On September 15, 2022, President Biden signed an Executive Order providing formal direction on the risk factors that the Committee on Foreign Investment in the United States (CFIUS) should consider when reviewing a covered transaction. CFIUS is an interagency committee authorized to review certain transactions involving foreign investment in the United States, including certain real estate transactions, to determine the impact of such investment on US national security concerns.

This is a first-ever Executive Order since CFIUS was established in 1975 providing formal Presidential directives regarding the risks CFIUS should consider in its reviews of covered transactions. CFIUS should consider the specific risk factors outlined in the Executive Order, in conjunction with the national security factors that are already set out in Section 721(f) of the Defense Production Act.

Specifically, the Executive Order directs CFIUS to consider the following:

  1. The covered transaction's effect on the resilience of critical US supply chains that may have national security implications, including those outside of the defense industrial base. The Executive Order directs CFIUS to consider the effects on critical US supply chains, including through considerations of: (1) the degree of diversification through alternative suppliers across the supply chain, including suppliers located in allied or partner countries; (2) supply relationships with the US government; and (3) the concentration of ownership or control by the foreign or foreign-owned or -controlled investor in a given supply chain. Importantly, the Executive Order states that CFIUS must consider these effects both within and outside of the defense industrial base.

  2. The covered transaction's effect on US technological leadership in areas affecting US national security. The Executive Order specifically identifies the following sectors as being fundamental to US technological leadership and national security: microelectronics, artificial intelligence, biotechnology and biomanufacturing, quantum computing, advanced clean energy, climate adaptation technologies, and certain elements of the agricultural industrial base. Pursuant to the Executive Order, CFIUS will be required to consider whether a covered transaction could reasonably result in future advancements and applications in technology that could undermine US national security and whether the foreign or foreign-controlled investor has ties to third parties that may pose a national security threat.

  3. Industry investment trends that may have consequences for a given transaction's impact on U.S. national security. In recognition that multiple transactions, when viewed in the aggregate, may pose national security threats, even where each transaction as considered individually may not, the Executive Order requires CIFUS to consider, as appropriate, risks arising from a covered transaction in the context of multiple acquisitions or investments in a single sector or in related sectors.

  4. Cybersecurity risks that threaten to impair national security. The Executive Order directs CFIUS to consider whether a covered transaction could result in foreign persons or their relevant third-party ties with access to conduct cyber intrusions or other malicious cyber-enabled activity, in addition to evaluating the cybersecurity posture, practices, capabilities, and access of all parties to the transaction that could allow a foreign person, or their relevant third-party ties, to manifest such activities.

  5. Risks to US persons' sensitive data. Enhancing the legislative amendments that require CFIUS to evaluate a foreign or foreign-controlled investor's access to sensitive personal information of US persons, the Executive Order directs CFIUS to consider whether a covered transaction involves a US business with access to US persons' sensitive data and 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.

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The risk factors CFIUS must consider under the Executive Order are relevant to a broad range of industries and technology, some of which have received increasingly close scrutiny by CFIUS in recent years. For example, China-based Asymchem's acquisition of Snapdragon Chemistry, a U.S.-based flow chemistry pharmaceutical firm, fell through due to CFIUS' intervention early this month. As recognized in the Executive Order, this reflects the Administration's growing concerns that certain foreign countries are using foreign investments to obtain access to sensitive data and technologies to the detriment of US national security.

The Executive Order, by focusing on specific risk factors, provides additional insight into which types of transactions trigger heightened US national security concerns, at least with respect to key industries and technologies identified in the Executive Order. Companies contemplating foreign investments in US businesses should carefully review those factors in relation to their proposed investments in evaluating the likelihood that CFIUS might prove an obstacle to proceeding with the transaction, as well as in drafting any declarations or notices for submission to CFIUS.

*Junghyun Baek contributed to this Advisory. Mr. Baek is a graduate of Harvard Law School and is employed at Arnold & Porter's Foreign Legal Consultant Office as a Law Clerk.

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