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Key details of CFIUS 2010 annual report

by contributors Brian Weimer, Thad McBride and Dan Brooks, Sheppard Mullin | Published January 25, 2012 at 1:51 PM

The Committee on Foreign Investment in the United States recently submitted its annual report to Congress for calendar year 2010. Among other things, the report reveals CFIUS is investigating a large number of transactions and increasingly conditioning approval of transactions on the implementation of mitigation measures. Buyers and sellers should take note.

Of the numerous details included in the report, we think the following five are particularly notable:

More notices filed. Ninety-three notices were filed with CFIUS in 2010. This is significantly more than the 65 notices filed in 2009 (though considerably fewer than the 155 notices filed in 2008). Because parties sometimes withdraw a notice, there were fewer than 93 distinct covered transactions; in fact, the report states that 12 of the 93 notices were withdrawn. The increase in notices is likely due to improving economic conditions and transaction parties' increasing wariness of CFIUS post facto review of transactions completed without notice.

Investigations are common. CFIUS conducted an investigation with respect to 35 of the 93 notices filed in 2010. Thus (as in 2009), CFIUS investigated nearly 40% of all notified transactions. In contrast, CFIUS launched investigations in only 4% of cases in 2007 and 15% of cases in 2008. Investigations are now becoming customary, and parties therefore need to account for the corresponding 45-day period when scheduling transactions.

Allies are subject to review, too. More than half of the 93 notices filed in 2010 were filed by foreign investors from the U.K. (26 notices), Canada (9), Japan (7) and France (6). While these countries are among our closest trading partners, much attention has been paid to proposed acquisitions by Chinese and other foreign investors perceived to threaten U.S. national security. Such frequent review of transactions involving allies is a reminder that CFIUS carefully examines the U.S. business over which control is being acquired, regardless of the acquirer's nationality.

Increasing use of mitigation in specific industries. More than in prior years, CFIUS is requiring mitigation measures as a precondition to approval of covered transactions -- such measures were imposed in 10% of cases in 2010. Measures included requiring transaction parties to (1) implement guidelines for handling U.S. government contracts and customer information, (2) notify relevant U.S. government parties of security incidents or (3) establish corporate security and compliance mechanisms. CFIUS also may monitor parties' compliance with mitigation measures on its own or through third-party audits. In addition, as in 2009, mitigation measures were targeted at acquirers of U.S. companies involved in computer software, telecommunications and energy. We believe these sectors, as well as the defense and aerospace sector, continue to be ripe for mitigation measures.

China. As in 2009, transactions involving Chinese investors accounted for only about 6% of all notices filed in 2010. (Note that the report lists Hong Kong separately from China in the list of acquirers' home countries; from our experience, it is not clear that CFIUS views Hong Kong acquirers differently from mainland China acquirers when reviewing a transaction.) Yet China transactions, such as the 2009 Firstgold Corp. transaction that was abandoned after CFIUS indicated its intent to recommend that President Obama block it, have gained the most attention in recent years. We expect there to be continued focus on China deals even though they constitute only a small proportion of transactions notified to CFIUS.

In short, we anticipate that the trends identified in the 2010 report will continue. We believe these trends mean that, in the coming years, navigating the CFIUS process will be increasingly challenging. Any foreign investor seeking to acquire a portion of a U.S. business needs to have a well-developed CFIUS strategy to address these challenges.

Brian Weimer and Thad McBride are partners and Dan Brooks is an associate in the law firm of Sheppard Mullin Richter & Hampton LLP. All three are resident in the firm's Washington office.

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Tags: CFIUS | Committee on Foreign Investment in the United States | Congress | Firstgold Corp. | President Obama

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