Biden administration issues precedent… | Fenwick & West LLP
CFIUS Executive Order Highlights Current Concerns Over a Wide Range of Foreign Investments
On September 15, 2022, President Biden Published an Executive Order (“EO”) on the Interagency Committee on Foreign Investment 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 associated with foreign investment in specific industries, technologies, and data-driven products, as well as potential momentum toward expanding CFIUS scope and jurisdiction in the future. This comes at a time when the administration and Congress continue to heighten attention to national security concerns posed by China and Russia. Although not explicitly stated in the EO, CFIUS is expected to use this framework to counter these concerns through foreign investment review.
While the EO does not change the current CFIUS review process, statutory risk considerations, or filing thresholds, it outlines five key factors that the Biden administration is asking the Committee to consider when making decisions. 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 affect “the resilience of critical U.S. supply chains” and the associated national security implications that could result from a transfer of ownership, rights or of control to a foreign entity or person. The EA notes that this review should include sectors outside of the defense industrial base, including manufacturing capabilities, services, critical mineral resources and technologies that could cause supply disruptions.
- The effect of a transaction on US technological leadership in areas affecting US national security. The OE directs the Committee to consider protecting U.S. technological leadership in sectors critical to U.S. national security, including microelectronics, artificial intelligence, biotechnology and biomanufacturing, computer science quantum, advanced clean energy and climate adaptation technologies. The OE recognizes that foreign investment can foster domestic innovation, but asks CFIUS to consider whether a transaction could result in technological or application advancements by foreign third parties that could harm national security.
- Industry investment trends. The EO asks the committee to consider proposed transactions in the context of previous investments or acquisitions, rather than in isolation. EO identifies the need to focus on overall trends such as incremental investments over time, or the acquisition of cumulative control, in an industry or technology that may yield, part by part, development or national control (eg through multiple unrelated investments by the same party or country in the same sector).
- Cybersecurity risks. The OE states that CFIUS should determine whether a transaction could provide foreign investors or related third parties with the ability to conduct cyber intrusions or other malicious activities using cybersecurity that would pose serious national security risks.
- Risks to Sensitive Data of US Individuals. Notably, the EO highlights the risk of access to sensitive personal data of US persons among the key factors for consideration by the Committee. The OE notes that tools such as surveillance, tracing, tracking and targeting of individuals combined with advances in technology and access to large datasets now allow data that was previously unidentifiable to be re-identified or made anonymous. Under the direction of the OE, CFIUS will now further examine whether a transaction could give a foreign investor the opportunity to exploit this information to the detriment of national security.
Expected launch of new export controls around semiconductors in a bid to limit Chinese access to AI
Next month, the Biden administration is expected to impose increased export controls around semiconductors, with a particular focus on artificial intelligence (AI) and a specific goal of curbing US shipments of semiconductors that use AI and related production equipment to China.
These new regulations will impact technology transactions and product sales, and could also significantly affect CFIUS reviews by expanding the categories of technologies that can trigger a mandatory CFIUS filing.
Last week, in a call with reporters, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) Assistant Secretary for the Export Administration, Thea Kendler, confirmed that the BIS had sent letters notifying specific industry leaders, including Nvidia, AMD, Lam Research, KLA, and Applied Materials, that new restrictions were on the horizon. The letters explained that some of these companies’ AI chips or related technologies that may not have previously required BRI export clearance will now be restricted to various customers in China. As new regulations continue to be drafted, more company-specific outreach is expected.
While CFIUS focuses on inbound investment and export controls focus on outbound transactions, neither regime deals with outbound investment. However, there have recently been rumblings from the legislative and executive branches about the possible implementation of a new regime to review and control overseas investments. As the U.S. government assesses its strategic alliances around the world, technology companies and investors should be alert to policy and regulatory trends toward decoupling economic relationships and technology partnerships with countries like China and Russia, while granting preferential treatment to transactions with the countries closest allies of the United States.
However, the CFIUS, BIS, and other U.S. government national security actors may not consider all transactions with investors or counterparties from allied countries harmless if there is a perceived influence of the China or Russia behind the scenes. For example, if a party derives the majority of its income, has a highly influential shareholder who is a national of, or conducts major operations in one of these countries, the presence of such factors could outweigh the assurance of the U.S. government that it might otherwise have with an investor or business counterparty located or organized under the laws of a closely allied country. It is therefore becoming increasingly essential for companies involved in cross-border investments, export transactions and other commercial arrangements to carry out a comprehensive assessment of potential national security risks, particularly if a clearance or authorization of the US government may be required to complete the transaction.