CFIUS 2022 Annual Report Shows Significant Increase in Imposition of Mitigation Measures and Other Notable Trends

The Committee on Foreign Investment in the United States ("CFIUS" or the "Committee") recently released its Annual Report to Congress for calendar year 2022 (the "Report"). Overall, the Report underscores an increasingly challenging, yet manageable CFIUS process. Most notably, CFIUS required mitigation measures in nearly one out of every four unique transactions for which a notice was filed—a substantial increase from historical trends. In addition, CFIUS continues to be active as parties submitted a record number of filings in 2022, though the numbers were generally consistent with 2021. The Report generally reflects a longer and more challenging CFIUS process, with a significant increase in short-form declarations resulting in requests for full notices, and more reviews of CFIUS notices extending into second-stage investigations. While CFIUS continues to actively search for non-notified transactions of interest, the Report confirms that CFIUS is now largely through its backlog of older investments and is now focusing on more recent deals. Importantly, CFIUS continues to approve the vast majority of notified transactions without mitigation. Nonetheless, the CFIUS landscape—and CFIUS's willingness to use its expanded authorities and resources—continues to evolve. It is therefore increasingly critical to carefully manage CFIUS considerations in transactions.

The following are our key takeaways from the Report:

• CFIUS is requiring mitigation measures for more transactions. In 2022, CFIUS required mitigation in 52 cases, representing 18% of total CFIUS notices—the highest percentage in CFIUS history and a significant increase since the enactment of the Foreign Investment Risk Review Modernization Act ("FIRRMA") overhauled the CFIUS statute in 2018. For reference, 10% of notices resulted in mitigation in 2021, 9% in 2020, and 12% in 2019. Moreover, unlike previous years, the Report distinguishes between "distinct notices" and "notices." The former represents distinct transactions (which may involve multiple notices due to withdrawals and resubmissions, such as to allow more time to negotiate mitigation measures), whereas the latter represents the total number of notices accepted by CFIUS. According to the Report, 23% of distinct transactions filed via notice—nearly one in four—resulted in CFIUS requiring mitigation measures to clear the transaction. In practice, we have observed this increase in mitigation over the past year. Also, while the incidences of mitigation increased, not all mitigation measures are extensive or highly burdensome. That said, even relatively narrow mitigation requirements can have a significant impact on transactions, parties, and deal timelines. As a result, this trend emphasizes the importance of carefully assessing potential mitigation measures in deal planning and making CFIUS risk allocation a key consideration in transaction negotiations.
• More short-form declarations are resulting in requests for notices. In 2022, declarations proved to be a less effective filing option, with 33% of declarations resulting in a request for a notice—nearly double the 18% in 2021 and up significantly from the 22% in 2020. Correspondingly, 58% of declarations were cleared in 2022, down from 73% in 2021 and 64% in 2020 (when declarations became a filing option for any transaction notified to CFIUS after the FIRRMA regulations took effect in February 2020). There was a slight increase in "shrug" outcomes—where CFIUS does not clear the transaction or request a notice—in 2022, with 9% of cases resolving this way, up slightly from 7% in 2021. Though the majority of declarations continue to be cleared by CFIUS, this marks a disappointing trend in 2022—and will likely cause transaction parties to consider carefully whether filing a notice from the outset might result in a shorter overall CFIUS process than starting with a declaration and risking the extended timeline caused by a notice request. Indeed, the consistent trend in recent years is that if CFIUS does not clear a transaction on the basis of a declaration, it is significantly more likely to request a notice rather than issue a shrug. The Report did not provide any explanation for why the number of notice requests increased in 2022 but given that this increase corresponded with the notable uptick in mitigation (which is negotiated only under the notice process—not during a declaration assessment), this likely generally reflects CFIUS more aggressively assessing and addressing potential national security concerns, especially in complex cases and/or those involving sensitive technology or data.
• Though CFIUS is mitigating more transactions, it is not stopping more deals. In 2022, 88 notices were withdrawn, with 68 later refiled. Of the cases that were not refiled, 12 were abandoned due to CFIUS determining its concerns could not be mitigated or parties being unwilling to accept mitigation requirements (the other eight were abandoned due to commercial considerations). This means that approximately 4% of CFIUS notices resulted in transactions being effectively blocked, up just slightly from 3.3% in 2021 and consistent with the percentages from 2020 and 2019. As in 2021, the President did not block any transactions. Accordingly, while CFIUS has become more aggressive in mitigating perceived national security risks, it is not stopping more deals. 
