United States: Lawmakers Continue Push For Review Of Outbound Investments

Revised draft legislation circulated June 13th is the most recent salvo in a long-running effort that is increasingly likely to create an unprecedented outbound investment review mechanism in the United States. The National Critical Capabilities Defense Act of 2022 (the NCCDA or Act), if enacted, would require notification and review of a broad range of outbound investments and activities, and empower the U.S. government to block transactions that it views as counter to U.S. national security goals. The Act seeks to increase scrutiny on outbound investments much like inbound investments are reviewed by the Committee on Foreign Investment in the United States (CFIUS).

The Act's bipartisan, bicameral authors are seeking to have it replace the provisions in the National Critical Capabilities Review Act incorporated in the House-passed version of the innovation and competition legislation—referred to as the Bipartisan Innovation Act—currently in conference. Below we discuss the aims of the Act as well as the new potential reporting requirements and powers of the federal government to modify or block certain outbound investments.

What Does the NCCDA Do?

The Act creates the Committee on National Critical Capabilities (CNCC). The CNCC would consist of several agencies and departments similar to but more expansive than CFIUS. The list includes CFIUS members such the Offices of the U.S. Trade Representative and Science and Technology Policy, and the Departments of Commerce, State, Treasury, Homeland Security, Justice, and Defense; as well as additions such as the Departments of Agriculture and Health and Human Services. The Act does not specify and leaves it to the President to determine the chair and in which office or department the CNCC will reside.

The CNCC would promulgate regulations, as we specify below, to implement the legislation, including penalties for violations. The CNCC would review "covered activities" and take actions and make recommendations to the President on "appropriate actions" to be taken which range from mitigating to prohibiting covered activities.

The CNCC is empowered to review both covered activities notified to the Committee and those which have not been notified. We cover the reporting requirement as well as the ability to block covered activities in more detail below.

Notification Requirements

U.S. persons and foreign entities would be required to provide written notification to the CNCC if they engage in or plan to engage in a "covered activity." This notification is due to the CNCC 45 days before engaging in such activity.

The Act provides a long list of what constitutes a "covered activity." It includes:

• Any activity by a U.S. person, foreign entity, or their affiliates, that:
  • Develops, manufactures, services, manages, operates, utilizes, sells, or relocates a national critical capability to or in a country of concern;
  • Transfers, contributes, or licenses to an entity of concern any design, intellectual property, technology, or know-how that contributes to, supports, or enables a national critical capability by an entity of concern or in a country of concern; or
  • Invests in, provides capital to, or gives any guidance, related to enhancing or facilitating financing for a national critical capability for an entity of concern or a country of concern;
  • Any activity by a recipient or beneficiary of financial assistance under the Bipartisan Innovation Act (or the eventual name of the final consolidated statute) with respect to an entity of concern or in a country of concern; or
  • Any activity by an entity that benefits from annual procurement (of more than a yet to be defined amount) by a U.S. national security agency with respect to an entity of concern or in a country of concern.

The CNCC would further define the term "covered activity" through regulation.

Nevertheless, covered activities would not include transactions under a CNCC-determined de minimis value, "ordinary business transactions" (e.g., sales and licenses of finished items), and any transaction that occurs before the effective date of the Act.

The NCCDA defines "national critical capabilities" broadly in relation to supply chains, industries, and technologies. These specifically include the supply chains, goods, and materials identified in the February 24, 2022 Executive Order 14017 on America's Supply Chains, including semiconductor manufacturing, pharmaceuticals, large capacity batteries, and critical minerals and materials. Critical capabilities also include "critical and emerging technologies" such as artificial intelligence, the bioeconomy, and quantum computing that are identified by the Director of National Intelligence (presumably as the DNI has done, e.g., in prior reports on protecting critical and emerging technologies from foreign threats) and those listed in the National Science and Technology Council's Critical and Emerging Technologies List Update.

The NCCDA provides the CNCC authority to identify other industries, technologies, and supply chains beyond those specified in the Act and to prescribe regulations identifying them. There would be continuing Congressional oversight of what the CNCC identifies as critical capabilities covered by the Act through annual reports to Congress.

The NCCDA lists China, Russia, Iran, North Korea, Cuba, and Venezuela as countries of concern. The Act defines a "country of concern" using the Secure and Trusted Communications Networks Act of 2019's definition of a "foreign adversary." A foreign adversary is "any foreign government or foreign nongovernment person engaged in a long-term pattern or serious instances of conduct significantly adverse to the national security of the United States or security and safety of United States persons." The Act defines "entity of concern" as an entity that is "influenced by a country of concern" or "that is directly or indirectly affiliated with a country of concern."

Actions by the CNCC and the President

Much like CFIUS, the CNCC, after reviewing notifications of covered activities, may enter into mitigation agreements or seek to impose conditions to handle risk if a covered activity poses an "unacceptable risk to one or more national critical capabilities." The definition of unacceptable risk under the Act includes not only the risk of a covered activity to U.S. capabilities but also the risk that an activity could contribute to the development of critical capabilities in a country of concern.

As we noted above, the CNCC may review both notified and non-notified covered activities. The purpose of the review is to determine if the covered activity is likely to result in an unacceptable risk to one or more national critical capabilities. The Act specifies several factors for the CNCC to consider. In some respects, these factors are more expansive than the ones CFIUS reviews. These factors include:

• The economic, national security, intelligence, military, health, and agricultural interests of the United States;
• The history of distortive or predatory trade practices in each country in which a covered activity occurs;
• Control and beneficial ownership of each foreign person that is a party to the transaction;
• Impact on the domestic industry and resulting resiliency, including the domestic skills base, taking into consideration any pattern of foreign investment in the domestic industry; and
• If the activity could directly or indirectly, support, enhance, or enable the capabilities of a country of concern or entity of concern.

If the CNCC determines that the covered activity poses an unacceptable risk, it will notify the U.S. person or foreign entity that is engaging in or planning to engage in the activity no later than 45 days after receiving notification. The CNCC may also make a recommendation to the President to take appropriate action to mitigate risk. However, prior to Presidential action, the CNCC (or the agency under whose jurisdiction the covered activity primarily occurs) may negotiate, enter into or impose, and enforce any agreement or condition with any party to the covered activity in order to "mitigate any risk to the national security of the United States that arises as a result of the covered activity." The CNCC's authority to negotiate and impose mitigation also applies to enforcing a party's decision to voluntarily abandon the covered activity (presumably, for example, in response to CNCC concerns) and to covered activities that have already been completed prior to the CNCC completing its review (presumably, for example, in the case of non-notified transactions).

The Act also empowers the President, after considering other existing measures, to take appropriate actions to address any unacceptable risk posed by a covered activity to one or more national critical capabilities, including mitigating, suspending, or prohibiting the covered activity. The Act requires the President to consider the factors listed above in determining whether to take such action. The President would announce no later than 15 days after CNCC's review completion whether to take action.

The Path Forward

The draft legislation is a revision of NCCDA bills introduced last year (by Senators Cornyn and Casey, and Representatives DeLauro, Pascrell, Spartz, and Fitzpatrick) that received pushback from the Treasury Department and industry and have not advanced. The NCCDA's supporters are seeking feedback as they try to incorporate it in the Bipartisan Innovation Act, which currently sits in conference committee. Although it is unclear if the NCCDA will become law, it shows that in an era of unrivaled partisanship, there remains remarkable bipartisan agreement to identify and employ tools to target China, Russia, and their economies. In some ways, this proposal is a logical extension of the regulatory actions that the U.S. government already employs and signals that outbound investments are about to become much more challenging.