Annual CFIUS Report Signals Increased FDI Scrutiny in Coming Years, Firms Say

The Committee on Foreign Investment in the U.S.’s annual report to Congress (see 2208020043) shows CFIUS is reviewing record numbers of investments and sheds light on how the Biden administration is approaching screening efforts, especially surrounding Chinese companies, law firms said. The report also indicates that companies should expect even more government scrutiny of foreign direct investments in coming years, firms said, including for non-notified transactions.

Wilmer Hale said the committee has “stepped up its scrutiny of transactions across the economy,” particularly in the finance, information and services, and manufacturing sectors. The firm said CFIUS’s review of 164 declarations and 272 joint voluntary notices in 2021 was the “largest number of transactions ever analyzed” and an “explosive growth” in CFIUS action. “Businesses should expect heightened government scrutiny of investments by and in foreign entities in coming years,” the firm said.

In the report, CFIUS said it plans to dedicate more resources to identifying non-notified transactions, which may include investments that have been completed for years. But “despite all of the noise about a greater emphasis on pulling in non-notified transactions,” CFIUS requested a formal filing for only eight out of more than 100 non-notified cases in 2021, Steptoe & Johnson said. This “suggests the increased risk of the worst-case scenario for transaction parties (i.e., the unwinding of a non-notified transaction) may be keeping parties on their toes and encouraging more filings on the front end,” the firm said.

But Weil Gotshal said CFIUS, in total, identified a higher number of non-notified transactions in 2021 compared with 2020, which “confirms that CFIUS is increasing its ability” to identify unreported investments. “However, it is only initiating reviews on a very small percentage of these transactions,” the firm said. This could mean companies are increasingly making “defensible decisions after conducting reasonable due diligence to inform their decisions as to whether the facts and circumstances of their particular transaction necessarily warrant a voluntary filing.”

Still, Weil said CFIUS’s plan to dedicate more resources toward identifying non-notified transactions could soon lead to an uptick in formal reviews of those investments. “We expect the number of non-notified transactions identified and considered by CFIUS to further increase in 2022 – 2023,” the firm said.

Investment scrutiny may also increase if the U.S. adopts a proposal to create an outbound investment screening mechanism, Weil said. The Biden administration and some lawmakers have voiced support for an outbound regime, but the proposal has faced some opposition in Congress (see 2207140035).

Even though the proposal has stalled, businesses should still prepare for a “path-breaking outbound investment review process that will significantly increase regulatory exposure,” Weil said. The firm said such a regime is increasingly likely, especially because scrutiny of foreign direct investments “reached new heights” in the first year of the Biden administration.

Although scrutiny is increasing, Steptoe noted that CFIUS last year saw an “uptick” in filed notices from China. The country represented the “single largest jump in notices of transactions year-over-year” from 2020, Torres Trade Law said, when Chinese parties submitted only 17 notices. Filing numbers are driven by “various factors,” but Steptoe said the increase may reflect “a view that the Biden administration is somewhat more hospitable to Chinese investors than the Trump administration.”

Steptoe also said CFIUS may be losing its “deadline discipline,” pointing out it asked parties to withdraw and refile in 63 cases in 2021, nearly a quarter of all cases. In total, the committee approved the withdrawal of 74 notices, a “significant increase” from the 29 notices that were withdrawn in 2020. “CFIUS had been working to reduce the number of cases that are withdrawn and refiled,” the firm said, “but the report suggests this practice continues to be alive and well.”

At the same time, CFIUS managed to speed up its review times for joint voluntary notices. Weil noted the committee was able to accept and provide written comments on draft voluntary notices more quickly than the previous year. “CFIUS continues to expedite its review process and filing timelines for” joint voluntary notices, Weil said. “We expect this trend to continue.”

The committee also reviewed 30% more declarations in 2021 than in 2020, the firm said, and “demonstrated an increased ability to clear transactions within the 30-day time period in the context of a material increase in the volume of declarations submitted.” Weil expects CFIUS to “continue these positive trends in 2022 as CFIUS and parties continue to establish increased comfort with the declaration format.”