The Committee on Foreign Investment in the United States (CFIUS) recently published its Annual Report to Congress covering calendar year 2023. Among other things, the report showed that, in 2023, CFIUS reviewed a total of 342 notices and declarations of covered transactions or covered real estate transactions, opened inquiries for 60 transactions through its non-notified process, and issued a record number of penalties. These facts, combined with the potential implications of proposed rules that have been issued in 2024, indicate that CFIUS likely will aggressively use the authorities granted to it to scrutinize many transactions in the future.
Brief Refresher on CFIUS
CFIUS is an interagency committee for which the Secretary of the Treasury serves as the chair. In addition to Treasury, other members of CFIUS include the Departments of Commerce, Defense, Energy, Justice, Homeland Security and State, the United States Trade Representative and the Office of Science & Technology Policy―and in March 2024, the Secretary of Agriculture was made a member for review of agricultural-related transactions. Other White House offices may observe and participate, as appropriate, including the Office of Management & Budget, the Council of Economic Advisors, the National Security Council, the National Economic Council and the Homeland Security Council. Finally, the director of National Intelligence and the Secretary of Labor are nonvoting, ex-officio members of CFIUS.
CFIUS is authorized to review any transaction that could result in a foreign person obtaining the ability to control a U.S. business for potential threats to U.S. national security. In addition, pursuant to the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), CFIUS has the authority to review transactions involving certain strategically sensitive real estate in the United States and noncontrolling investments in U.S. businesses involving certain critical technology, critical infrastructure or sensitive personal data―referred to as TID U.S. businesses. Significantly, FIRRMA also provides CFIUS with authority to review pending or completed transactions even absent a voluntary filing by the parties (known as non-notified and nondeclared transactions).
In 2020, the Treasury Department issued two FIRRMA-related final rules that expanded CFIUS' jurisdiction to review certain noncontrolling investments in TID U.S. businesses and established criteria that would trigger mandatory filing requirements. Pursuant to the TID-related regulations, a filing is required if:
- A covered transaction involves a TID U.S. business;
- A foreign person obtains a 25 percent or more voting interest in the TID U.S. business; and
- A foreign government holds a 49 percent or more voting interest in the foreign person (other than a limited number of foreign governments specifically identified by the Treasury Department, including those of Australia, Canada, New Zealand and the United Kingdom).
In addition, a filing is required if a covered transaction involves:
- A TID U.S. business that produces, designs, tests, manufacturers, fabricates or develops a critical technology; and
- A U.S. regulatory authorization would be required to export, reexport, transfer (in-country) or retransfer such critical technology to the foreign investor or a person that holds a voting interest of 25 percent or more in the foreign investor.
The regulations that were issued in 2020 also created a new voluntary declaration filing option that is shorter and less detailed than the standard voluntary notice option. Significantly, whereas there is no filing fee associated with declarations, the filing fee associated with notice submissions can range from zero dollars to $300,000 depending on the size of the transaction.
Importantly, on September 15, 2022, President Joe Biden signed Executive Order 14083, which was one of the first CFIUS-related executive orders issued in decades. While it did not change the scope of CFIUS jurisdiction, EO 14083 requires that CFIUS focus on reviewing transactions in ways that will contribute to achieving the following objectives: fostering supply chain resiliency; preserving U.S. technological leadership; protecting sensitive personal data; assessing cybersecurity risks; and examining transactions in the context of broader industry and investment trends.
As a result of EO 14083, CFIUS is effectively scrutinizing more closely transactions in the following sectors: microelectronics; artificial intelligence; biotechnology and biomaufacturing; quantum computing; advanced clean energy (e.g., battery storage and hydrogen); climate adaptation technologies; critical materials (e.g., lithium and rare earth elements); and the agricultural industrial base.
As noted in the CFIUS Enforcement and Penalty Guidelines, and as explicitly enumerated under 31 C.F.R. §§ 800.901 and 802.90, CFIUS has the power to impose penalties relating to three categories of acts or omissions:
- Failure to timely submit a mandatory declaration or notice, as applicable;
- Conduct that is prohibited by or otherwise fails to comply with CFIUS mitigation agreements, conditions or orders (CFIUS Mitigation); and/or
- Material misstatements in or omissions from information filed with CFIUS and false or materially incomplete certifications filed in connection with assessments, reviews, investigations, or CFIUS Mitigation, including information provided during informal consultations or in response to requests for information.
Currently, CFIUS may impose a civil penalty of up to $250,000 per violation, but it has recently issued a proposed rule that would increase the maximum civil penalty to $5 million per violation or, depending on the kind of violation, the greater of $5 million, the value of the transaction or the value of the party's interest in the U.S. business or covered real estate at the time of the violation or time of the transaction.
Key Data from the Report
Declarations
There were 109 declarations of covered transactions submitted in 2023. Three of these declarations were for covered real estate transactions under 31 C.F.R. Part 802. Based on stipulations provided by the parties, 36 declarations were subject to mandatory filing requirements. Following a 30-day assessment, CFIUS took the following kinds of actions.
- CFIUS requested that the parties to 20 declarations file a full written notice.
- CFIUS informed the parties to six declarations that the committee was unable to conclude action.
- CFIUS notified the parties to 83 declarations that the committee had concluded all action under Section 721.
- CFIUS did not reject any declarations submitted in 2023.
Investors from Canada accounted for the most declarations in 2023 (13 declarations). Investors from Japan and France accounted for the second- and third-most declarations in 2023 with 11 each.
Notices
There were 233 written notices of transactions filed with CFIUS in 2023. CFIUS conducted a subsequent "investigation" with respect to 128 of those 233 notices, meaning that approximately 55 percent of notices proceeded to the investigation phase, which is slightly down from 2022 (57 percent).
