Last month, CFIUS issued its 2023 Annual Report to Congress. The report highlights key indicators of CFIUS’s activities and process, including the complexity and volume of its cases. The report says that there were 233 written notices of transactions filed with CFIUS in 2023 that it determined to be covered transactions, and that a subsequent investigation was conducted with respect to 128 of those 233 notices. The parties ultimately withdrew the notice and abandoned the transaction in 14 of these instances, either for commercial reasons or after being unable to identify mitigation measures acceptable to CFIUS and the parties involved.
There are a whole bunch of numbers in this report, and I could go on like this for quite a while, but that would be really tedious. Instead, I’m just going to point you in the direction of Davis Polk’s memo on the report and offer up an excerpt from that memo identifying some of the report’s key takeaways:
– Complex filings are not getting any easier (or shorter). As discussed above, the time to resolve investigations continues to increase, despite growth in CFIUS resources and staffing. In our experience, the increase in the number of questions from and information requested by the Committee during an investigation continues to drive longer timelines.
– Mitigation measures continue to expand. While the share of notices that resulted in the imposition of some form of mitigation measures remained the same as in 2022 (roughly 18%), it is significantly higher than in 2020 (12%) and 2021 (11%). Moreover, CFIUS’s indicative list of mitigation measures continues to expand, tracking changes to typical NSAs. Expansion has focused largely on data security and increased information and reporting requirements.
– Expect non-compliance with mitigation measures to be more heavily scrutinized and penalized. As discussed in our recent client update, CFIUS has increasingly focused on enforcement, and the Treasury Department issued a notice of proposed rulemaking earlier this year to amend its compliance and enforcement provisions to sharpen its enforcement authorities. Consistent with this trend, in 2023, CFIUS assessed or imposed four civil monetary penalties for noncompliance with material provisions of mitigation agreements, double the total number of previous penalties in the entire history of CFIUS, and issued its first formal finding of a violation of the mandatory filing requirements. The report notes that CFIUS member agencies increased investment in monitoring and enforcement resources in 2023.
– Shifting trends in non-notified transactions. CFIUS has made clear that investigating non-notified transactions is a priority of the Committee. As forecasted in the Committee’s 2022 report, though, the total number of non-notified inquiries has continued to decline, from 135 in 2021 and 84 in 2022 to 60 in 2023, as the Committee uses its increased investigative resources to work through a backlog of historical transactions. That said, the percentage of non-notified inquiries resulting in a formal request for a filing is trending upwards from ~6% in 2021 and ~13% in 2022 to ~22% in 2023, and we expect that CFIUS will continue to closely monitor for transactions of interest.
– John Jenkins
In Fortis Advisors v. Medtronic Minimed, (Del. Ch.; 7/24), the Delaware Chancery Court dismissed claims by a sellers’ representative that the buyer wrongfully deprived the target’s former stockholders of a $100 million contingent milestone payment. The Court rejected the plaintiff’s claims based on the earnout provision’s unusually buyer-friendly language concerning the buyer’s obligations with respect to the achievement of the milestone.
The merger agreement contained language stating that the parties intent was that “development, marketing, commercial exploitation and sale of the Milestone Products” could be exercised by the buyer in accordance with its business judgment and in its “sole and absolute discretion.” It went on to say that the parties acknowledged that the buyer’s ability to exercise its discretion “may have an impact on the payment of the Milestone Consideration.”
While the agreement also provided that the buyer could not “take any action intended for the primary purpose of frustrating the payment of Milestone Consideration,” it also said that the buyer would not “have any liability whatsoever to any [former target stockholder] for any claim, loss or damage of any nature that arises out of or relates in any way to any decisions or actions affecting whether or not or the extent to which the Milestone Consideration becomes payable.”
The plaintiff alleged that the buyer’s decision to defer hiring new salespeople, commencing a marketing program and refusing to pursue regulatory clearance and sales of a particular product were actions intended to frustrate payment of the Milestone Consideration. However, the Court concluded that “[d]eferring action and refusing action are functional opposites of “tak[ing]” action.” If the buyer had covenanted to use reasonable efforts to achieve the milestone, the Court said that those omissions might carry more weight, but not with the buyer-friendly language contained in the agreement.
The Court observed that the unusual language in the contract put the plaintiff in the position of having to satisfy a pleading burden that it just could not meet:
The Court first notes the unusually heavy burden that Fortis contractually imposed on itself. This is not a case where Medtronic covenanted to use “best efforts,” “commercially reasonable efforts,” or even “good faith efforts” to achieve the First Milestone. To the contrary, in an arm’s-length transaction, Medtronic secured for itself sole discretion to take actions that Medtronic knew would frustrate the First Milestone, so long as the action had some other primary purpose. Fortis freely assented to that arrangement. The Court is not aware of any Delaware precedent applying such a buyer-friendly contingent payment scheme, and the parties cite to none.
Thus, while Fortis is correct that Delaware law imposes a “‘minimal’ and ‘plaintiff-friendly’ standard” at the pleading stage, Fortis must contend with a voluntarily undertaken contractual standard that is far from plaintiff-friendly. To meet that standard, Fortis cannot simply raise an inference that Medtronic acted in a way that had the purpose or effect of defeating the First Milestone, Fortis must plead facts that raise an inference that Medtronic acted with the primary purpose of defeating the First Milestone. Fortis fails to raise the latter inference.
While the Court dismissed the plaintiff’s claims relating to the earnout, it allowed the plaintiff to move forward with claims that the buyer wrongfully withheld amounts held in an escrow account based on the buyer’s alleged untimely assertion of indemnity claims.
– John Jenkins