August 19, 2022

Proposed Outbound Investment Review Legislation Has Sweeping Extraterritorial Scope

Darshak Dholakia, Betsy Feuerstein, Hrishikesh Hari, Brooklynn Moore, Jeremy Zucker

Dechert LLP

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Key Takeaways

The U.S. Congress (“Congress”) is considering the establishment of a new Committee on National Critical Capabilities (“CNCC”) to review and potentially mitigate or block outbound investments from the United States in order to protect U.S. national security and safeguard U.S. supply chains from certain "countries of concern," including China and Russia.
If enacted, such an outbound review mechanism would be the first of its kind to be adopted by a major Western economy and could have potential ripple effects with other governments considering similar mechanisms.
It would also likely cover a significant proportion of U.S. outbound investments in China, among other locations, impacting costs, timing and decision making regarding such investments.
As the United States is the largest source of global outbound investment flows, the impact of an outbound investment screening mechanism could be significant. As Senator Pat Toomey (R-Pennsylvania), a critic of the proposal, recently said: “[i]t is not an overstatement to suggest that hundreds of thousands of U.S. companies and tens, if not hundreds, of billions of dollars in commerce could be impacted by” an outbound review mechanism.

Background

The concept of an outbound investment review mechanism is not new and has been considered previously by Congress. For example, early drafts of what eventually became the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), which provides statutory authorization for the inbound investment review process led by the Committee on Foreign Investment in the United States (“CFIUS”), also contained an outbound investment review mechanism, but the proposal did not make it into the enacted legislation.

Discussion of an outbound review mechanism was reignited in 2021. One of the main drivers motivating Congress to create an outbound investment screening mechanism is the ongoing U.S. supply chain crisis. At present, there is bipartisan support for a mechanism that would prevent supply chain components from being sent to certain countries of concern, including China and Russia.

It appears there are three potential paths forward for the outbound investment review mechanism. The first is through the Bipartisan Innovation Act, which is aimed primarily at funding U.S. research and competitiveness. The House version of the legislation (the America COMPETES Act) includes the National Critical Capabilities Defense Act (“NCCDA”), which would create an inter-agency committee —the CNCC—to review and regulate outbound investment transactions. Although the NCCDA was dropped from the Senate version of the bill, Speaker of the House Nancy Pelosi (D-San Francisco) has yet to bring the Senate package to the floor for a vote, and it is not clear whether the Senate package will pass the House. The second path forward would be to attach the NCCDA to another piece of legislation, such as the National Defense Authorization Act. The third path forward would be through the Biden Administration. Media reports have noted that the White House may be considering executive action on an outbound investment review mechanism if Congress does not act, but Biden Administration officials have not yet agreed on the scope of such action.

In addition to the possibility of executive action, the Department of the Treasury has proposed an alternative review mechanism in a bill called the “Sensitive Technologies Supply Chain Risk Management Act of 2022.” Treasury’s proposal would create a pilot program that would gather information about certain investments made by U.S. persons in “covered foreign persons” (persons from “covered states” as determined by the Secretary of State) that could affect the United States’ critical supply chain. Importantly, the bill would not give Treasury the authority to block the investments; it may be reasonable to expect, however, that the information collected in such a pilot program would inform a subsequent set of legislation and implementing regulations providing such blocking authority to one or more executive agencies.

The Outbound Investment Review Process

In brief, the most recent proposal for an outbound investment review mechanism (the CNCC) would require prior notification to an inter-governmental committee for covered activities involving national critical capabilities, with additional scrutiny for covered activities involving countries or entities of concern. Below is an overview of the proposed outbound investment review mechanism.

1 - STRUCTURE	An interagency Committee (the “Committee”) would review transactions and would have the authority to impose mitigation measures and to block transactions. The most recent NCCDA establishes the President of the United States or his designee as the Committee Chair. The U.S. Trade Representative (“USTR”) was also considered for Committee Chair in an older version of the proposal. A third option is the Department of Treasury’s Office of Investment Security. The Office of Investment Security already has experience/staff with expertise in leading the CFIUS review process.

1 - STRUCTURE

An interagency Committee (the “Committee”) would review transactions and would have the authority to impose mitigation measures and to block transactions.
The most recent NCCDA establishes the President of the United States or his designee as the Committee Chair. The U.S. Trade Representative (“USTR”) was also considered for Committee Chair in an older version of the proposal.
A third option is the Department of Treasury’s Office of Investment Security. The Office of Investment Security already has experience/staff with expertise in leading the CFIUS review process.

