CFIUS Transaction Approvals Taking Longer

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The Committee on Foreign Investment in the United States, or CFIUS, recently released the public version of its annual report to Congress regarding its review of certain transactions involving foreign investment during 2022.

The report confirms recent trends that we have observed, including an overall heightened level of scrutiny from CFIUS, with more reviews proceeding to investigations, more short-form declarations resulting in requests for full notices, more notices being withdrawn and refiled and more instances of the committee requiring mitigation agreements as a condition of approval.

The final point is especially noteworthy: 2022 saw a sharp increase in the number of transactions being subject to mitigation agreements, with 41 out of 286 notices filed resulting in mitigation — a rate above the committee’s historical average.

When considered together with the data on the home countries of foreign investors, the report suggests that the committee is increasingly requiring mitigation in transactions involving investors from friendly jurisdictions that previously were unlikely to face mitigation.

The volume of agreements, when combined with the committee’s increased focus on overseeing compliance, further underscores that parties need to be able to anticipate and plan for potential ongoing compliance obligations, and equally, to preserve investors’ confidence in CFIUS, it is imperative that the committee develop a more mature and accountable structure for monitoring and enforcing compliance. We note several key issues.

First, parties have the option of submitting a short form “declaration” rather than a full notice. At the conclusion of a 30-day declaration review, the committee can approve the transaction based on the declaration; request that the parties file a full notice subsequent to the declaration; or inform the parties that it cannot conclude action on the basis of the declaration and leave it to the parties to decide whether to file a full notice — the “shoulder shrug” response.

The choice of whether to file a notice or declaration accordingly requires transaction parties to make a judgment as to whether CFIUS is likely to be able to complete its analysis in the abbreviated 30-day period or is more likely to request a full notice.

In 2022, the committee reviewed 154 declarations — compared to 164 in 2021. Of these declarations, CFIUS: approved 90 transactions, compared to 120 in 2021; requested the parties to 50 declarations file a full notice, compared to 30 in 2021; and notified the parties in 14 transactions that the committee was unable to conclude action but did not request a notice, compared to 12 in 2021, 16 in 2020 and 32 in 2019. The report demonstrates that CFIUS was less likely to approve a transaction on the basis of a declaration, and of those transactions where the committee did not approve a transaction on the basis of the declaration, CFIUS increasingly requested that the parties file a full notice.

The lesson from this data is that transaction parties should think twice before filing a declaration and do so only where there is a strong basis to conclude that the committee will be able to complete its analysis and approve the transaction in 30 days. This is likely to be the case for investors from jurisdictions that are allies of the United States, and where the investor has received committee approval in recent years for similar transactions.

If the transaction presents facts that will require more thorough investigation by CFIUS, such as large numbers of government contracts that it will need to analyze — and if there is a meaningful possibility of mitigation — then a declaration likely will not be the best choice.

Next, there are longer timelines. CFIUS reviewed 286 notices of covered transactions filed in 2022, which represents an increase from the 272 notices reviewed in 2021. The increase in notices in 2022 — despite significant drops in global and U.S. mergers and acquisitions activity from 2021— indicates that transaction parties appear to be filing notices for a larger percentage of transactions. For 162 of the notices filed in 2022, approximately 57 percent, the committee’s review extended into the second 45-day “investigation” phase. Of note, there was a meaningful increase in the number of notice reviews extending to investigation compared to 2021, signaling that approvals at the conclusion of the initial 45-day review period are increasingly difficult for parties to secure.

Finally, there is a continued focus on mitigation. The rate of notices cleared with mitigation measures in 2022 — approximately 14 percent — increased from the 2021 rate of approximately 10 percent. When calculated as distinct notices — i.e., excluding transactions that were withdrawn and refiled — the number of transactions where the committee conditioned its approval on mitigation agreements climbed to approximately 23 percent, indicating that CFIUS is now requiring mitigation for nearly a quarter of transactions it reviews. This suggests a more fundamental change compared to the committee’s historical practice regarding mitigation.

With the additional mitigation agreements from 2022, CFIUS reported that it was monitoring 214 agreements in total. As the number of mitigation agreements increases — especially given that those agreements more frequently involve investors from friendly jurisdictions — it is going to be imperative that CFIUS agencies enforce mitigation agreements in a coordinated, principled and fair manner. As we have previously observed, the mitigation monitoring and enforcement regime has been inconsistent in this regard. As mitigation agreements grow in number — and potentially in complexity — it is critical that the committee evolve a more mature and consistent monitoring and enforcement framework. ND

B.J. Altvater is an associate and David Fagan and Jonathan Wakely are partners in the national security practice of Covington and Burling LLP.

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