CFIUS Executive Order highlights current concerns about a wide range of foreign investments
On September 15, 2022, President Biden issued an executive order (“EO”) to the Inter-Agency Committee on Foreign Investments in the United States (“CFIUS” or the “Committee”) and guidance to ensure robust national security reviews of foreign investments. The EO signals a strategic focus on national security risks related to foreign investments in specific industries, technologies and data-driven products, as well as potential impetus for future expansion of the scope and jurisdiction of CFIUS. This comes at a time when the administration and Congress continue to focus on China’s and Russia’s national security concerns. While not specifically stated in the EO, CFIUS is expected to use this framework to address these concerns through screening foreign investments.
While the EO does not change the current CFIUS review process, legal risk considerations, or filing thresholds, it outlines five key factors that the Biden administration directs the committee to consider when conducting national security reviews of covered transactions:
- The impact of a transaction on US supply chains. The EO directs CFIUS to consider how a proposed transaction could impact the “resilience of critical U.S. supply chains” and associated national security implications resulting from a transfer of ownership, rights or control to a foreign entity or person could arise. The EO notes that this review should cover sectors Outside the defense industrial base, including manufacturing capacity, services, critical mineral resources and technologies that could cause supply disruptions.
- Impact of a transaction on US technological leadership in areas affecting US national security. The EO directs the committee to consider protecting US technological leadership in sectors critical to US national security, including microelectronics, artificial intelligence, biotechnology and biomanufacturing, quantum computing, advanced clean energy and adaptation technologies to climate change. The EO recognizes that foreign investment can support domestic innovation, but calls on the CFIUS to consider whether a transaction could lead to technological or application advances by foreign third parties that could undermine national security.
- investment trends in the industry. The EO instructs the committee to consider proposed transactions in the context of previous investments or previous acquisitions – and not in isolation. The EO identifies the need to focus on aggregate trends such as B. making incremental investments over time or acquiring cumulative control in a sector or technology, which may partially cede domestic development or control (e.g. through multiple independent investments). from the same party or country in the same sector).
- Cyber Security Risks. The EO states that CFIUS should assess whether a transaction could enable foreign investors or related third parties to conduct cyber attacks or other malicious cyber activities that would pose serious national security risks.
- Risks to Sensitive Data of US Persons. In particular, the EO highlights the risk of accessing sensitive personal data of US citizens as one of the key factors for the Committee’s consideration. The EO notes that tools such as monitoring, tracking, tracing and targeting coupled with advances in technology and access to big data now make it possible to re-identify or de-anonymize data that was previously unidentifiable. At the direction of the EO, CFIUS will now look more closely at whether a transaction could allow a foreign investor to use such information to the detriment of national security.
Expected release of new semiconductor export controls aimed at restricting China’s access to AI
Next month, the Biden administration is expected to introduce increased semiconductor export controls, with a particular focus on artificial intelligence (AI) and a specific goal to curb U.S. shipments to China of semiconductors that use AI and related manufacturing equipment.
These new regulations will impact technology transactions and product sales, and could also significantly impact CFIUS reviews by expanding the categories of technologies that can trigger mandatory CFIUS filing.
Last week, while speaking to reporters, US Department of Commerce Assistant Secretary for Export Administration (BIS) Thea Kendler confirmed that BIS sent out letters notifying certain industry leaders, including Nvidia, AMD, Lam Research, KLA and Applied Materials, and that new limitations are on the horizon. The letters explained that some of these companies’ AI chips or related technologies, which may not previously have required a BIS export license, will now be restricted to various customers in China. As the new regulations continue to be worked out, more enterprise-specific reach is expected.
While CFIUS focuses on inbound investment and export controls on outbound transactions, neither regime addresses outbound investment. Recently, however, there have been rumors in the legislature and executive about the possible introduction of a new regime to screen and control foreign investments. As the US government evaluates its strategic alliances in the world, companies and investors in the technology sector should be aware of the political and regulatory trends towards decoupling economic ties and technological partnerships with countries like China and Russia, while giving preferential treatment to transactions with the closest allied countries of the USA.
However, the CFIUS, BIS and other US government national security actors may not view all transactions with allied investors or counterparties as benign if there is a perceived behind-the-scenes influence of China or Russia. For example, if a party derives the majority of its revenues from one of these countries, has a significant shareholder who is a national of one of these countries, or does significant business in one of these countries, the presence of such factors could outweigh the convenience of the U.S. government, which it would otherwise have been with an investor or commercial counterparty located in, or organized under the laws of, a closely related country. As such, it is becoming increasingly important for companies involved in cross-border investments, export deals, and other trade arrangements to conduct a holistic assessment of the potential national security risks involved, particularly when US government approval or clearance is required to proceed with the transaction to continue.