ANALYSIS: For International Deals, Changes Are on the Horizon

Dealmakers, take note: The US has been making moves in regulating and policing foreign direct investment that are likely to impact cross-border M&A activity in the coming year. Here’s a look at three changes—one involving outbound investments and two involving inbound investments—that dealmakers may expect to see in 2024.

US Acquirers May Turn to South Korea for Chip Deals

For the first time since 1986, US outbound investments are set to be regulated.

In August, the White House and Department of the Treasury issued an executive order along with an Advance Notice of Proposed Rulemaking for an outbound investment program. The forthcoming regulation targets US–China investments in three advanced technology sectors: semiconductors and microelectronics, quantum information technologies, and certain artificial intelligence systems. The transactions covered by the program would include mergers and acquisitions, private equity, venture capital, greenfield investments, joint ventures, and certain debt financing transactions by United States persons. The program will require US acquirers and investors to notify the government of some of these transactions, as well as prohibit them from engaging, directly or indirectly, in certain other transactions in these sectors.

One of the three advanced technology sectors that has gotten a lot of buzz this year is the semiconductor sector. China accounts for about one-third of the chip market, and semiconductor deals (i.e., M&A, investment and joint-venture deals) between the US and China have increased notably since 2019. In 2022, the number of US-to-China deals in the semiconductor industry rose by over 130%, from 28 deals in 2021 to a total of 69.

However, this year’s deal count is lagging behind, with 46 semiconductor-industry deals through Oct. 24. That’s still higher than in previous years, but with the upcoming outbound investment regulation targeting US–China chip deals, deal count is bound to fall even more dramatically in 2024.

South Korea, on the other hand, recorded the second-highest number of deals in the last four years and has showed a steady increase in deal count since 2021. So far this year, US–South Korea chip deals have shot up by 142% over 2022. The trend with US-South Korea chip deals will likely continue and acquirers also may show some more interest in UK, Germany, Canada, and Israel, which were other top target jurisdictions for chip deals since 2019. The list of countries of concern targeted by the upcoming outbound investment regulation could increase. But seeing as all of these countries are on good diplomatic terms with the US, they’re unlikely to be included as countries of concern under the regulation.

CFIUS Approval for Inbound Deals May Take Longer

With regards to inbound investments, it might take longer for transaction parties to secure approval from the Committee on Foreign Investment in the United States (CFIUS).

CFIUS is responsible for reviewing foreign mergers, acquisitions, or takeovers that could result in the control of a US business, and determining whether such transactions pose national security risks. The committee is required to conduct reviews of transactions within 45 days of a notice of such a deal being submitted. If it determines that it needs more time to assess the transaction after the review period ends, it may commence an additional investigation lasting another 45 days.

According to its latest annual report to congress, CFIUS in 2022 cleared fewer notices in the first 45-day period than in 2021, signaling that it was more difficult for parties to secure an approval at this stage.

CFIUS reviewed a record-high 286 notices of covered transactions in 2022. And for the first time in at least four years, the majority of those notices (56%) were subjected to an additional investigation after the 45-day window required for review elapsed. This is a considerable increase over the share of notices that reached the investigation stage in previous years: 48% in 2021, 47% in 2020, and 48% in 2019.

This increase in the number of notices reaching the investigation stage could be for numerous reasons. It could be a sign of CFIUS’ dedication to increasing its scrutiny of transactions or it could be a sign of a reduction in the committee’s case-processing efficiency—especially considering the larger number of transactions it had to assess.

The figures for 2023 won’t be available for some time, but speakers at September’s second annual CFIUS conference provided some insight on how CFIUS has approached transaction reviews this year.

CFIUS members said that CFIUS sharpened its diligence in transaction reviews this year in newer ways, such as requiring the submission of confidential side letters entered into with investors for the review stage. CFIUS remarked that it is strengthening its efforts on calling in transactions that were not filed with it for review. Theoretically, this would be putting more on its plate in terms of transaction reviews. However, CFIUS speakers hinted at regulatory updates in the coming year that they anticipate could increase efficiency and effectiveness in case processing and review functions.

Ultimately, CFIUS seems to be doing more in transaction reviews to address national security risks, but the tools for better efficiency do not exist yet to allow them to conclude the bulk of those reviews within the initial 45-day period. As of today, there has been no confirmation on the effective date of the regulatory updates, and until there is a regulatory update that introduces higher efficiency in these functions, dealmakers can expect a higher chance of a long road to regulatory approval.

More Mitigation Measures Likely

CFIUS is also authorized to impose measures on transaction parties to mitigate national security risks. In 2022, CFIUS imposed almost as many mitigation measures and conditions on transaction parties as it did in the previous two years combined. In 2022, CFIUS adopted mitigation measures in 52 cases, about 18% of the notices filed whereas it adopted mitigation measures with respect to 11% of notices filed in 2021 and 12% in 2020.

Most of the mitigation measures negotiated with and adopted by the businesses involved in 2022 were similar to those in previous years. But CFIUS also went further in 2022 by requiring businesses to restrict the recruitment and hiring of certain personnel, and to notify the U.S government regarding changes to data storage locations.

Members of CFIUS at the second annual conference also said that CFIUS is renewing its focus on compliance, and that parties under mitigation agreements should expect more compliance checks.

With this upward trend in the volume of mitigation agreements per year, and newer mitigation measures imposed on businesses, such as restricting recruitment of personnel, transactional lawyers involved with foreign direct investment in the US may include a higher chance of being subjected to mitigation conditions into their deal planning.

Access additional analyses from our Bloomberg Law 2024 series here, covering trends in Litigation, Transactions & Contracts, ArtificialIntelligence, Regulatory & Compliance, and the Practice of Law.

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