• Transaction parties filing notices should plan for an investigation. After a significant reduction in investigations following FIRRMA's expansion of the initial review period from 30 to 45 calendar days, 2022 marked a substantial uptick in cases moving to investigation. In 2022, 57% of cases went to investigation, up from 48% in 2021, 47% in 2020, and 49% in 2019. The increase in mitigation, which is generally negotiated in the investigation phase, might have contributed to this jump in investigations. We routinely advise parties to a notice to plan for an investigation, and these numbers confirm that more than half of notices required at least a full 90-day cycle last year. In general, the Report indicates that even with a steady number of overall filings and increased Committee resources, the CFIUS process is often taking longer, with more cases moving to investigation and continued high numbers of withdrawals and resubmissions (31% of notices were withdrawn in 2022, 77% of which were refiled, compared with 27% being withdrawn in 2021, 85% of which were subsequently refiled). 
• CFIUS saw a record number of filings in 2022, but the numbers were generally consistent with the prior year. Although CFIUS reviewed a record 440 filings (i.e., declarations and notices) in 2022, there was not a significant increase over 2021's 436 filings. By contrast, calendar year 2021—the first full year that the FIRRMA regulations were in effect and an extremely busy year for mergers and acquisitions—saw a nearly 40% increase in overall CFIUS filings compared to 2020. Calendar year 2022 saw a mere 1% increase (representing four additional filings) compared to 2021. There were 154 declarations in 2022, down ten from the year before, and 286 notices, up 14 from 2021. The 2022 numbers show that CFIUS remained quite busy despite the general slowdown in M&A compared to 2021, though factors such as the increase in notice requests following declarations likely somewhat inflated the total number of filings.
• CFIUS remains focused on identifying non-notified transactions of interest but has now largely worked through its backlog of old deals. The Report states that CFIUS formally considered 84 non-notified transactions in 2022, with 11 resulting in a request for a notice. There were also 8 notice requests resulting from non-notified outreach in prior years. This did not include transactions that were voluntarily notified following non-notified outreach but before CFIUS formally requested a notice. The Report notes that the total transactions considered by the Committee (including individual member agencies) as potential non-notifieds regularly number in the thousands. Most notably, the Report explains that the number of non-notified transactions formally considered by CFIUS might continue to decrease because CFIUS has largely completed its review of older, previously closed transactions. For context, the Report states that in 2020, approximately 80% of non-notified reviews pertained to pre-FIRRMA transactions, which reduced to 26% in 2021, and is now less than 1%. Though CFIUS will continue to consider older transactions as it learns of new information, CFIUS is now primarily focused on monitoring more recent non-notified transactions that might be subject to CFIUS jurisdiction and present national security considerations. 
• CFIUS did not issue any penalties in 2022. As previously reported, CFIUS released Enforcement and Penalty Guidelines in October 2022 and has signaled a willingness to issue penalties, particularly for violations of mitigation agreements. The Report, however, confirms that CFIUS did not impose any enforcement penalties in 2022. The fact that the Enforcement and Penalty Guidelines were issued relatively late in 2022 might indicate that increased penalty activity is more likely to start this year. With the addition of 44 new mitigation agreements in 2022 (and 16 terminating), the Committee is currently monitoring 214 mitigation agreements. Given that the termination of obsolete agreements is significantly outpaced by the imposition of new mitigation agreements, even with increased CFIUS resources we generally expect more reliance on third parties to assist the Committee in its monitoring efforts going forward. 
• Canada remained the lead investor country in declarations and Singapore became the new lead investor country in notices. For the third year in a row, Canada led all other investor countries in declarations (representing 14% of declarations), followed by Japan (12%) and Germany (8%). Singapore became the new leader in notices (representing 13% of notices), followed by China (13%) and the United Kingdom (6%). However, the Report noted that when only considering distinct transactions, the highest number of notices were from investors from Singapore, followed by the United Kingdom. Investors from Canada and Japan tied for the third-highest number of distinct notices, followed by China, France, and South Korea (which each had the same number of notices). When only considering distinct transactions, China's drop in filing representation likely reflects that Chinese investments, including for non-notified transactions, are generally more likely to involve withdrawals and refiling to address CFIUS concerns. 
• Real estate transactions remain a negligible amount of overall CFIUS filings. Out of 440 total CFIUS filings in 2022, only six were filed under CFIUS's real estate authorities—five declarations and one notice. At just under 1% of filings, CFIUS's real estate authorities are not being heavily utilized in practice. It is unclear whether this low percentage is the result of investors avoiding real estate transactions subject to CFIUS's jurisdiction and/or the fact that real estate transactions cannot trigger mandatory filings. In any event, the Committee's real estate authorities remain an important guide for close-proximity risk considerations in investment transactions. Moreover, as we previously reported in connection with several recent updates, CFIUS is seeking to expand the geographical scope of its real estate authorities to be able to capture more real estate transactions within its jurisdiction.

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