CFIUS Report Signals Trend Toward Fewer Declarations, Lawyer Says

The Committee on Foreign Investment in the U.S. may continue to see a drop in short-form declarations, particularly if more declarations continue to result in full filings, said Laura Fraedrich, a lawyer with Lowenstein Sandler. She said the decrease in declarations submitted to CFIUS last year -- the first drop since the concept was introduced in 2018 -- highlights the challenges investors face in assessing how best to approach CFIUS.

“CFIUS isn’t as easy as it used to be,” Fraedrich said in an interview, adding that the process is becoming more difficult “at every step of the way.”

CFIUS’ annual report, released earlier this month, showed the committee received 154 declarations in 2022, a slight drop from the 164 it received in 2021 and the first decrease in declarations since the Foreign Investment Risk Review Modernization Act was enacted in 2018 (see 2308010053). Of those declarations -- which are abbreviated disclosures parties may submit to CFIUS, sometimes in the hopes of receiving safe harbor -- CFIUS requested that parties file a joint voluntary notice (JVN) about 32% of the time, a notable jump from 18% in 2021.

That and the overall decrease in declarations “is a reflection that it is getting harder,” Fraedrich said. “A lot of people are saying we don't want to waste the 30 days” waiting for a CFIUS decision on the declaration “if chances are we're going to have to make a filing anyhow, or we’re not going to get cleared.”

Morgan Lewis, in a client alert this month, noted that CFIUS requested a JVN from 150% more declarations in 2022 than in 2021. The firm said there seems to be an “increasing chance that after reviewing a declaration, CFIUS will still ask for a full filing -- thereby potentially increasing the overall review time (if the JVN does not clear in review but rather goes into investigation).”

This and other factors could lead to the declaration process being “used less frequently,” Fraedrich said, adding that more cases are also being subjected to mitigation requirements “with lots of pulling and refiling because of the difficulty of addressing what mitigation is appropriate.”

The report also showed CFIUS is taking longer to close investigations. The committee spent an average of 65 days to close an investigation in 2021 compared with 80.5 days in 2022, which may have been caused by CFIUS spending time examining factors outlined in President Joe Biden’s CFIUS-related executive order last year, Fraedrich said (see 2209150053). That order listed several specific national security factors for the committee to consider when reviewing covered transactions, such as the deal’s potential effect on U.S. critical supply chains, whether the deal affects U.S. technological leadership and whether it may signal any industry trends.

“I think after that came out, things bogged down a little,” Fraedrich said. CFIUS began to look at a wider set of factors surrounding deals, such as whether the particular industry involved was becoming more foreign-owned or whether the foreign buyer had any loose connections to China.

The executive order “definitely gave some insight into some of the things that CFIUS was thinking were more important,” she said. “And I think after that came out, things just slowed down a little bit as they ticked all the boxes of doing that review.”

The committee’s annual report also said CFIUS is focusing less on finding years-old non-notified deals and is instead increasingly looking to intervene in more current transactions. CFIUS said it identified 84 non-notified transactions in 2022, a steep drop from the 135 it found in 2021, and that number may continue to decrease as the committee nears completion of its backlog of non-notified deals that predated the FIRRMA (see 2002270049 and 2001140060).

Before FIRRMA, Fraedrich said CFIUS had not made any non-notified calls that went back “more than three years.” But that changed as CFIUS began to target deals that were able to slip under a less strict investment review regime pre-FIRRMA, sometimes targeting deals that had closed as many as 10 years prior (see 2101220034).

Fraedrich said the report suggests CFIUS appears to now be focusing more on pending transactions, placing “more of its resources in trying to catch things before they happen.”

Weil in a client alert said the committee’s non-notified process may have “matured” enough to where investors are increasingly “making defensible decisions after conducting reasonable due diligence to inform their decisions of whether a transaction necessarily warrants a voluntary filing.”

Morgan Lewis called the decline in non-notified transactions a “striking metric,” saying that along with completing its backlog of pre-FIRRMA cases, more investors may be doing their CFIUS homework. Parties may be “structuring transactions in ways that deprive the Committee of jurisdiction," the firm said, "thereby making a non-notified outreach less likely."

Fraedrich said she has been “on the other end of lots of non-notified calls” but has never been asked to file. “I just explained to them how I analyzed it, and why I concluded that there shouldn't be any national security concerns and they don't need to worry about it," she said. "And in every case, they've gone away.”

Some companies have opted to voluntarily file with the committee just to avoid potentially being caught up in CFIUS’ non-notified transaction process (see 2203180032), but Fraedrich said she tends to avoid filing with the committee absent a clear reason.

“Frankly,” she said, “I don't want to take my client in front of nine government agencies unless we really have to.”