Fifty percent of the notices filed in 2023 (115 notices) were in the finance, information and services sector. Within this sector, professional, scientific and technical services continued to be the largest subsector, accounting for 46 percent or 53 notices. The other top subsector in 2023 was publishing industries (except internet) at 17 percent or 19 notices. All other subsectors fell below 10 percent of notices.
The manufacturing sector accounted for 29 percent or 68 of the 231 CFIUS notices not related to real estate. Within manufacturing, the subsector with the most notices remained computer and electronic product manufacturing, accounting for 41 percent or 28 notices. The next highest subsector was machinery manufacturing, accounting for 19 percent or 13 notices.
In 2023, investors from China filed the highest number of notices, accounting for 14 percent (33 notices) of total notices, followed by investors from the United Arab Emirates at 9 percent (22 notices). Investors from the United Kingdom (19 notices), Singapore (19 notices) and Canada (16 notices) rounded out the top five, respectively.
Fifty-seven of the 233 notices were withdrawn. In 43 of these instances, the parties filed a new notice. Thirty-five were refiled in 2023 and eight in 2024. In most instances, the notices were withdrawn after CFIUS informed the parties that the transaction posed a national security risk to allow the parties additional time to consider CFIUS' mitigation terms. In 14 of these instances, the parties withdrew the notice and abandoned the transaction 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.
Two notices of covered transactions were rejected by CFIUS in 2023. CFIUS may reject a notice due to incompleteness, a material change to the transaction, discovery of contradictory information regarding the transaction, or failure of the parties to respond to CFIUS' requests for follow-up information.
Non-Notified Transactions
CFIUS used various methods in 2023 to identify non-notified and nondeclared transactions, including interagency referrals, tips from the public, classified reporting, media reports, voluntary self-disclosures, congressional notifications and multiple commercial and proprietary databases. In 2023, Treasury opened non-notified inquiries for 60 transactions and CFIUS formally requested filings for 13 transactions. Additionally, in 2023, three parties in receipt of non-notified-related outreach voluntarily filed a declaration or notice prior to receiving a formal request for a filing.
Mitigation Measures and Penalties
In 2023, CFIUS adopted mitigation measures and conditions in 43 instances (approximately 18 percent of the total number of 2023 notices), as follows:
- CFIUS concluded action after adopting a mitigation agreement or order to resolve national security concerns with respect to 35 notices.
- CFIUS adopted mitigation agreements to address residual national security concerns with respect to one notice that was voluntarily withdrawn and abandoned.
- Separately, in letters issued by Treasury granting the withdrawal and abandonment for six notices, conditions were imposed (however, these did not involve mitigation agreements).
- Measures were imposed to mitigate interim risk with respect to one notice filed in 2023. This notice was subsequently voluntarily withdrawn and abandoned.
CFIUS is currently monitoring, as of 2023 year-end, 246 mitigation agreements and conditions. In 2023, 20 mitigation agreements and conditions were modified materially, of which 15 were terminated. All 36 mitigation agreements that were entered into for transactions filed in 2023 have compliance plans as required under Subsection (l)(6)(C) of Section 721.
Where monitoring agencies identified instances of noncompliance in mitigation agreements and conditions in 2023, they assessed the noncompliance and pursued prompt remediation and determined whether a civil monetary penalty was appropriate. In 2023, CFIUS assessed four civil monetary penalties for breaches of material provisions in mitigation agreements, double the number of penalties issued in CFIUS' nearly 50-year history. CFIUS will continue to assess noncompliance on a case-by-case basis as it evaluates whether civil penalties should be assessed or if measures to address national security risk should be implemented.
Two Important Proposed Rules Issued in 2024
In 2024, CFIUS has issued two proposed rules of considerable importance. On April 15, 2024, CFIUS issued a proposed rule that would:
- Clarify and expand CFIUS' authority to request information when conducting reviews;
- Specify a time frame for parties to respond to proposed mitigation terms (i.e., three days);
- Increase the maximum civil monetary penalties for noncompliance (i.e., generally from $250,000 per violation to $5 million per violation); and
- Expand the circumstances in which penalties can be imposed.
More recently, on July 19, 2024, CFIUS issued a notice of a proposed rule that would expand CFIUS' jurisdiction over foreign real estate transactions involving certain real estate that is located within:
- A 1-mile radius of 40 additional military installations;
- A 100-mile radius of 19 additional military installations; and
- A 100-mile radius of eight military installations that were already listed in the regulations.
The proposed rules will likely follow the same timeline as previous CFIUS rules and will become effective 30 days after the publication of the applicable final rules in the Federal Register. In the meantime, while the comment period for the proposed rule issued in April 2024 has closed, CFIUS is accepting comments on the real estate-related proposed rule that are submitted by August 19, 2024.
Conclusion
As shown in the discussion above relating to the annual report and the proposed rules that have been issued to date in 2024, CFIUS scrutiny is here to stay and likely will expand and should be factored in to the pre- and post-closing deal processes for all transactions potentially implicating FIRRMA's requirements. CFIUS remains particularly concerned with transactions involving Chinese parties or U.S. businesses that involve critical technology, critical infrastructure or sensitive personal data, but is also poised in 2024 and beyond to focus closely on transactions involving companies in the artificial intelligence, biotechnology and biomanufacturing, microelectronics, quantum computing, clean energy, climate technology and agricultural technology sectors as well.
For More Information
If you have any questions about this Alert, please contact Geoffrey M. Goodale, Joel N. Ephross, Hope P. Krebs, Thomas R. Schmuhl, Elizabeth G. Hodgson, Lauren E. Wyszomierski, any of the attorneys in our International Practice Group or the attorney in the firm with whom you are regularly in contact.
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