As the United States Enhances CFIUS Surveillance of Foreign Investments in Sensitive Sectors of the Economy, We Assess the Key Factors at Play
President Biden recently issued an executive order on ensuring rigorous review of evolving national security risks by the Committee on Foreign Investment in the United States (the FO on Foreign Investment). It directs the Committee on Foreign Investment in the United States (CFIUS) to take a closer look at foreign acquisitions and investments in what the US government has deemed to be particularly sensitive sectors of the US economy. In doing so, the Foreign Investment EO, signed on September 15, 2022, also specifies several national security factors that CFIUS will consider when reviewing transactions within its jurisdiction. In practice, many of these aspects are already addressed in any CFIUS review of non-US acquisitions of certain covered investments in US companies. While the Foreign Investment EO does not expand CFIUS’ jurisdiction or change its review process, it does send a clear signal to dealmakers and their advisers that CFIUS will continue to review such acquisitions/investments. foreigners, especially when the US target company operates in the technology or data sectors.
BACKGROUND: NEW FOREIGN INVESTMENT EO IS PART OF WIDER EFFORT TO BOOST NATIONAL SECURITY
The Biden administration has previously expressed concerns that U.S. adversaries could exploit the U.S. government’s commitment to open investment, including foreign direct investment, in the U.S. economy to undermine national security, including allowing the transfer of critical technologies to adversaries and undermining American technological leadership. in areas considered strategically important.
The months-awaited Foreign Investment EO essentially formalizes a broader new interpretation of CFIUS review authority that has been in the works since the 2018 enactment of the Foreign Investment Review Modernization Act. foreign investment risks (FIRRMA). Among other notable provisions, FIRRMA expanded the jurisdiction of CFIUS to reach certain uncontrolled investments in U.S. technology, infrastructure, or data-related businesses and imposed mandatory filing requirements in certain cases.
NEW FACTORS FOR CFIUS TO CONSIDER
The Foreign Investment EO directs CFIUS to consider five specific sets of factors (as summarized in a White House fact sheet). These are set out below:
The effect of a given transaction on the resilience of critical U.S. supply chains that may have national security implications, including those outside the defense industrial base
The Foreign Investment EO states that the CFIUS must take into account, where relevant, the effect of a covered transaction on the resilience and security of the supply chain, both internally and externally. outside the defense industrial base (and the energy sector). This guides the examination of the level of diversification through alternative suppliers throughout the supply chain, including suppliers located in allied or partner countries, the extent to which the target US company supplies the US government ; and the concentration of foreign ownership or control in a given supply chain.
The effect of a transaction on U.S. technological leadership in critical/sensitive areas affecting U.S. national security
The Foreign Investment EO identifies sectors that the US government deems fundamental to US technology leadership and national security. This includes, but is not limited to: microelectronics, artificial intelligence, biotechnology and biomanufacturing, quantum computing, advanced clean energy, climate adaptation technologies, and elements of the agricultural industrial base which have implications for food security. In addition, the Foreign Investment EO directs CFIUS to consider whether a covered transaction involves manufacturing capabilities, services, critical mineral resources, or related technologies.
In addition, CFIUS must assess: (i) whether a Covered Transaction could reasonably result in future technological advancements and applications that could injure national security; and (ii) whether a foreign acquirer or investor has ties to third parties that could cause the transaction to pose a security threat. A potential consequence of this second factor is that CFIUS is likely to test the national security implications of a transaction not only by referring to the parties themselves, but also by examining the parties’ business and information-sharing relationships. parties with other companies, investors, or governments that are not part of the transaction under consideration, but which, in the opinion of CFIUS, may nevertheless present security concerns.
Although China (or any other jurisdiction) is not specifically mentioned in the Foreign Investment EO or its provisions, the Foreign Investment EO may have the effect of making it more difficult for Chinese companies to obtain CFIUS approval for investments in identified US sectors. given the US government’s increased emphasis on Chinese investment in domestic companies.
Industry investment trends with potential implications for a transaction’s impact on U.S. national security
The Foreign Investment EO explains that certain investments by a foreign person in a sector or technology may appear to pose a limited threat when considered in isolation, but when considered in the broader context of previous transactions. , they can be used to facilitate the transfer of sensitive technologies in key areas. industries or harm national security by gradually ceding national control over such technologies or sectors. The CFIUS is now specifically responsible for assessing the risks arising from a transaction in the context of multiple acquisitions or investments in the same or related sectors.
While this new instruction appears to expand the scope (but not the jurisdiction) of a CFIUS review, the administration clarified that CFIUS can still maintain its transaction-by-transaction approach, while additionally reviewing individual cases within the context other global or related transactions. .
Cybersecurity risks that threaten to harm national security
The Foreign Investment EO directs CFIUS to consider whether a Covered Transaction may provide a Foreign Person, or its relevant “Third-Party Links”, access to databases and systems to conduct malicious cyber activities against United States. Cyber intrusions that could affect the outcome of a US election, the operation of critical US infrastructure, or the privacy or availability of US communications systems are of particular (and reported) concern.
Risks to Sensitive Data of US Individuals
The fifth and final factor for CFIUS to consider focuses on protecting sensitive data. The Foreign Investment EO states that CFIUS must determine whether a transaction involves a U.S. company with access to sensitive data of U.S. individuals (as part of the CFIUS vulnerability assessment) and, if so, whether the foreign investor, or its ties to third parties, has the ability to use this data to target individuals or groups in the United States to harm national security (as part of the CFIUS threat assessment ).
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