Biden’s CFIUS Has Become Tougher In The Latter Half Of His First Term

The August 2022 publication of the annual report on the 2021 activities of the Committee on Foreign Investment in the United States (CFIUS)—Washington’s interagency executive branch body that screen’s inbound foreign investment to protect U.S. national security—depicts an entity whose operations have become remarkably more systematic and robust than heretofore has been the case since its creation in 1975.

This is important, since for decades investors located abroad and the U.S. businesses interested in attracting their capital perceived CFIUS as opaque and its decision-making fraught with uncertainty. Having been a member of CFIUS while serving in the the White House some years ago, I’d be remiss if I didn’t acknowledge significant improvements could have been made in the way in which it operated.

CFIUS’ operational improvements and increased transparency are largely due to the completion of the implementation of the Foreign Investment Risk Review Modernization Act (FIRRMA) enacted—notably on a bipartisan basis—in 2018 and of its accompanying regulations. CFIUS’ maturity has reached a point where prospective foreign investors now know exactly where they stand in terms of trying to make a go of it in the U.S. market. In many respects CFIUS has become the model other countries look toward as they fashion their own foreign investment regulatory regimes.

As is the case in most areas of economic regulation (like in other policy areas) every administration seeks to make its imprint. CFIUS is no exception. To this end, right on the heels of the publication of the new annual report, the Biden White House issued an Executive Order modifying CFIUS’ sectoral focus and its review criteria—in some areas quite significantly. It is notable that this is the first time since CFIUS’s establishment that a president has directly exercised his authority to modify how and when the agency is to assess specific risks.

An assessment of how the findings of the 2021 annual report and the content of the new Executive Order will alter CFIUS’ decision-making calculus over the remainder of Biden’s tenure in the White House is obviously of intense interest to both U.S. firms seeking investment funds from abroad as well as foreigners assessing the hospitality of making investments in the U.S. market.

Interpreting CFIUS’ Annual Reports

Outsiders routinely bemoan that CFIUS is not more transparent to the public. Indeed, press stories continue to refer to CFIUS as a “secretive agency”. But CFIUS, by its very nature, routinely assesses businesses’ and investors’ proprietary financial data as well as closely held US national security information. Frankly, to think it would not operate in a fashion where there is systemic protection of such matters is naive. FIRRMA rightly reinforced the safeguards to fulfil that objective.

Cynics of CFIUS – I can be one from time to time; indeed, I am not an apologist for it – tend to misjudge the implications of the data contained in its annual reports. In particular, there is often a lack of understanding that CFIUS operates in a dynamic economic policy system.

What do I mean by this? The fact of the matter is in any given year, foreign investors increasingly make their decisions about whether to invest in the US; in what sector to do so; and with whom they select as a US target based on their assessment of CFIUS’ past or contemporaneous decisions, including those made by the President; changes in pertinent US regulations, laws and policy, for example, in US antitrust policy; the policy stance of the administration currently in power; and related US political economy factors, including relevant court decisions.

Simply put, a failure to take into account such factors when assessing CFIUS’ decisions conflates cause and effect. Fundamentally, it overlooks that prospective foreign investors ex ante engage in self-selection—to the extent they are well-informed and rational actors, or at least advised by those who are.

This analytical mistake is epitomized in various reports assessing, for example, how many inbound investments have been cleared (or not cleared) by CFIUS; the speed or inefficiency of its decision-making process; and so on.

What’s driving this dynamic process? CFIUS’ rules have measurably matured and become clearer, and prospective investors are increasingly aware of this. Thus, assessment of data on CFIUS’ operations – such as those contained in its annual reports – needs to be grounded on this principle.

Critically, however, such greater maturity and clarity does not necessarily translate into a more liberal policy stance toward foreign direct investment (FDI). Indeed, arguably US inbound FDI policy has become more stringent. But now foreign investors know much better where they stand than heretofore was the case.

Major Findings from CFIUS’ 2021 Annual Report

As is the routine, although the new CFIUS annual report was published in 2022 it contains data for all of the immediately prior year, in this case, 2021—which was the first full calendar year since FIRRMA became effective.