2 - SCOPE	Under the most recent NCCDA, the outbound review process is expected to apply to U.S. persons, non-U.S. entities and their affiliates. This means that a non-U.S. entity engaging in a covered activity in a country of concern or with an entity of concern would trigger the Committee’s jurisdiction for review. For example, the Committee’s jurisdiction would potentially cover a non-U.S. entity’s affiliate (broadly defined) investing in semiconductors in China, or even a Chinese company investing in semiconductors in China.

2 - SCOPE

Under the most recent NCCDA, the outbound review process is expected to apply to U.S. persons, non-U.S. entities and their affiliates.
This means that a non-U.S. entity engaging in a covered activity in a country of concern or with an entity of concern would trigger the Committee’s jurisdiction for review. For example, the Committee’s jurisdiction would potentially cover a non-U.S. entity’s affiliate (broadly defined) investing in semiconductors in China, or even a Chinese company investing in semiconductors in China.

3 - COVERED ACTIVITIES	Covered activities include: Creating, producing, or relocating a “national critical capability” in, or to, a country of concern. Sharing or transferring design or technology that “enables a national critical capability” in a country of concern or entity of concern. Investing in or giving any guidance that facilitates “access to financial resources for a national critical capability for an entity of concern.” “Covered activities” remains a broad term that would result in significant uncertainty for all companies, whether they are U.S. or non-U.S. companies.

3 - COVERED ACTIVITIES

Covered activities include:
- Creating, producing, or relocating a “national critical capability” in, or to, a country of concern.
- Sharing or transferring design or technology that “enables a national critical capability” in a country of concern or entity of concern.
- Investing in or giving any guidance that facilitates “access to financial resources for a national critical capability for an entity of concern.”
“Covered activities” remains a broad term that would result in significant uncertainty for all companies, whether they are U.S. or non-U.S. companies.

"NATIONAL CRITICAL CAPABILITIES"	National critical capabilities are defined broadly under current proposals; the most recent NCCDA references a list of industries in its definition of “capabilities” such as semiconductor manufacturing, large-capacity batteries, pharmaceuticals, artificial intelligence, quantum technology, and other sectors such as “bioeconomy.” It also references technologies identified as critical and emerging technologies, the manufacturing and other capabilities necessary to produce critical goods and materials, as well as other industries, technologies, and supply chains to be identified by the Committee.

"NATIONAL CRITICAL CAPABILITIES"

National critical capabilities are defined broadly under current proposals; the most recent NCCDA references a list of industries in its definition of “capabilities” such as semiconductor manufacturing, large-capacity batteries, pharmaceuticals, artificial intelligence, quantum technology, and other sectors such as “bioeconomy.”
It also references technologies identified as critical and emerging technologies, the manufacturing and other capabilities necessary to produce critical goods and materials, as well as other industries, technologies, and supply chains to be identified by the Committee.

"COUNTRY OF CONCERN"	The most recent NCCDA defines “Countries of concern” as having the meaning given to the term “foreign adversary” in section 8(c)(2) of the Secure and Trusted Communications Networks Act of 2019 (47 U.S.C. 1607(c)(2)) – which does not specifically identify any country by name. The current proposal also specifically mentions China, Russia, Iran, North Korea, Cuba, and Venezuela. The inclusion of this list highlights congressional focus on Russia and China as rivals to U.S. economic and national security interests.

"COUNTRY OF CONCERN"

The most recent NCCDA defines “Countries of concern” as having the meaning given to the term “foreign adversary” in section 8(c)(2) of the Secure and Trusted Communications Networks Act of 2019 (47 U.S.C. 1607(c)(2)) – which does not specifically identify any country by name.
The current proposal also specifically mentions China, Russia, Iran, North Korea, Cuba, and Venezuela. The inclusion of this list highlights congressional focus on Russia and China as rivals to U.S. economic and national security interests.

"ENTITY OF CONCERN"	The most recent NCCDA defines “Entities of concern” to include entities that are “influenced by” a country of concern or affiliated with a country of concern.

Conclusion

Although an outbound investment review mechanism has not yet been established, bipartisan congressional support for the proposal has not waned. The Biden Administration also appears to be prepared to pick up the proposal if Congress fails to pass it, which further raises the likelihood that some form of this outbound investment review mechanism will become law. Companies should begin considering their contingency plans for Day-1, such as conducting due diligence with respect to investment targets and their non-U.S. board members, shareholders and subsidiaries to determine ties to targeted countries of concern.

Dechert will continue to monitor the proposal as it moves through the Congress and the Biden Administration and report on any significant developments.

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