On September 15, 2022, President Joe Biden signed an executive order (“EO”) detailing key factors for the Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”) to consider when reviewing transactions for national security risks. The EO provides direction to CFIUS by elaborating on existing statutory factors and adding five sets of national security factors for CFIUS to consider during its review process. Moreover, the EO highlights for CFIUS specific industry sectors that have national security implications, 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), and elements of the agricultural industrial base.
Importantly, the EO does not alter existing CFIUS processes or legal jurisdiction. Although CFIUS already focuses on many of the factors articulated in the EO, the EO provides explicit direction to CFIUS that arguably formalizes the Committee's recent approach to national security reviews. However, in the long term, these new factors may provide a basis for a gradual expansion of CFIUS's purview and they signal to market participants what types of inbound investment may raise national security concerns.
In a statement, the White House emphasized the importance of updating the foreign investment review process to remain responsive to evolving national security threats and noted that these new factors reflect the Biden Administration's overall national security priorities, which include “preserving U.S. technological leadership, protecting Americans' sensitive data, and enhancing U.S. supply chain resilience.”
The EO directs the Committee to consider five specific sets of factors in its national security reviews of transactions that are subject to its jurisdiction (commonly referred to as “covered transactions”). Such transactions include (i) “covered control transactions” (i.e., any transaction with a foreign person that could result in control of a U.S. business by a foreign person), and (ii) “covered investments” (i.e., non-controlling investments that afford a foreign person (1) access to material, nonpublic technical information, (2) membership or observer rights on the board of directors, or (3) involvement in certain substantive decision-making in a U.S. business that is involved with critical technologies, critical infrastructure, or sensitive personal data).
1. Resilience of Critical U.S. Supply Chains
First, the EO states that the Committee should consider how a transaction will affect the resilience of critical U.S. supply chains that may have national security implications, including those outside of the defense industrial base. Foreign investment that shifts ownership, rights, or control to a foreign person in certain manufacturing capabilities, services, critical mineral resources, or technologies that are fundamental to national security may make the United States vulnerable to future supply disruptions of critical goods and services. The EO states that the Committee should consider a covered transaction's effect on supply chain resilience and security, both within and outside of the defense industrial base. These considerations include the degree of diversification through alternative suppliers across the supply chain, including suppliers located in allied or partner countries; supply relationships with the U.S. government; and the concentration of ownership or control by the foreign person in a given supply chain.
2. U.S. Technological Leadership
Second, the EO directs CFIUS to consider the effect on U.S. technological leadership in sectors affecting U.S. national security, including microelectronics, artificial intelligence, biotechnology and biomanufacturing, quantum computing, advanced clean energy, climate adaptation technologies, and elements of the agricultural industrial base that have implications for food security. The EO specifically identifies these sectors as fundamental to U.S. technological leadership and, therefore, national security. The Committee is instructed to consider whether a covered transaction involves manufacturing capabilities, services, critical mineral resources, or technologies in such sectors.
3. Cumulative Investment Trends of Foreign Investors
Third, the EO directs the Committee to examine broader industry investment trends that may have consequences for a given transaction's impact on U.S. national security. Certain investments by the same foreign person in a sector or technology may appear to pose a limited threat when viewed in isolation, but when viewed in the context of previous transactions, it may become apparent that such investments can facilitate sensitive technology transfer in key industries or otherwise harm national security. For example, there may be a comparatively low threat associated with a foreign company or country acquiring a single firm in a sector, but a much higher threat associated with a foreign company or country acquiring multiple firms within the sector.
4. Cybersecurity Risk
Fourth, CFIUS will consider cybersecurity risks that threaten to impair national security. Investments by foreign persons with the capability and intent to conduct cyber intrusions or other malicious cyber-enabled activity may pose a risk to national security. This includes cyber actions intended to alter election outcomes, critical infrastructure, or the integrity or availability of communications. The EO directs CFIUS to consider whether a covered transaction may provide a foreign person, or their relevant third-party ties, with access to conduct such activities.
5. Risks to U.S. Persons' Sensitive Data
Fifth, the EO calls out the continued national security risks associated with U.S. persons' sensitive data. The EO notes that technological advances have made possible re-identification or de-anonymization of what once was unidentifiable data. Consequently, the EO directs CFIUS to consider potential risks posed by foreign persons who might exploit access to certain data on U.S. persons to target individuals or groups within the United States to the detriment of national security.
Conclusion:
These factors indicate where additional CFIUS attention is likely to be directed in the near future, and they offer insight that can better inform the risks associated with cross-border investments, particularly in those industry sectors experiencing increased amounts of foreign investment. Consequently, U.S. companies in these industries and business sectors that are contemplating raising capital from foreign sources, or engaging in M&A transactions involving foreign parties should expect that these activities will be subject to heightened regulatory scrutiny from CFIUS.
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