On July 31, 2020, the Treasury Department published its Annual Report to Congress on all notices filed with CFIUS in 2019 and all reviews or investigations completed during the year. This Dechert memo reviews the report & says that it provides some important insights for foreign companies considering acquisitions or investments in the United States. This excerpt discusses the increasing importance of mitigation efforts to address concerns raised during the CFIUS review process:
The data in the 2019 Annual Report reflects a similar theme seen in 2018: more transactions requiring mitigation measures since the implementation of FIRRMA. The percentage of reviewed transactions that required mitigation measures in 2019 (12%) reflects the level of concern seen in 2018 (13%), both of which roughly doubled the number of transactions involving mitigation in 2017. Transaction parties should continue to evaluate in advance of CFIUS review what mitigation measures might be required and determine whether and to what extent such measures might impact the feasibility of proceeding with the transaction.
The Annual Report included examples of mitigation measures negotiated in 2019 – identical to those adopted in 2018 – that required the parties involved to take specific and verifiable actions. These actions included the following:
– Prohibiting or limiting the transfer or sharing of certain intellectual property, trade secrets, or know-how;
– Establishing guidelines and terms for handling existing or future USG contracts, USG customer information, and other sensitive information;
– Ensuring that only authorized persons have access to certain technology, that only authorized persons have access to USG, company or customer information; and that the foreign acquirer not have direct or remote access to systems that hold such information;
– Ensuring that only U.S. citizens handle certain products and services, and ensuring that certain activities and products are located only in the United States;
– Establishing a Corporate Security Committee and other mechanisms to ensure compliance with all required actions, including the appointment of a USG-approved security officer or member of the board of directors and requirements for security policies, annual reports, and independent audits;
– Exclusion of certain sensitive assets from the proposed transaction; and
– Divestiture of all or part of the U.S. business.
The Annual Report discloses that investors from China, Canada and Japan accounted for 40% of all notices filed in 2019. Japanese investors led all others, and were responsible for 20% of all transaction notices & foreign acquisitions of U.S. critical technologies. Not surprisingly given the deteriorating relationship between the U.S. & China, Chinese acquisitions decreased by over 50% compared to the prior two years. Chinese investment in critical technologies also dropped by over 50%.
– John Jenkins