New Executive Order Emphasizes National Security Factors for CFIUS to Consider in Evaluating Transactions

What Happened

On September 15, 2022, President Biden issued an Executive Order (CFIUS EO) that elaborates on existing national security factors that the Committee on Foreign Investment in the United States (CFIUS or the Committee) considers during its review process for certain foreign investments in the United States.

The Bottom Line

The CFIUS EO is the first order since CFIUS was established in 1975 to provide formal guidance from the White House on specific national security risks the Committee should consider when reviewing a foreign investment transaction under its jurisdiction (covered transaction).  The CFIUS EO identifies certain priority technologies (e.g., microelectronics, semiconductors, quantum technologies, biotechnology, climate adaptation technologies, and artificial intelligence) and sectors (e.g., critical minerals and agricultural/food systems) as particularly sensitive, directs CFIUS to consider a covered transaction’s effect on supply chain resilience, and emphasizes that the Committee should carefully consider three factors in its review of covered transactions (aggregate industry investment trends, cybersecurity capabilities and practice, and risks to sensitive American data), along with the existing statutory factors guiding CFIUS reviews set out in Section 721(f) of the Defense Production Act.

The CFIUS EO also emphasizes that the Committee should consider that national security risks may arise from foreign investors from countries with a demonstrated or declared strategic goal of acquiring a type of critical technology or critical infrastructure that would affect US technological leadership, which suggests even closer scrutiny of foreign investors hailing from, or involving the governments of, foreign economic adversaries of the United States, than the scrutiny given such investors in recent years.

The CFIUS EO’s further refinement and modernization of CFIUS reviews follows a global trend as other countries also work to implement or strengthen foreign direct investment regimes.  Foreign companies seeking to invest in the United States and domestic US companies seeking foreign investors should carefully review the factors identified in the CFIUS EO. 

The Full Story

CFIUS is an interagency committee authorized under Section 721 of the Defense Production Act to review covered transactions (certain transactions involving foreign investment in the United States and certain real estate transactions by foreign persons) in order to determine the effect of such transactions on the national security of the United States.  Since January 13, 2020, CFIUS reviews have been guided by the factors enumerated in the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) and the implementing regulations (the FIRRMA Regulations).

The CFIUS EO elaborates on the existing FIRRMA Regulations by directing CFIUS to consider in its reviews of covered transaction certain factors reflecting modern foreign investment concerns, which factors fall within the statutory framework established by Section 721 of the Defense Production Act.  While technically adding to the list of factors to be considered, these factors are already part of CFIUS reviews as a practical matter, and the CFIUS EO should be viewed as elaborating on them and focusing attention in certain areas.  Specifically, the CFIUS EO directs the Committee to consider:

1. The covered transaction’s impact on the resilience of US supply chains

The CFIUS EO directs the Committee to consider the covered transaction’s effect on supply chain resilience and security, both within and outside of the defense industrial base, in manufacturing capabilities, services, critical mineral resources, or technologies that are 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 agriculture industrial base that have implications for food security, as well as other sectors identified in accordance with the Biden administration’s prior Executive Order on US supply chains.  In doing so the Committee is directed to consider the degree of involvement in the US supply chain by the foreign investor, who might take actions to impair the national security of the United States as a result of the covered transaction, relevant third-party ties, the capabilities of the United States with respect to manufacturing, services, mineral resources, or technologies, diversification through alternate suppliers across the supply chain (including those located in allied countries), whether the supplier supplies the US government, the energy sector industrial base, the defense industrial base, the concentration of foreign ownership in a given supply chain, among other factors.

2. The covered transaction’s impact on US technological leadership

The White House has placed the CFIUS EO within a broader strategy by the Biden administration to maintain US economic and technological leadership.  The CFIUS EO directs the Committee to consider whether a covered transaction involves manufacturing capabilities, services, critical mineral resources, or technologies that are fundamental to United States technological leadership and therefore national security.  It specifically identifies the following sectors as particularly important in this regard: microelectronics, artificial intelligence, biotechnology and biomanufacturing, quantum computing, advanced clean energy, climate adaptation technologies, as well as others periodically identified by the Office of Science and Technology Policy (OSTP) in consultation with the Committee.  CFIUS will consider whether a covered transaction poses risks by foreign persons who might take actions that threaten to impair the national security of the United States by threatening its technological leadership in these sectors.

The CFIUS EO also emphasizes that the Committee should consider that national security risks may arise from foreign investors from countries with a “demonstrated or declared strategic goal of acquiring a type of critical technology or critical infrastructure that would affect United States leadership in areas related to national security,” which suggests closer scrutiny of covered transactions involving investors hailing from, or involving the governments of, foreign economic adversaries of the United States such as Russia or China. 

3. Incremental investments over time in a given sector or technology

The CFIUS EO directs the Committee to consider that multiple transactions, when viewed in the aggregate, may pose national security threats, even where each transaction considered individually may not.  Accordingly, the Committee will consider as part of its review, the risks arising from the covered transaction in the context of multiple acquisitions or investments in a single sector or in related manufacturing capabilities, services, critical mineral resources, or technologies, by any foreign person who might take actions that threaten to impair the national security of the United States as a result of the transaction, or involving relevant third-party ties that might cause the transaction to pose such a threat.

4. Cybersecurity risks that threaten to impair US national security

The CFIUS EO directs the Committee to consider whether a covered transaction exacerbates or creates new cybersecurity vulnerabilities by providing a foreign person (or relevant third parties) with direct or indirect access to capabilities or information databases and systems on which they could engage in malicious cyber‑enabled activities affecting the interests of the United States or US persons, including activity to undermine the protection or integrity of data storage systems or designed to interfere with elections, critical infrastructure, the defense industrial base, or other priorities established in the Biden administration’s prior Executive Order on national cybersecurity.

5. Risks to the sensitive data of Americans

The CFIUS EO directs CFIUS to consider whether a covered transaction involves a US business with access to US persons’ sensitive data (e.g., health, digital identity, or other biological data and any data that could be identifiable or de-anonymized), that could be exploited to distinguish or trace an individual’s identity in a matter that threatens national security, or data on sub-populations in the United States that could be used to target groups of individuals in the United States in a manner that threatens national security.  The Committee will also consider whether the foreign investor or their third-party ties have sought or have the ability to exploit such information, including through the use of commercial or other means.

The CFIUS EO also directs the Committee to undertake a periodic review process that considers its processes, practices, and regulations and regularly reports the results of its review, as well as relevant policy recommendations targeting the evolving set of national security risks, to the Assistance to the President for National Security Affairs.

The risk factors identified in the CFIUS EO relate to a broad range of sectors that have been the focus of foreign investment in the United States in recent years.  As indicated by CFIUS’s 2021 annual report, critical technologies are an area of increasing focus (our coverage of the 2021 CFIUS annual report is available here).  Foreign investors and companies working with foreign investors in the United States should carefully consider the factors highlighted in the CFIUS EO, implications for whether and how to file for CFIUS clearance, and whether any of the concerns highlighted by the CFIUS EO may be preemptively addressed in deal documentation.

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The national security, mergers and acquisitions and competition practices at Hunton Andrews Kurth LLP will continue to monitor the development of this and other CFIUS and cross-border investment matters. Please contact us if you have any questions or would like further information regarding the CFIUS EO or CFIUS.