CFIUS Executive Order Highlights Current Concerns Over Wide Range of Foreign Investments
On September 15, 2022, President Biden issued an Executive Order (“EO”) on the interagency Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”) and guidance for ensuring robust national security reviews of foreign investment. The EO signals a strategic focus on national security risks associated with foreign investment into specific industries, technologies and data-driven products, as well as potential momentum toward an expansion of CFIUS’s scope and jurisdiction in the future. This comes at a time when the Administration and Congress continue to intensify the focus on national security concerns posed by China and Russia. While not explicitly stated in the EO, it is expected that CFIUS will use this framework in countering these concerns through foreign investment review.
While the EO does not alter the current CFIUS review process, statutory risk considerations, or filing thresholds, it outlines five key factors that the Biden Administration is instructing the Committee to consider when conducting national security reviews of covered transactions:
- A transaction’s impact on US supply chains. The EO directs CFIUS to consider how a proposed transaction could affect “the resilience of critical US supply chains,” and associated national security implications that could result from a shift in ownership, rights or control to a foreign entity or person. The EO 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.
- A transaction’s effect on US technological leadership in areas affecting US national security. The EO instructs the Committee to take into consideration the protection of US technological leadership in sectors that are critical to US national security, including microelectronics, artificial intelligence, biotechnology and biomanufacturing, quantum computing, advanced clean energy, and climate adaptation technologies. The EO acknowledges that foreign investment can aid domestic innovation but asks CFIUS to consider whether a transaction could result in technological or application advancements by foreign third parties that may undermine national security.
- Industry investment trends. The EO directs the Committee to view proposed transactions in the context of previous investments or past acquisitions—rather than in isolation. The EO identifies the need to focus on aggregate trends such as incremental investments over time, or the acquisition of cumulative control, in a sector or technology that may cede, part-by-part, domestic development or control (such as through multiple unrelated investments by the same party or country across the same industry).
- Cybersecurity risks. The EO states that CFIUS should consider whether a transaction could provide foreign investors or related third parties with the ability to conduct cyber intrusions or other malicious cyber-enabled activity that would pose serious national security risks.
- Risks to US persons’ sensitive data. Notably, the EO highlights the risk of access to US persons’ sensitive personal data among the key factors for the Committee’s consideration. The EO notes that tools like surveillance, tracing, tracking, and targeting of individuals combined with advances in technology and access to large data sets now allow data that was previously unidentifiable to become re‑identified or de-anonymized. At the direction of the EO, CFIUS will now apply greater consideration to whether a transaction could provide a foreign investor with the ability to exploit such information to the detriment of national security.
Expected Release of New Export Controls Around Semiconductors with Aim of Curbing 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 aim at 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, during a call with reporters, the US Commerce Department’s Bureau of Industry and Security (BIS) Assistant Secretary for Export Administration, Thea Kendler confirmed that BIS sent letters notifying specific industry leaders, including Nvidia, AMD, Lam Research, KLA, and Applied Materials, and that new restrictions were on the horizon. The letters explained that some of those companies’ AI chips or related technology that may not have previously required export authorization from the BIS will now be restricted as to various customers in China. While the new regulations continue to be drafted, more company-specific outreach is expected.
While CFIUS is focused on inbound investment, and export controls focus on outward transactions, neither regime addresses outbound investment. However, there have been recent legislative and executive branch rumblings about the possible implementation of a new regime to review and control outbound investment. As the US government evaluates its strategic alliances in the world, companies and investors in the tech sector should be alert to the political and regulatory trends toward decoupling of economic relationships and technological partnerships with countries like China and Russia, while affording preferential treatment to transactions with the US’s closest allied countries.
However, CFIUS, BIS, and other US government players in the national security space may not view all transactions with allied country investors or counterparties as innocuous if there is a perceived influence from China or Russia behind the scenes. For example, if a party derives the majority of its revenue from, has a significantly influential shareholder who is a national of, or conducts major operations in either of those countries, the presence of such factors could outweigh the US government’s comfort that it might otherwise have with an investor or commercial counterparty located in 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 conduct a holistic assessment of the potential national security risks involved, especially if US government authorization or clearance may be necessary to proceed with the transaction.