Foreign investment monitor #9

The firestorm around Nippon Steel Corporation’s proposed acquisition of U.S. Steel Corporation might seem like an isolated incident, driven by the political sensitivity of the target company and the dynamics of a Presidential election year. However, this controversy risks overshadowing a more significant trend affecting a broader range of companies: transactions not involving Chinese investors are increasingly being swept up by lengthy and unpredictable CFIUS reviews, even when the target company isn’t politically high-profile.

While data from the US Treasury Department’s 2023 CFIUS Annual Report (Annual Report) indicates that aspects of its process are becoming more efficient, a deeper analysis reveals a significant shift in focus. Traditionally, CFIUS skepticism was primarily directed at Chinese investments due to national security concerns. However, the latest data indicates that this skepticism is now expanding to include investors from US allies and partner nations.

It's important to note that the Annual Report treats each CFIUS filing as a separate transaction. This means that if a single corporate transaction undergoes multiple filings – such as starting with a declaration and then proceeding to a notice, or if a notice is withdrawn and refiled – it is counted multiple times. This approach can be misleading, inflating the apparent number of transactions under review.

Our adjusted analysis reveals that transactions involving non-Chinese investors are increasingly subject to extended reviews with a higher risk of material mitigation. This highlights a significant broadening of CFIUS’ focus and underscores the necessity for companies to carefully assess CFIUS risks early in the deal-making process to reduce the likelihood of any unwelcome surprises.

Unmasking CFIUS trends: efficiency or hidden complexities?

To better understand these shifting dynamics, we delve into the key findings of the latest CFIUS Annual Report. This deep dive will reveal the nuances behind the data and what they mean for your investment strategies.

Declining transaction filings and rising unpredictability

The number of distinct transactions filed with CFIUS continued to drop from an estimated peak of 343 transactions in 2021, to 322 in 2022, and 279 in 2023. While some of this decrease may be attributed to a greater familiarity with the CFIUS rules since the enactment of the Foreign Investment Risk Review Modernization Act regulations, a notable factor is the growing unpredictability of the CFIUS review process. Companies are becoming cautious, fearing delays and complications that can arise from extended reviews.

Short-form declarations: an effective strategy for straightforward cases

The use of short-form declarations in the CFIUS process has experienced a notable shift. A declaration is a concise filing that allows parties to potentially receive a decision more quickly than with a full notice. Upon reviewing a declaration, CFIUS may:

i. Issue a clearance letter that provides safe harbor.

ii. Issue a no-action letter that does not provide safe harbor.

iii. Request that a full notice be submitted.

iv. Initiate a unilateral review.

Between 2020 and 2022, an estimated 48 percent of distinct transactions were filed as declarations. In 2023, this rate dropped to 39 percent. This decline likely reflects concerns from parties due to the significantly increased rate at which CFIUS had been requesting notices at the end of the declaration process – in 2022, 32 percent of declarations resulted in such requests. This trend led many parties to perceive filing declarations as riskier and potentially less efficient.

However, despite the decrease in the number of transactions filed as declarations, the effectiveness of declarations improved significantly in 2023. Only 18 percent of declarations that year resulted in a request for a full notice. This marked improvement suggests that filing a declaration is once again a realistic and efficient option for certain transactions.

This shift is likely due, in part, to parties adjusting their strategies. Recognizing the previous risks, they began reserving declarations for the most straightforward cases – transactions unlikely to raise material national security concerns. By carefully selecting which transactions to submit as declarations, parties increased the likelihood of receiving clearance without the need for a more time-consuming full notice.

Another contributing factor is the role of lead agencies in the CFIUS process. Various US government agencies participate in CFIUS reviews, with certain agencies designated as lead agencies based on their specific interests in a transaction. The choice of lead agency can materially impact the process and outcome of a review.

We estimate that the US Department of Defense (DOD) and US Department of Energy (DOE) are the co-lead agencies in a majority of declarations. Improvements in efficiency within these agencies may have streamlined the declaration process, contributing to the reduced rate of declarations ending with a request for a full notice .

Increased investigations signal heightened scrutiny

The rate at which transactions filed as notices proceed to the investigation phase remains notably high, signaling sustained scrutiny from CFIUS. In 2023, we estimate that 45 percent of distinct transactions filed as notices went to investigation (assuming any transaction withdrawn/refiled involved two investigation periods) – slightly above the 2022 rate of 44 percent and well above the 2021 rate of 32 percent.

Under CFIUS regulations, the Committee has up to 45 calendar days to complete its initial review of a notice. If additional time is needed to assess potential national security risks, CFIUS can initiate an additional 45-calendar-day investigation, extending the total review period to up to 90 calendar days. Entering the investigation phase can therefore significantly prolong the review process, impacting transaction timelines and introducing uncertainty.

The high rate of notices advancing to investigation is expected to persist. This is partly because parties are more likely to file short form declarations for straightforward, low-risk cases – especially if CFIUS continues to clear transactions efficiently through that process. As a result, more complex transactions that raise national security considerations are funneled into the notice process and are likely to take more than 45 days.

Chinese transactions continue to decline, a trend that is likely to continue

Chinese transactions are disproportionately likely to be withdrawn and refiled. When adjusting for distinct transactions—taking into account that a single corporate transaction may undergo multiple filings due to withdrawals and refilings—we estimate that no more than 14 unique transactions involving Chinese investors were reviewed by CFIUS in 2023, as opposed to the 33 transactions reported in the raw data.

Furthermore, transactions involving Chinese investors are significantly more likely to be the subject of CFIUS’s non-notified process. This process occurs when CFIUS seeks to review a transaction that had not been notified. Consequently, a significant portion of Chinese transactions reviewed in 2023 likely involved transactions completed over several years prior to 2023.

