Finds Coordinated Foreign Strategy to Acquire US Critical Technologies; Number of Filings by Chinese Acquirers Increase
The Committee on Foreign Investment in the United States (CFIUS), a multi-agency U.S. government committee charged with reviewing foreign acquisitions of U.S. companies for national security implications, recently released its Annual Report to Congress regarding its activity during calendar year 2011. CFIUS's annual report provides important insights for foreign companies that are considering investment and M&A transactions that could raise U.S. national security considerations.
Since 2008, CFIUS has prepared an Annual Report to Congress in accordance with the Foreign Investment and National Security Act of 2007, or "FINSA," which substantially amended the Exon-Florio Amendment to the Defense Production Act of 1950.
CFIUS Finds Coordinated Foreign Strategy to Acquire US Critical Technologies
For the first time, the report has found that that there is likely a "coordinated strategy" among foreign governments or companies to acquire U.S. companies involved in research, development, and production of critical technologies.1 The most significant M&A activity involving foreign acquisitions of U.S. critical technology companies involved targets whose primary activities were in the machinery and equipment sector.
Although the unclassified public report does not provide further information concerning CFIUS's assessment, the finding is significant and could result in increased security-related conditions imposed on transactions in certain industrial sectors. The finding also could lead to CFIUS recommending that the President block additional transactions. Although not covered by the 2011 report, as we previously reported here, the President recently determined that national security interests warranted blocking Chinese-owned Ralls Corporation's acquisition of wind farm projects in Oregon, and ordered the Chinese company to remove all property and installations and divest all interest in the projects. The Ralls divestment order was only the second time since CFIUS's establishment in 1975 that a President has ordered divestment under CFIUS authority.
Number of Filings Up
The number of notices filed with CFIUS has increased 70% since 2009 (from 65 to 111), reflecting greater M&A activity following the 2007-2008 global financial crisis. Although the number of filings remains below the pre-recession high of 155 notices in 2008, the number of notices has continued to increase each year since 2009.
Percentage of Filings that Proceed to Investigation Stage is Relatively Constant
The percentage of notified transactions proceeding to the full 45-day investigation stage has remained relatively constant since 2009 at roughly 37% of all filings. Of the 111 notices filed in 2011, 40 transactions (or approximately 36%) proceeded into the investigation stage, while of the 93 notices filed in 2010, 35 transactions (or approximately 38%) were investigated.
Chinese Filings Increased
Notified acquisitions of U.S. businesses by Chinese buyers continue to increase, increasing from four in 2009 to ten in 2011. Of the 20 notices filed since 200, 12 have involved transactions in the manufacturing sector; five in mining, utilities and construction; and three in finance, information, and services.
Mitigation Measures Imposed to Address National Security Concerns
From 2009 through 2011, 22 cases (approximately 8% of filings) resulted in the use of legally binding mitigation measures. In 2011, CFIUS agencies negotiated, and parties adopted, mitigation measures for eight different covered transactions. These measures involved acquisitions of U.S. companies engaged in software, computer programming, computer and electronic manufacturing, electrical equipment and component manufacturing, aerospace manufacturing, and finance.
In 2011, CFIUS employed a number of mitigation measures to place conditions on transactions and thereby address national security concerns. Such mitigation measures included:
- establishing a Corporate Security Committee, security officers and other mechanisms to ensure compliance with required actions, including annual reports and independent audits;
- ensuring compliance with established guidelines and terms for handling existing or future U.S. Government (USG) contracts and USG customer information;
- ensuring only U.S. persons handle certain products and services, and ensuring that certain activities and products are located only in the United States;
- notifying relevant USG parties in advance of foreign national visits to the U.S. business;
- notifying relevant USG parties of any material introduction, modification or discontinuation of a product or service, as well as any awareness of any vulnerability or security incidents;
- ensuring continued production of certain products for relevant USG parties for specified periods; and
- requiring a proxy entity to perform certain functions and activities of the U.S. business
The notices of covered transactions filed with CFIUS during the 2009-2011 period involved a wide range of industrial subsectors. Broadly, more than one third of notices during this period were in the manufacturing sector (106 notices, or 39%), while approximately one third of the notices were in the finance, information, and services sector (95 notices, or 35%). The remainder of notices were in the mining, utilities, and construction sector (48 notices, or 18%) and the wholesale, retail, and transportation sectors (20 notices, or 7% percent).
Within these broad sectors, the following sub-sectors represented approximately more than half of all filings between 2009- 2011:
- Computer and electronic products, including navigational, measuring, electromedical, and control instruments; communications equipment, and semiconductor and other electronic components (53 filings);
- Professional, scientific, and technical services, including computer systems design and related services and architectural and engineering services (52 filings);
- Utilities, including electric power generation, transmission, and distribution (25 filings); and
- Transportation equipment, including aerospace products and parts (23 filings).
By Nationality of Investor/Acquirer
Companies domiciled in 31 countries filed CFIUS notices over the last three years. From 2009 to 2011, companies based in the United Kingdom filed 68 notices, accounting for 26% of all CFIUS filings, the highest of any country. France and Canada followed the United Kingdom with 27 filings each, followed by China with 20 and Israel and Japan with 18 filings.
As has been the historical trend, companies from the United Kingdom had the highest number of filings in 2011, at 25. The number of transaction notices involving French companies increased from six in 2010 to 14 in 2011. Chinese-based companies made ten filings, followed by companies based in Japan and the Netherlands (seven filings each), and Israel, Sweden, and Canada (six filings each).
The CFIUS Annual Report for 2012 and prior years may be obtained here: http://www.treasury.gov/resource-center/international/foreign-investment/Pages/cfius-reports.aspx
1 The definition of "critical technologies," which includes technologies subject to certain U.S. export controls, is set forth in 31 C.F.R. § 800.209, Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons.