Will 2023 Be an Inflection Point for CFIUS?

• Author: Fagan, David N.
• Position: GOVERNMENT CONTRACTING INSIGHTS

On the heels of Russia's invasion of Ukraine, pandemic-induced supply chain disruptions and U.S.-China tensions over Taiwan, 2022 accelerated a sweeping effort within the U.S. government to make national security considerations--especially with respect to China--a key feature of new and existing regulatory processes. This trend toward broader national security regulation, designed to help maintain U.S. strategic advantage, has support from both Republicans and Democrats, including from the Biden administration.

With this backdrop, 2023 is looking like a pivotal moment for national security regulation, with the Committee on Foreign Investment in the United States, or CFIUS, and a potential outbound screening regime at the center of attention.

CFIUS will face increased stress as an institution owing to a combination of factors, including an increased caseload, a policy push on enforcement and the drain of additional policy initiatives, including outbound investment. While we anticipate that CFIUS will continue to process in a timely manner transactions that do not raise complex national security considerations, the stress in the system may make resolving complex cases even more challenging and, in turn, places an even greater premium on thorough, and early, planning by transaction parties.

Since enactment of the Foreign Investment Risk Review Modernization Act in 2018, we have seen a steady increase in overall activity from CFIUS, backed by dramatic increases in staff and expanded funding. As we observed in CFIUS's Annual Report to Congress released in August 2022, CFIUS's heavy caseload continues to grow, with a record-setting 164 declarations and 272 notices reviewed in 2021. Based on Covington's internal estimates, CFIUS's caseload last year appears to have surpassed even 2021's record, with at least 280 notices filed in 2022. This is particularly striking given the concomitant decline in U.S. mergers and acquisitions activity of as much as 43 percent during the same period.

Several parallel trends will make CFIUS's caseload even more acute.

Enhanced scrutiny in individual transactions, particularly responding to Russia's invasion of Ukraine and tensions with China. The general level of scrutiny in CFIUS reviews has intensified--with information requests expanding both in volume and aperture--probing more frequently into business operations and relationships in China and Russia, as well as into general national security risks that may be...