CFIUS EO to Have ‘Marginal’ Impact on Reviews but Puts Industry on ‘Notice,’ Law Firms Say

Although President Joe Biden’s recent executive order on foreign direct investment isn’t expected to significantly change review outcomes, it sends a clear signal to industry about the U.S.’s FDI priorities and could help companies better understand whether they should submit a voluntary filing, law firms said this month. One firm said the Committee on Foreign Investment in the U.S. may use the order as further reason to reach out to businesses about non-notified transactions.

The order, signed by Biden Sept. 15, was the first to give specific presidential direction to how the U.S. conducts FDI reviews, a move officials hope will sharpen the country's focus on sensitive technologies, personal data and other national security-related issues (see 2209150053). Although the order mostly codified “priorities and areas of interest” for CFIUS, it also placed “market participants on clear notice that CFIUS will scrutinize transactions that implicate such priorities and areas of interest,” Cleary Gottlieb said.

Skadden said the order may have a “marginal” impact on future reviews, adding that some of the new FDI factors outlined in the order are “likely to further encourage members of CFIUS to broaden their analysis and review.” But the firm also stressed that many of the factors “have already been an integral part of the CFIUS review dynamic” established by the Foreign Investment Risk Review Modernization Act (see 2001140060). Crowell & Moring specifically pointed to investments related to critical supply chains, sensitive technologies, industry control, cybersecurity and personal data, which have “already been intensely focused on over the past few years, especially with respect to Chinese and Russian investments.”

“At this early stage, we do not expect the EO will radically change the outcomes we have seen over the past several years,” Skadden said. But “it may increase mitigation on the margins and empower some agencies to play a larger role in regulating areas that are less traditionally considered part of ‘national security.’”

Crowell also said it’s “possible that CFIUS may utilize this new EO as a potential pretext to reach out about prior transactions not previously filed with CFIUS.” It could also help parties to a transaction better evaluate whether they should undertake a specific investment, particularly if it involves one of the factors mentioned in the executive order. “The EO will provide guidance and transparency for both U.S. businesses and foreign entities when deciding whether to undertake a particular transaction or investment, in a manner that has otherwise been private,” the firm said.

Akin Gump said the order may also help companies decide whether they should submit a voluntary filing to CFIUS. “It does provide a helpful roadmap for parties seeking to understand what CFIUS considers to be a national security concern in the current environment,” the firm said. Akin Gump pointed to several parts of the order that are “particularly noteworthy,” including its emphasis on a foreign investor’s third-party ties to foreign countries of concern, the investor’s ability to acquire sensitive data and whether the transaction involves a sector critical to U.S. technological leadership, such as microelectronics or artificial intelligence. These factors can help companies weigh “the pros and cons of making a voluntary filing,” the firm said.

Perhaps most importantly, the order signals that the Biden administration is focused on investment-related controls and may be only the “first in a series of consequential executive branch actions on trade and investment that focus on national security,” Skadden said. A National Security Council official said this month that the administration is considering creating an outbound investment screening regime in an effort to help fill certain gaps in semiconductor-related export controls (see 2209140041)

“[W]hile both today’s EO and future steps are largely motivated by concerns related to China,” Skadden said, “these yet-to-be finalized steps portend significantly greater disruption to a range of investment and commercial activities.”