Upcoming Outbound Screening Tool Won't Necessarily Unwind Past Deals, Former Official Says

The upcoming U.S. outbound investment review tool probably won’t be used to unwind past deals, and will likely only target investments in specific, sensitive technology areas, said Laura Black, a former Treasury Department official. But she said companies still should prepare for a new outbound investment executive order and be ready for other jurisdictions to implement their own outbound investment controls, including in the EU.

Black, speaking during a virtual conference hosted by the Massachusetts Export Center last week, said she doesn’t believe the Biden administration will use the outbound investment mechanism, if and when it’s created, to immediately go after deals that have already been completed. “I don't think that they would necessarily be unwound,” Black said of existing sensitive technology investments in China, “but it could be harder to make follow-on investments.” That “could affect the value of the company,” she said, adding that more will “become clear after the executive order comes out.”

She also said the new mechanism will “probably be more focused on sensitive technologies” in “the near term.” The Biden administration reportedly appears to be leaning toward a narrower investment screening mechanism than previously expected, prioritizing transactions involving quantum computing, artificial intelligence and semiconductor technology as opposed to a broader range of critical and emerging technologies (see 2301120035 and 2301190024).

“Advanced computing, semiconductors -- those are kind of the areas where we've seen other targeted actions,” said Black, who oversaw policy and international relations at the Committee on Foreign Investment in the U.S. and is now a lawyer with Akin Gump. “So I would say that companies should carefully consider those types of investments into China.”

A few U.S. trading partners have outbound investment screening regimes, but Black stressed that “it’s not common.” She pointed to Taiwan and South Korea, which has a “more targeted system based on sensitive technologies, which is kind of where the U.S. is heading.”

She also noted that the EU has said it will consider outbound investment controls this year, and Germany reportedly mentioned the tool in its draft China strategy (see 2301110051). “I think you'll see the U.S. government actively discussing this with allies,” she said. “This may be the next area of investment regulation.”

As U.S. companies await more details, they still must contend with a range of compliance challenges involving CFIUS filings. Black said the committee is still heavily targeting non-notified transactions -- deals that may raise national security concerns but weren’t reported (see 2206090053). “We're seeing more transactions being called in,” Black said, adding that many of those deals have some nexus involving China or Russia.

When thinking about filing with CFIUS, companies should “be forthcoming and don't try to hide information,” Black said. Concealing details about a transaction could lead to business disruptions if the committee finds out, which she said is likely.

“Often information will come to light anyway, and it's not in anyone's interest for that to come up close to the end of a review period, because you may end up having to restart the review,” Black said. “It also decreases trust,” which can impact whether CFIUS is willing to enter into a mitigation agreement. “One of the bases for mitigation, if there is a risk, is whether the government can trust the counterparty,” she said. “So if parties are seen to be hiding information or not being forthcoming, it may make things more difficult.”

It can often be challenging for trade compliance officials to convince senior management to alert them about new investments before a deal is completed, Jeff Rittener, chief trade officer at Intel, and Barb Secor, vice president for global trade compliance at Thermo Fisher Scientific said during the conference. Secor said compliance officials should be building “relationships” with the department that handles mergers and acquisitions so they can “at least tell them what they need to be aware of, at least make sure they know what CFIUS is and outbound investment is.”

Rittener, who said he worked on Intel’s first acquisition more than two decades ago, said it took time to convince management that he should be made aware of investment transactions at their start. “Through a lot of scarring,” he said, “I think the organization has come to realize how important it is to bring the trade into the very beginning of the discussions.”

Compliance personnel should, at the very least, be examining the “who, what and where” of each investment, Rittener said: who are all the associated parties, what is being transferred and where are the parties located. “It really comes down to education and helping the organization understand the risks,” he said. “It comes down to actually offering yourself to help do some of the work.”

Secor said she finally convinced her company to involve her in deals after it approved an acquisition with a company and didn’t realize that company sold export-controlled technology. “It turned out it was a great acquisition,” she said. “But that was kind of the impetus for them to say, ‘OK, we'll give you a seat at the table.’ But you really have to fight for that.”