Increase in filings

The total amount of filings CFIUS received rose greatly in 2021 compared to 2020. In 2021, CFIUS reviewed 164 declarations (short-form filing), and 272 formal notices (long-form filings). It is the latter that necessitate investigation. Relative to 2020, this represents an increase of 30% in declarations and roughly 45% in notices, respectively.

In judging the reasons for the annual growth in filings, three caveats are needed. First, I use the term “roughly” because filers for a specific transaction do withdraw and re-file notices depending on CFIUS’ initial reactions. Second, under FIRRMA there has been a shift (depending on the sector and other attributes of a particular transaction) from voluntary to mandatory filings.

Third, CFIUS has increased its focus on mandatory filings of previously consummated transactions that did not go through the CFIUS process to begin with. In fact, CFIUS has enhanced its resources to review non-notified deals. Given this risk – and the potential cost to investors if they are required to unwind a transaction – it is likely a poor strategy for investors to bypass CFIUS, especially if the transaction lies at all in the “grey area”. Why? Because all other things equal, CFIUS-cleared transactions receive “safe harbor” treatment.

Incidence and disposition of declarations.

Not surprisingly, investors from Canada accounted for the greatest number (22) of total declarations filed. That was exactly twice as high as the number of declarations filed each by Germany, Japan, Singapore and South Korea. Their filings were just slightly greater than those by the UK, Guernsey, and Australia.

Virtually three-fourths of the declarations filed with CFIUS in 2021 were cleared; this compares with almost two-thirds of declarations filed in 2020. As to non-clearance, for more than 90% of the declarations filed in 2021 CFIUS able to come to a determination. Thus, filers in only less than 10% of the declaration cases would be required to submit a long form notice if they wished to pursue CFIUS clearance and thus determine if they would or would not be able to proceed with the transaction.

Incidence and disposition of notices

China filed 44 notices in 2021 – the greatest number of filed notices among all countries. Indeed, the 2021 level is a much larger amount than that filed by Canada (28 notices) and Japan (26 notices) – the countries with the second and third greatest number of notices filed. Particularly striking is that not only does this represent a sizeable increase in China’s incidence in the filing of notices in 2020 – when China filed just 17 notices – but also the last time China was the country with the most notice filings was 2018.

It is reasonable to hypothesize that one of the reasons for the tempered amount of Chinese filings in 2019 and 2020 was the anxiety and uncertainty surrounding some CFIUS decisions involving Chinese capital, especially those where actions by the White House rose to the fore: think the proposed Tik-Tok transaction. In fact, 2021 marked the first year since 2015 that Presidential action on CFIUS did not occur.

Of the total number of notices filed in 2021, roughly one-half were subject to formal investigation – a proportion similar to that in 2020. Another quarter of the transactions for which notices were filed in 2021 was withdrawn; however, most of these – 85% – were refiled. Most of the remaining small number of transactions did not proceed because CFIUS was not able to come to a mitigation agreement with the parties or market conditions turned unfavorable.

On the other hand, of those transactions that were cleared in 2021, about 10% are subject to mitigation agreements – roughly the same proportion in 2020. In fact, in recent years CFIUS’ involvement in imposing and overseeing mitigation remedies has been increasing. At present, CFIUS is monitoring more than 180 mitigation agreements.

Non-notification claw-backs

The enlargement of resources at CFIUS’ disposal in the wake of FIRRMA has facilitated the entity’s efforts to assess non-notified transactions. The latest report indicates that in 2021, while CFIUS stepped up such activity compared to 2020 – 135 versus 117 non-notified transactions – it requested ex post notices to be filed in just over 5% of the cases. In fact, this represents a decline from 2020, where about 15% required notices to be filed.

Locus of sectoral transactions

As in previous years, in 2021 CFIUS reviewed transactions were concentrated in a number of sectors, especially electric power generation, transmission and distribution firms; software publishing; computer systems and design; R&D services; telecommunications; semiconductor and related electronic component manufacturing.

What is the overarching theme of the new annual report?

As in past years, CFIUS continues to be seen by the rest of the world as possessing a start-of-the-art regime for appraising national security risks of inbound foreign investment. Of course, inasmuch as the dynamics of the globe’s political economy continually drives change – both risks and opportunities – for CFIUS to remain effective, it too must evolve.

