The central theses
- On September 15, 2022, President Biden issued an executive order (the “CFIUS EO”) providing dealmakers with clear signals regarding areas of heightened interest to the Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”) are. .
- While the CFIUS EO does not expand the Committee’s processes or jurisdiction, the CFIUS EO sharpens the Committee’s focus, including on protecting sensitive personal information, enhancing U.S. supply chain resilience, and maintaining U.S. technological leadership in Fields such as semiconductors and microelectronics, biotechnology, clean energy and artificial intelligence.
- While the White House has downplayed whether the CFIUS EO is targeting a specific country, the CFIUS EO’s focuses are consistent with concerns previously raised by US officials regarding Chinese investments.
- Amid an increase in global dealmaking and related CFIUS reviews, dealmakers should pay attention to areas of heightened interest to the committee. Conducting due diligence to assess the types of U.S. national security risks identified in the CFIUS EO and taking steps to voluntarily mitigate such risks can help transaction parties obtain regulatory approvals and clearances at their preferred timing and risk reduce their transactions becoming alerts
Background information on CFIUS
CFIUS is an interagency committee, composed primarily of nine members and chaired by the Secretary of the Treasury, that has broad powers to review foreign investments in and acquisitions of US companies to determine the potential impact on US national security. The Committee has the power to impose mitigation measures, suspend transactions and, where appropriate, recommend the President to block or settle transactions.
CFIUS has broad powers (which have been expanded in recent years as a result of the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”)) to review certain transactions involving US companies and foreign investors (“covered transactions “), including:
- Mergers, acquisitions, and acquisitions that could result in a foreign person obtaining control (broadly defined) of a US corporation;
- Certain Non-Controlling Investments by Foreign Persons in U.S. Companies Related to Critical Technology, Critical Infrastructure, and Sensitive Personal Information (collectively, “TID US Companies”) (with mandatory filing requirements for transactions involving certain U.S. companies involved with critical technologies, or foreign persons associated with them, with foreign governments); and
- Transactions involving the purchase or lease by, or concession to, a foreign person of certain U.S. real estate that may raise national security concerns.
We discuss key trends in the Committee’s review of transactions in our recent OnPoints (which can be found here and here).
CFIUS EO highlights for dealmakers
The CFIUS EO underscores the important role the Committee plays in responding to emerging U.S. national security threats related to foreign investment in the United States. Given that the White House could have communicated its priorities to CFIUS behind closed doors, the CFIUS EO is newsworthy in that it is public. Reading between the lines, the White House’s intention is to make it clear to dealmakers what types of issues they should evaluate in potential deals. Below, we highlight the top questions dealmakers should ask.
1. Will the transaction affect US technology leadership?
Specifically, the CFIUS EO identifies sectors fundamental to US technological leadership and therefore national security, including but not limited to microelectronics, artificial intelligence, biotechnology and biomanufacturing, quantum computing, advanced clean energy, technologies to adapt to climate change and elements of the agricultural industrial base that have an impact on food security. While existing authorities may already be capturing these sectors as TID US companies, dealmakers should consider future advances and applications in an investment target’s technology and consider whether future innovations could potentially undermine US national security, particularly when a potential non-US Investor (or third party with whom a non-US investor has affiliations) poses a potential threat to US national security. Dealmakers should consider, among other things, whether a transaction involves manufacturing capacity, services, critical mineral resources or technology in the above sectors .
Although the Biden administration has downplayed whether the CFIUS EO is a response to concerns about China, it is no coincidence that the US sectors identified in the CFIUS EO correspond to the growth sectors identified under the Made in China 2025 initiative ‘ of the Chinese government were identified. Dealmakers who are proactive in considering potential national security risks should consider whether a non-US investor has ties to countries of concern, including China, when involved in a transaction.
2. Does the transaction affect the resilience of critical supply chains in the US?
The CFIUS EO makes it clear that the committee will focus on the impact of a potential transaction on supply chain resilience and security. A White House fact sheet said CFIUS will “consider the degree of diversification by alternative suppliers throughout the supply chain, including suppliers in allied or partner countries; supply relationships with the US government; and the concentration of ownership or control by the foreign person in a particular supply chain.”
3. In light of other similar transactions, what is the cumulative impact of the transaction on US national security?
According to the CFIUS EO, multiple investments over time “in a sector or technology may cede in part domestic development or control in that sector or technology” and result in a national security risk. The White House seems focused on understanding how a particular transaction is part of a broader investment strategy. Dealmakers proactively conducting due diligence should step back from transaction-specific considerations and consider whether there might be risks arising from a non-US investor’s participation in (or association with) a “series of acquisitions” as “part-by-part” control of a US focus sector or otherwise when the acquisition(s) may facilitate sensitive technology transfer in key industries.
4. What is the cybersecurity risk of the transaction?
Preventing cybersecurity attacks and other malicious cyber activities remains a key focus of US national security policy. Dealmakers should consider the attitude, practices, skills and access to cybersecurity of both a non-US investor (including third parties with whom a non-US investor has affiliations) and an investment objective. Dealmakers should also carefully consider ties between a non-US investor and non-US government actors, as the CFIUS EO highlights government-sponsored cybersecurity risks as a key concern.
5. What are the risks of the transaction for sensitive personal data?
The CFIUS EO describes data as “an increasingly powerful tool for monitoring, tracking, tracking, and targeting of individuals or groups of people.” After FIRRMA, it became clear that dealmakers should assess whether an investment target is collecting or storing sensitive personal information and whether a transaction results in non-US persons gaining access to that information. The CFIUS EO underscores the breadth of data that CFIUS considers sensitive and adds folds to the due diligence that should be performed. For example, while anonymized data was previously considered less sensitive, advances in de-anonymization technology make it clear that dealmakers should evaluate the potential of a transaction resulting in the exploitation of such technology.
Given converging trends of growth in global transaction volume, committee review activities, and White House guidance to the market in the form of the CFIUS EO, transaction parties contemplating investments by non-US investors in US companies should review CFIUS considerations early in the transaction process to avoid surprises and delays on their preferred path to completion. A sophisticated CFIUS strategy — one that considers an investor’s goals and also anticipates the likelihood that the committee will identify national security risks and the actions that may be needed to mitigate those risks — can make a significant difference. When considering a transaction, investors should exercise diligence to understand the national security touchpoints on all sides of a transaction, including the investors and the investment objective. Whether the target company provides products or services to the US government (whether directly or indirectly), and whether it is involved in critical technology, critical infrastructure, or sensitive personal information, all should be considered.
Dechert has represented many clients through CFIUS audits, including major operators and investors in the high tech, telecom, energy, defense and infrastructure industries. We regularly advise foreign and domestic companies (“buyers” and “sellers” and other interested third parties) as part of the CFIUS review process, helping them decide whether to bring a transaction before the Committee (and whether to conduct a CFIUS review). should be or not). required) to compile the necessary information and materials for a filing and then (if necessary) negotiate national security arrangements with CFIUS in a manner that minimizes both delays and the imposition of conditions that could jeopardize the transaction. We also advise on strategies to identify and address political and policy considerations that may arise.