Given that CFIUS has likely now identified and reviewed through the non-notified process most legacy Chinese transactions of interest that are subject to its jurisdiction, and considering that new Chinese direct investment at levels with CFIUS jurisdiction has substantially decreased, we anticipate that the number of Chinese transactions subject to CFIUS review will continue to decline.

Non-Chinese investors under the microscope

We estimate that approximately 75 percent of CFIUS investigations in 2023 involved a non-Chinese investor. This clearly indicates that the expanded CFIUS bureaucracy remains highly active despite the decline in Chinese direct investment.

This heightened scrutiny likely stems in part from CFIUS examining non-Chinese investor ties to China. The fact that the risk is indirect has not lessened the intensity of CFIUS scrutiny.

Notably, we estimate that of the 35 mitigation agreements CFIUS required in 2023, at least 32—and possibly more – were with non-Chinese investors. This suggests that while non-Chinese transactions are subject to rigorous scrutiny, they are more likely to be resolved through mitigation agreements rather than prohibitions. In contrast, the overwhelming majority of abandoned transactions in 2023 involved Chinese investors.

Increased scrutiny reflected in higher withdraw/refile and mitigation rates

The intensified examination of non-Chinese transactions is evident in the increased rates of withdrawals, refilings, and mitigation requirements. Before 2020, the vast majority of withdraw/refiles likely involved Chinese investors. However, after 2020, the withdraw/refile rate for non-Chinese transactions became at least as high as, if not higher than, that for Chinese transactions.

We estimate that in 2021, non-China transactions accounted for at least 51 percent of withdraw/refiles, at least 65 percent in 2022, and at least 49 percent in 2023. This shift underscores that non-Chinese investors are now experiencing heightened scrutiny during the CFIUS review process, similar to or exceeding that faced by Chinese investors.

Perhaps the most notable trend over the past few years is the increasing rate at which transactions are requiring mitigation. Adjusted for withdraw/refiles, we estimate that the rate rose from 12 percent in 2021 to 19 percent in 2022, and reached 23 percent in 2023. The vast majority of these are non-Chinese transactions.

Limited transaction failures under CFIUS

The estimated 190 notices of distinct transactions filed with CFIUS in 2023 resulted in 9 transactions—5 percent—being withdrawn and abandoned or subject to a divestment requirement due to national security concerns, effectively the same rate of failure as the prior few years. 

Singapore and the UAE have had the most interesting trends beyond China

While investors from the UK, Canada, and Japan accounted for the most transactions filed with CFIUS in 2023—19, 16, and 15 respectively—this aligns with their historical investment levels in the United States and is not unexpected. While these statistics are raw numbers of notices filed by investors from these countries, it is unlikely that many, if any, of these filings involved withdrawals and refilings. Therefore, these numbers likely reflect the actual number of distinct transactions reviewed by CFIUS from these countries through the notice process.

In contrast, the trends involving Singapore and the United Arab Emirates (UAE) have been particularly noteworthy and indicative of shifting dynamics.

Singapore continued to be a significant participant in CFIUS filings, but at a much lower rate than the previous year. In 2022, Singapore accounted for more distinct transactions filed as notices than any other country, with an unadjusted count of 40 reported notices. This number dropped to 19 in 2023, with some portion of the reported transaction count in each year likely tied to withdraw/refiles.

The UAE experienced a significant increase in CFIUS filings, coupled with heightened scrutiny. Notices involving UAE investors jumped from zero in 2021, to 11 in 2022, and further to 22 in 2023.

In the case of both Singapore and the UAE, the fluctuations could be driven by rates of investment, increased willingness to invest in more sensitive targets, risk-tolerance of the investors for proceeding without a CIFUS filing, and other geopolitical considerations.

Transactions with DOJ as co-lead face higher risks of withdrawal/refiling and mitigation

Transactions where DOJ serves as a co-lead agency have been disproportionately more likely to be withdrawn, refiled, or subjected to mitigation measures. According to DOJ’s FY 2025 budget request, in FY 2023 (October 1, 2022-September 30, 2023), DOJ led approximately 16 percent of cases in which a joint voluntary notice was filed, with CFIUS. Notably, these cases resulted in prohibition, abandonment, or mitigation based on national security risks roughly 82 percent of the time—a significant increase from 40 percent in FY 2022.

It's unclear whether these figures are adjusted for withdrawals and refilings; if they are not, the effective percentages could be even higher in reality. Historically, CFIUS mitigates approximately 15 percent of discrete transactions (adjusting for withdraw/refiles). The data from DOJ’s budget request, regardless of these adjustments, demonstrates a significant divergence from CFIUS’s typical trends. This indicates that even transactions involving seemingly benign investors are more likely to be subject to mitigation if DOJ co-leads the review.

Among the DOJ’s equities in the CFIUS review process is data protection. Transactions involving the acquisition of a target that has access to, or collects, or maintains data would be most subject to this risk. However, we will be looking to see whether and how much this DOJ inclination to use CFIUS for general data protection purposes, regardless of investor, continues with the change in administration.

Increased enforcement, high compliance

Biden Administration political officials in the Treasury Department made enforcement a clear priority, and CFIUS imposed four penalties in 2023 and four in 2024, which is four times the number it has imposed since gaining penalty authority under the Foreign Investment and National Security Act of 2007. CFIUS has also used its subpoena authority for the first time in the past year.

This uptick in enforcement underscores CFIUS's commitment to enforcing compliance and should drive greater attention to adhering to mandatory filing requirements and complying with mitigation agreements.  However, the relatively low number of enforcement actions suggests that most companies are taking their compliance responsibilities seriously. This high rate of compliance indicates that transaction parties are effectively navigating CFIUS's regulations and are committed to upholding national security considerations.