-form filing process is still heavily utilized. Investors from U.S.-allied countries are using the process most frequently, with declarations by investors from Canada, France, Japan, and the United Kingdom topping the list.

B. Notices

Canada, Germany, Japan, Singapore, and the United Kingdom are also among the most frequent home countries of investors submitting notices; however, they are still behind China and the United Arab Emirates (UAE). The number of notices involving investors from China has been dropping over the years, from 46 in 2021 to 36 in 2022 and to 33 in 2023. Despite the decrease, notices involving investors from China still represent a large share of notices filed—14% of all notices in 2023 were by investors from China (up from 12.5% in 2022). CFIUS reviewed only seven Chinese transactions involving U.S. critical technology in 2023. The reasons for the decrease in the number of notices from investors from China are not certain, but likely include geopolitical tensions between the United States and China, a slowdown in the Chinese economy, and a general decline in M&A and investment activity due to higher interest rates.

Interestingly, notices involving investors from the UAE have been increasing over the years, from zero notices in 2021 to 11 in 2022 and 22 in 2023. The increase in CFIUS filings by investors from the UAE could be indicative of a more cautious approach to CFIUS risks by investors from the Middle East.

3. Top Sectors

A. Declarations

By industry sector, the greatest number of declarations involved transactions relating to:

• scientific research and development services (12 filings);
• navigational, measuring, electromedical, and control instrument manufacturing (8 filings); and
• aerospace products and parts manufacturing (8 filings).

Additional filings were related to transactions involving the following sectors: electric power generation, transmission and distribution; computer systems design and related services; architectural, engineering and related services; semiconductor and other electronic component manufacturing; and software publishers.

B. Notices

As for notices, the greatest number of filings involved transactions relating to:

• scientific research and development services (25 filings);
• electric power generation, transmission and distribution (20 filings); and
• software publishers (19 filings).

Additional filings were related to transactions involving the following sectors: semiconductor and other electronic component manufacturing; computer systems design and related services; architectural, engineering, and related services; communications and equipment manufacturing; management, scientific, and technical consulting services; and aerospace products and parts manufacturing.

4. Critical Technologies

The annual report provides a list of countries where investors filed notices and declarations related to the acquisition of U.S. critical technologies. As illustrated below, the vast majority involve investors from allied countries.

The CFIUS cases involving the acquisition of U.S. critical technology companies were mostly related to computer and electronic product manufacturing, and professional, scientific and technical services. Below is a table of 2023 CFIUS filings involving critical technology by sector.

5. CFIUS Imposes New Mitigation Measures

As of the end 2023, CFIUS is monitoring 246 mitigation agreements and conditions, 36 of which were entered into in 2023. CFIUS includes a list of mitigation measures and conditions that it imposed with respect to certain transactions in its annual reports to Congress. Those mitigation measures remain largely similar to the mitigation measures CFIUS imposed in 2022. However, the 2023 report included a few new added measures, as compared to 2022, including:

• Ensuring that businesses notify customers regarding the identity of ultimate beneficial owners;
• Ensuring that potential conflicts of interest involving third-party monitors, third-party auditors, security officers, and security directors do not arise or are disclosed to the U.S. government;
• Notifying the U.S. government prior to entering into agreements to collaborate with persons in certain countries;
• Establishing processes to review and approve contracts involving third parties before granting access to systems or data;
• Destroying sensitive information; and
• Ensuring that computer networks are segregated.

6. Penalties for Breach of Mitigation Agreements and Conditions

In instances of non-compliance with mitigation agreements, CFIUS usually imposes measures to address the non-compliance, and in the event of a material breach, it might impose monetary penalties. In 2023, CFIUS imposed a record of four civil penalties for material breaches and the first under the regulations implementing FIRRMA; prior to this, CFIUS had only assessed two civil monetary penalties in its nearly 50-year history.

We note that in April 2024, Treasury published a Proposed Rulemaking that, among other changes, would increase the maximum civil penalty for violations of statutory or regulatory provisions (or agreements, conditions, or orders issued pursuant thereto) from $250,000 to $5 million per violation (or the greater of (i) $5 million; (ii) the value of the violating party's interest in the U.S. business or covered real estate at the time of the transaction or violation; or (iii) the value of the transaction). It is clear that CFIUS is prioritizing enforcement in order to ensure compliance with regulatory and other legal requirements.

Looking Ahead

• As illustrated by the increase in number of enforcement actions reported to Congress as well as Treasury's proposed rulemaking in April 2024, CFIUS will likely increase enforcement activity, especially in regard to parties that fail to submit mandatory filings or violate mitigation agreements.
• With an expected decrease in interest rates and corresponding uptick in the number of corporate transactions, CFIUS is likely to be increasingly active in the coming year.
• We anticipate that investors from G7, NATO, and other allied countries will continue to be the top users of the short-form declaration process. In addition to China, investors from the Middle East will continue to be more frequent filers of CFIUS notices.
• We expect CFIUS will continue to carefully scrutinize both notified and non-notified transactions involving key industries, including life sciences, semiconductors and advanced computing, clean energy technologies, cybersecurity, and aerospace, among others.

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