Biden’s Executive Order: “Ensuring Robust Consideration of Evolving National Security Risks By CFIUS”

The issuance of Executive Order No. 14083 by President Biden on September 15, 2022 is notable on two counts. Understandably, to date, much of the attention given to the Order has focused on a number of specific considerations and industry sectors it directs CFIUS to pay attention to in making its judgments about the national security impacts on inbound foreign investment in the US. Those directives could well prove to be quite sweeping. Before discussing them, however, it is important to call attention to the opening section of the Order.

Presidential Statement on U.S. Policy Towards Foreign Investment

The Order begins by setting out a clear Presidential statement of U.S. official policy toward foreign investment. Specifically:

“The United States welcomes and supports foreign investment, consistent with the protection of national security. The United States commitment to open investment is a cornerstone of our economic policy and provides the United States with substantial economic benefits, including ‘the promotion of economic growth, productivity, competitiveness and job creation, thereby enhancing national security, as the Congress recognized in section 1702(b)(1) of FIRRMA.”

The issuance of this statement is most welcome. This is because presidents early on in their administration make such proclamations. Indeed, in modern times very few presidents have not done so. Yet in the case of Biden, some of us expressed concern soon after he took occupancy of the Oval Office that such a statement had not been made.

Why was it especially critical for him to have taken this step? Simply put, because the U.S. government’s position on foreign investment—as taken by his immediate predecessor, Donald Trump—had been so conflicted; again, think Tik-Tok. Both U.S. and foreign investors would have been reassured if President Biden had articulated then what he has done now.

The Order’s Specification of New Considerations and Sectoral Focus for CFIUS Reviews

Biden’s Order does not alter the procedures under which CFIUS operates, as enshrined in FIRRMA and its implementing regulations. But it does direct CFIUS to enlarge its deal review focus across a very wide array of business sectors and activities. These can be summarized in four broad categories:

– Shoring up the resiliency and diversification of U.S. supply chains across a multitude of sectors of the economy, including manufacturing, defense industries, infrastructure services, energy supplies, climate adaption technologies, microelectronics, minerals, artificial intelligence, agriculture, and food supplies.

– Enhancing U.S. cybersecurity—not only in the public sector but also in the private, educational and not-for-profit sectors

– Ensuring protection of U.S. citizens’ sensitive personal data, pertaining to financial matters, health records, voting choices, digital identity, biological profile, etc. and,

– Maintaining U.S. leadership in advanced technologies, investment in R&D and, innovation

In addition, and perhaps the most far-reaching review criterion specified in the Order—a criterion embodied in FIRRMA as a factor that CFIUS may consider in its deliberations—is a requirement that CFIUS is to take a cross-cutting integrative approach in its assessment of a particular transaction in sensitive sectors—defined in FIRRMA as “critical infrastructure, energy assets, critical material or critical technology.”

Specifically, rather than making such judgments on a seriatim or case-by-case basis, under the Order, CFIUS must assess the national security impacts of a prospective transaction in light of the nature, magnitude and scope of the existing cumulative foreign investment or the trend of foreign investment in the sector in question. In other words, the Order is instructing CFIUS to guard against sensitive sectors in the U.S. from becoming dominantly owned by foreign parties.

Although not defined in the Order, the objective sought here appears to be not one of ensuring a certain degree of inter-firm competition in the sector under review—an area that is, of course, the purview of the antitrust officials in the Department of Justice, which is a statutory member of CFIUS. Rather, the goal is ensuring there is not an excessive degree of foreignness in the sector—regardless of the strength of competitive forces, which is measured by the number and size distribution of firms in a market typically without regard to nationality.

Biden’s CFIUS Imprint

On prima facie grounds, it should be obvious that, going forward, the scope of the Order will result in an even more expansive role for CFIUS in carrying out reviews of new inbound foreign transactions in the U.S. than is already the case.

But that conclusion is likely an understatement. Why? Because CFIUS has the statutory authority to review “non-notified” transactions—that is, previously consummated foreign investment deals that had bypassed a review by CFIUS. In fact, notwithstanding the issuance of this Order, CFIUS has been significantly enhancing its resources to increase the number of its non-notification reviews. It would seem, therefore, that Biden’s Executive Order could well greatly propel CFIUS’ role.