On September 15, 2022, President Biden signed an executive order (EO) reaffirming the long-standing US open investment policy and elaborating and expanding the existing list of legal factors that the United States Committee on Foreign Investments (CFIUS or the Committee) may take into account when reviewing transactions to assess their potential impact on US national security.
The EO does not change existing CFIUS processes or legal responsibilities, but rather addresses two existing national safety factors and defines three additional factors for the Committee to consider when reviewing covered transactions. While CFIUS is not limited as to the factors it may consider in the course of its review and has historically considered many if not all of the factors described in the EO, the administration has stated that the EO will lead the committee and ” Businesses and investors will better anticipate national security risks arising from transactions to help them decide whether to file with CFIUS.”
The EO provides CFIUS with additional guidance in relation to two existing national safety factors described in Section 721(f)(3) and (f)(5) of the CFIUS Enabling Statute:
1. Supply chain resilience. The EO directs the Committee to consider the impact of a Covered Transaction on the resilience and security of the supply chain, both inside and outside the defense industrial base, related to manufacturing capacity, services, critical natural resources or technology fundamental to national security , including microelectronics, artificial intelligence, biotechnology and biomanufacturing, quantum computing, advanced clean energy (such as battery storage and hydrogen), climate adaptation technologies, critical materials (such as lithium and rare earth elements), elements of the agricultural industrial base that have an impact on food security, and all others Sectors listed in Section 3(b) or Section 4(a) of Executive Order 14017 dated February 24, 2021 (America’s Supply Chains).
Relevant considerations are the degree of diversification by alternative providers, including suppliers in allied or partner countries; supply relationships with the US government and/or relevant industrial locations; and Concentration of ownership or control by the foreign person in a particular supply chain.
2. Technology leadership of the USA. The EO directs the Committee to consider whether a covered transaction involves manufacturing capacity, services, critical natural resources, or technology fundamental to United States technological leadership, including microelectronics, artificial intelligence, biotechnology and biomanufacturing, quantum computing, advanced clean energy and climate adaptation technologies.
The EO also instructs CFIUS to consider whether a covered transaction could reasonably lead to future advances and applications in technology that could undermine national security. To support the committee’s decision-making in this regard, the EO requires the White House Office of Science and Technology Policy (OSTP) to regularly publish a list of technology sectors considered fundamental to US technological leadership in areas relevant to the national safety are classified.
The EO also directs the Committee to consider the following additional factors not currently included in the CFIUS enabling charter:
3. Aggregated industry investment trends. The EO notes that “[i]Incremental investments over time in a sector or technology may partially cede domestic development or control in that sector or technology” and that certain investments could therefore pose a limited threat when viewed in isolation but may be of concern when they are taken into account in the context of previous transactions. Such transactions may facilitate harmful technology transfers in key industries or otherwise adversely affect national security through the cumulative effect of these investments. Accordingly, the EO directs CFIUS to consider the risks arising from covered transactions related to multiple acquisitions or investments in a single sector or related manufacturing capacity, services, critical natural resources or technology.
To assist in the Committee’s related decision making, CFIUS may, as part of its review, request that the Department of Commerce’s International Trade Authority provide the Committee with an analysis of the industry or industries in which the U.S. company operates and the cumulative control or template for Provides recent transactions by a foreign person in that sector or industry.
4. Cyber Security. The EO directs the Committee to consider whether an affected transaction could provide a foreign person, directly or indirectly, with access to capabilities or information databases and systems on which threat actors could engage in malicious cyber-enabled activities that harm the interests of the United States or U.S. may adversely affect any person, including activities aimed at undermining the security or integrity of data in stores or databases or systems containing sensitive data; Activities aimed at disrupting U.S. elections, critical infrastructure, the defense industry base, or other national cybersecurity security priorities; or the sabotage of critical energy infrastructure, including smart grids.
The EO also directs the committee to review the cybersecurity posture, practices, capabilities, and access of the foreign person and US business that could allow a foreign person to manifest cyber intrusions and other malicious cyber activities in the United States.
5. Sensitive Data. The EO directs the Committee to consider whether an affected transaction involves a US company that (i) has access to or stores sensitive data of US persons, including health, digital identity or other biological data and all Data that is identifiable or de‑anonymized that could be exploited to distinguish or track an individual’s identity in a manner that threatens national security, or (ii) has access to data about subpopulations in the United States who could be used by a foreign person to attack any individual or group of people in the United States in a manner that threatens national security. The EO also directs the committee to review whether an affected transaction involves the transfer of sensitive information from a US person to a foreign person.
With respect to each of the five factors described above, the EO directs CFIUS to consider not only the risk profile of the foreign person involved in the transaction, but also whether the foreign person has trade, investment, non-economic or other ties (relevant links to third parties) with other foreign persons, including foreign governments, that could cause the transaction to pose a threat to U.S. national security.
In addition to developing and expanding the national security factors that CFIUS may consider when screening transactions to assess their potential impact on US national security, the EO recognizes the importance of continually evaluating and improving the foreign investment screening process. Accordingly, the EO directs CFIUS to regularly review its processes, practices and regulations to ensure they are responsive to evolving national security threats and to implement any necessary updates.
Wiley has an unparalleled ability to assist clients with investments that raise national security concerns. Our team has direct experience managing the CFIUS process and assisting clients with CFIUS reviews. We have over two decades of experience dealing with national security matters, including CFIUS, Team Telecom, the Defense Counterintelligence and Security Agency, US sanctions and export control laws, and supply chain security, and have advised clients on transactions affecting nearly every industry sector , which is subject to CFIUS review.
Please contact one of the authors listed in this alert if you have any questions about the EO or CFIUS foreign investment regulations.
Jack WroldsenTrade Analytics Coordinator at Wiley Rein LLP, contributed to this alert.
