U.S. M&A Newsletter — July 30, 2024

The Committee on Foreign Investment in the United States (CFIUS), the interagency U.S. government body responsible for most national security reviews of inbound foreign investments, is required by law to provide an annual report to Congress on its activities from the previous year. Last week, CFIUS released its annual report to Congress covering activities from calendar year 2023. Here are the main things we learned, including our unique analysis of the statistics reported by CFIUS.

Fewer filings, but more are mandatory

CFIUS experienced a significant downturn in the number of cases during 2023. By CFIUS’s own metrics, there were more than 29% fewer filings of short-form declarations in 2023 than in 2022, and the number of full-length notices was down by more than 18%. We estimate that CFIUS reviewed or assessed 278 distinct transactions—down nearly 14% from 321 in 2022—after removing double-counted transactions (i.e., where notices were withdrawn and refiled or a declaration led to a full notice), rejected filings that did not lead to a refiling or an agency notice, and filings withdrawn for non-CFIUS (usually commercial) reasons. See our statistical summary below for more details.

We note that while the number of CFIUS filings dropped, it appears that more of the filings were mandatory pre-closing filings. CFIUS filings are required at least 30 days prior to closing for certain transactions involving a target that qualifies as a “TID U.S. Business,” or one engaged in developing or producing “critical technologies” (“T”), performing functions relating to “covered investment critical infrastructure” (“I”), or collecting or maintaining “sensitive personal data” of U.S. citizens (“D”). In 2023, 33% of declarations were submitted as mandatory filings, an increase from fewer than 29% in both 2022 and 2021.

CFIUS does not provide mandatory filing statistics for notices, but if the percentage of required declarations grew so sharply in 2023, it is not unreasonable to expect the same for notices (especially since more than 18% of the declaration filings submitted in 2023 resulted in CFIUS requests that the parties file full notices).

Two factors may be contributing to the combined decrease in CFIUS cases and increased share of mandatory filings. First, global M&A activity, cross-border M&A, and U.S.-inbound transactions, all of which contribute to CFIUS activity, were significantly lower in 2023. A smaller number of deals overall may not just reduce the number of CFIUS filings but increase the percentage of mandatory filings. Still, another factor may be in play. As we noted in our review of last year’s CFIUS annual report, CFIUS is no longer keeping pace with the volume of filings reviewed by foreign investment regimes in other countries. The CFIUS “safe harbor” used to be enough of a draw to bring in hundreds of filings per year. Despite CFIUS’s emphasis on increased enforcement (more below), we wonder whether it remains as compelling.

More frequent and faster clearances

Although CFIUS’s caseload fell, parties are getting cleared more often and more quickly. The clearance rate for declarations increased to 76% in 2023, a higher rate than any previous year since declarations were introduced, and far higher than last year’s (aberrational, we hope) 58% clearance rate. As a result, the number of declarations resulting in requests for long-form notices dropped from 32% in 2022 to 18% in 2023 (the same figure as in 2021). The “CFIUS shrug” (a term CFIUS disfavors, but which practitioners use nonetheless to describe when CFIUS cannot clear a case on a declaration alone, but stops short of requesting a full notice) continues its steady year-over-year decline; only 5.5% of the declarations led to that outcome.

For long-form notice filings, the clearance percentage is about the same as in years past, as is the rate at which CFIUS requires clearance subject to mitigation conditions (whether agreed with or imposed on the parties). From a timing perspective, however, the process for notices is improving greatly. While the percentage of cases requiring second-stage investigation phases remained largely unchanged from previous years, the number of cases in which the CFIUS process had to be extended through an administrative “withdrawal and refiling” of a notice dropped noticeably, from nearly 24% in 2022 to 18% in 2023.

Overall, between the increase in unconditional clearances of transactions following declaration filings and the decrease in the number of notices being withdrawn and refiled, CFIUS is taking less time to resolve transactions. Reducing the likelihood of a notice being withdrawn and refiled also removes some of the uncertainty parties have about the potential length of the CFIUS process.

Continuing focus on enforcement

This year’s annual report highlights the fact that CFIUS imposed civil monetary penalties on parties on four occasions during 2023, more than any previous year in CFIUS’s history. In each case, the penalties were for noncompliance with CFIUS mitigation conditions. The amounts of the penalties and the nature of the specific violations were not reported.

CFIUS has not yet issued a monetary penalty for failure to submit a mandatory pre-closing filing. However, CFIUS did note that it had investigated several instances of failures to file, issuing formal “determinations of noncompliance” in several cases. CFIUS also remarked that its investigations of these cases led to issuance of the May 2023 “completion date” FAQ that undercut the longstanding use of “springing rights” that previously allowed the initial acquisition of economic interests to be followed—after CFIUS clearance—by the acquisition of governance and/or information access rights. In addition, CFIUS received a voluntary self-disclosure from one party of a failure to submit a mandatory filing; CFIUS has previously indicated that, as with other regulatory regimes, voluntary self-disclosures could reduce the severity of penalties for noncompliance.

For the first time, CFIUS publicly acknowledged the filing of an “agency notice” in 2023 after a notice filed by the parties was rejected by CFIUS and the parties subsequently refused to resubmit their notice. CFIUS’s self-initiation of an “agency” notice is a rare occurrence, as is the rejection of a filing itself. Rejections may result from incomplete filings, material changes in the transaction, discovery by CFIUS of information inconsistent with information submitted by a party, or a failure to respond to CFIUS’s follow-up questions. CFIUS’s rejection of two filings (both notices) during 2023 is largely consistent with the figures for previous years. Click here to view the statistical summary and analysis.

Written by Jonathan Gafni, our Head of U.S. Foreign Investment in the Washington, D.C. office of Linklaters LLP and formerly served on CFIUS for five years as a representative of the U.S. Intelligence Community.

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