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3 Takeaways From CFIUS’ Latest Report

The Committee on Foreign Investment in the U.S. is reviewing a growing number of deals as it hunts for potential national security risks in transactions from foreign buyers, with Chinese buyers from an expanding swath of industries increasingly becoming of interest to the regulator, new data suggests.

CFIUS’ annual report, which was released Friday and covers activity for 2014, shows that the overall number of transactions reviewed by the regulator swelled to 147 cases, up from 97 the prior year. That marks the highest number on record since 155 transactions were reviewed in 2008.

The report also reflects the growing number of Chinese deals under review, a broadening of the industries CFIUS is interested in and the evolution of the CFIUS review process itself, noted Mario Mancuso, a Kirkland & Ellis LLP international trade and national security partner.

“The increased geographical distribution of CFIUS buyers in the 2014 data underscores an important macroeconomic secular trend, which is that Asia is on the rise,” he said. “Asia is increasingly a principal source of global M&A liquidity. And, Asian buyers are increasingly investing across industries in the U.S., and we’re starting to see that in the data.”

Here, Law360 recaps three major takeaways from the agency’s latest report.

Chinese Buyers Rack Up the Most Reviews

For the third year in a row, transactions involving Chinese buyers made for the largest number of reviews from any one country, the report found. A total of 24 transactions were reviewed by CFIUS in 2014, up from 21 in 2013 and 23 in 2012.
The perception often is that Chinese buyers, especially those with ties to the government, will see a higher level of scrutiny, and regardless of whether or not that is true, the perception itself likely lands a growing number of Chinese deals in front of CFIUS, explained Jose Fernandez, a Gibson Dunn partner.

Although CFIUS review is optional, the agency can request to review a transaction if it has concerns even after a deal's closing, which can make opting into the review process a safer pathway for foreign buyers.

“If it's ever a close call or if it's anywhere near the line ... there’s a rationale for this, in the sense that you get blessed and inoculated by CFIUS by getting an approval. But in my experience, Chinese companies do not want to take any chances,” Fernandez said.

As Chinese foreign direct investment into the U.S. continues to flourish, the volume of transactions that will be filtered through the CFIUS review process is only expected to rise further, Fernandez added.

“You are seeing an effort on the part of Chinese companies to purchase U.S. companies. You are seeing much more interest from Chinese companies, as they have their strategy to go out, just buy foreign companies and spread out in the world,” he said.

But China is not the only country that saw — and likely will continue to see — a significant uptick in the number of reviewed deals. Buyers from the U.K. saw 21 deals reviewed in 2014, up from seven in 2013, while the number of deals reviewed from buyers in Germany, Hong Kong, Israel, the Netherlands, Singapore, South Korea and Switzerland all at least doubled.

While that may appear to indicate heightened scrutiny from CFIUS, it also comes at a time when cross-border M&A was starting to heat up, noted Eric Shimp, an Alston & Bird LLP policy adviser.

“That looks like a large jump, but how much is that due to additional scrutiny or fear of scrutiny, and how much of that is attributable to increased deal flow in the U.S. economy as a whole?” Shrimp asked. “Some of the growing rate of CFIUS review has to be attributable to the increase in M&A volumes.”

Industry Focus Continues to Broaden

The latest report shows that CFIUS is going beyond aerospace and defense or sensitive technologies in its reviews and sizing up foreign investments from a wider swath of industries.
Manufacturing — which includes electronics, such as semiconductors — remained the most active industry for deals reviewed by CFIUS. A total of 69 manufacturing transactions were reviewed by the agency, up from 35 the year before and 47 in 2012, the report said.

But the finance, information and services industries; the mining, utilities and construction industries; and the wholesale, retail and transportation industries all saw an increasing number of transactions reviewed.

CFIUS even oversaw four real estate transactions during 2014, showing that any type of transaction could be viewed as having a national security risk as companies continue to become more globalized, explained Stroock & Stroock & Lavan LLP special counsel Anne Salladin, a former senior adviser counsel to CFIUS.

“The fact that national security is not defined in the statute was intentional and serves to capture concerns as they may evolve,” she said. “Broadening may be too strong a term — what we’re seeing here is that the supply chain has been globalized. There are more and more companies that are foreign who are providing services to the U.S. government.”

The interest in a growing number of industries also reflects the growing complexity of transactions, particularly from China, where a growing number of private equity players and privately held companies are inking acquisitions alongside more traditional, state-owned enterprises.

“In terms of scrutiny, I think we’re still operating in an atmosphere of heightened scrutiny,” Salladin said. “The new annual report shows that CFIUS is doing its job. It’s giving deals, including Chinese deals, a vigorous review.”

Withdrawals Rise as In-Depth Reviews Fall

Heightened scrutiny was certainly evident in the large number of deals that were withdrawn from CFIUS review, especially after making it to the investigation stage. Of the 12 that were withdrawn in 2014, including nine during the investigation stage, only one refiled for review.
Noticed transactions can be withdrawn for a number of reasons, including commercial reasons or the need for more than 30 days to answer all of CFIUS’s inquiries. But the fact that only one withdrawn application was refiled makes the statistic interesting, noted Salladin.

“Although parties can withdraw deals for any number of reasons, this seems to be a record number of deals to be scuttled in just one year,” she said.

The 11 scuttled deals from 2014 stands in comparison with the seven that fell apart in 2013 and the 10 that were terminated in 2012, the report shows. And all six deals that were withdrawn in 2011 were refiled.

While withdrawals were on the rise, a smaller portion of reviewed transactions required in-depth investigations, the report found. Only 35 percent of the transactions reviewed in 2014 were investigated following an initial review, compared with 49 percent in 2013, 39 percent in 2012 and 36 percent in 2011. The 2013 results need to be taken with a grain of salt, however, as the government shutdown at the end of that year skewed the numbers, Mancuso noted.

“CFIUS takes its responsibilities to expeditiously review notices seriously and is quite careful about which notices go into an investigation. It isn’t just increasing,” Mancuso said.