CFIUS’ annual report signals upgraded scrutiny of non-notified transactions, especially deals involving Chinese investors.
In July 2021, the Committee on Foreign Investment in the United States (CFIUS) issued its annual report, which reviews its implementation of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) in 2020. The report indicates that CFIUS has been extending to non-notified transactions, where the companies involved have not issued a voluntary notice to the Committee. Based on its annual report, CFIUS has heightened scrutiny over deals involving Chinese investors in particular.
According to the annual report, 117 transactions were “identified through the non-notified/non-declared process in 2020 that were put forward to the Committee for consideration,” of which 17 transactions were requested by CFIUS for formal review. Resources for identifying non-notified transactions included referrals from other agencies, press coverage, commercial databases, and U.S. Congress. An email address was even set up exclusively for receiving tips from the public – which means companies have nowhere to hide from CFIUS.
Even though CFIUS has been authorized to review non-notified transactions for years, such transactions historically only involved an extremely small percentage of deals reviewed. However, CFIUS augmented its enforcement after FIRRMA was enacted in 2018, allocating a greater budget for monitoring and enforcement. A new process was also established to identify non-notified transactions. CFIUS and its coordinating agencies are expanding their teams to exclusively probe non-notified transactions in a timely fashion. Coordination with member agencies has significantly improved the efficiency of identification of potential transactions for CFIUS to investigate.
Treasury Department officials reported that the number of non-notified transactions requested by CFIUS for filing doubled in 2020 compared to the numbers for 2018 and 2019 combined, with an expected further increase of 50 percent in 2021.
If the Committee is interested in pursuing a non-notified transaction, CFIUS will generally start to reach out to the management of U.S. entities through the Treasury Department’s Office of Investment Security. The process of disclosure to CFIUS may include confidential matters and even participation of attorneys and foreign investors.
As soon as CFIUS finds out a non-notified transaction is subject to its jurisdiction, a request of voluntary notice has to follow and begins the formal process, resulting in the suspension of prospective transactions or even requiring a buyer’s divesture for completed transactions.
It is definitely not a rarity for CFIUS to demand that Chinese buyers divest before allowing a deal to go through. An array of ordered divestures occurred with regard to ByteDance’s ownership of Tik-Tok in 2017, Beijing Shiji’s acquisition of StayNTouch in 2018, iCarbonX’s acquisition of PatientsLikeMe in 2017, and Beijing Kunlun Tech’s acquisition of Grindr in 2016 and 2018. In fact, just two weeks ago, Magnachip, a South Korean semiconductor company, was notified that CFIUS planned to refer the proposed transaction, valued at $1.4 billion, to President Joe Biden to block the acquisition by Chinese private equity firm Wise Road Capital due to unresolvable national security concerns. This move came despite Magnachip’s assertions that all its research and development activities take place in South Korea and it is merely a U.S. incorporated and listed company.
Overall, regardless of the value of a proposed deal, or whether it involves a transfer of control, any non-notified transaction involving U.S. businesses engaged in TID – critical technology, infrastructure, and personal data – may be called in by CFIUS and trigger a formal filing. Information-sharing and support from other CFIUS member agencies will enhance coordination and efficiency to facilitate such investigations, which will inevitably be more far-reaching.
With regard to Chinese investors engaged in sensitive non-notified transactions, they are more likely to hear from CFIUS in the near future. It is imperative for Chinese investors and their counterparties to re-evaluate the compliance dynamic and re-negotiate the risk allocation of any given transaction, and prepare for the upcoming investigation.