Coming soon: a national security screening mechanism for outbound investments
Earlier this month, a bipartisan and bicameral group of congressional leaders took a major step towards finalizing legislation that would allow the US government to screen American outbound investments to certain countries and potentially prohibit transactions deemed to threaten certain domestic capabilities.
The sponsors of the National Critical Capabilities Defense Act (NCCDA) agreed on a revised version of the bill that is largely perceived to have narrowed the scope of the prior version in response to corporate pushback. Congress is now seeking feedback from industry and other stakeholders in hopes of passing the legislation before the August recess.
It is expected that the NCCDA will be folded into broader legislation, such as the CHIPS Act or the COMPETES Act – which is aimed at bolstering US competitiveness in the semiconductor industry – to ensure that domestic funding is not subsequently transferred abroad.
A new interagency federal commission
The United States government has long-maintained authority to review inbound foreign direct investment for its impact on national security, a process that is led by the Committee on Foreign Investment in the United States (CFIUS). The NCCDA would establish an interagency federal commission (the National Critical Capabilities Committee or the Committee) with authorization to screen certain forms of US outbound investments to increase oversight of supply chains that run through certain countries of concern and prevent the offshoring of “national critical capabilities.” The Committee has been referred to as a “reverse CFIUS”: its role as a national security monitor is similar, but its focus is on outbound as opposed to inbound investment.
Under the proposed law, if a US business plans to engage in “covered activity” – for example, by building, selling or relocating such capability to or in a country of concern, by sharing or transferring the design or intellectual property associated with such capability to an entity or country of concern, or by investing in or facilitating access to financial resources for such capability for an entity or country of concern – then that activity must be notified to the Committee. The Committee will then have 45 days to review the proposed transaction, considering factors such as impact on the economic, national security, intelligence, military, health and agricultural interests of the United States, and make recommendations on how to mitigate any identified “unacceptable risk.” Certain exceptions may exist for “ordinary business transactions” or transactions that occur before the law’s effective date.
Defining national critical capabilities, covered activities, and countries of concern
Although subject to change, the latest version of the bill defines “national critical capabilities” to include supply chains for semiconductor, large-capacity batteries, critical minerals and materials, and pharmaceuticals, as well as technologies such as artificial intelligence, bioeconomy, and quantum information and science technology. Countries of concern include China, Russia, Iran, North Korea, Cuba and Venezuela. The latest version also defines “covered activity” to encompass a wide range of actions connected with the transfer, development, and support of national critical capabilities involving any countries of concern “by a United States person or a foreign entity or an affiliate of a United States person or an affiliate of a foreign person.” Covered activity might thus encompass, for example, a wide range of sales, production, research, and financial activities by foreign subsidiaries of US persons in third countries.
At this stage in the legislative process, it is difficult to predict what the final legislation will look like. Members are balancing numerous competing interests, including the views of the business community and the need for safeguards on outbound investments at a time when the US government is seeking to incentivize domestic industry through the CHIPS or COMPETES Acts.
The US would not be alone in regulating outbound investment. Chinese regulators have multiple formal and informal channels for regulating outbound investment and technology transfers and have historically construed “national security” expansively. Nevertheless, Chinese commentators have publicly criticized the proposed legislation. In January 2022, a researcher at the China Academy of Social Sciences dismissed the proposal as a “delusional” reflection of the “anxieties” among “some U.S. politicians” at the risk being “strangled” by dependence on key imports from China. Earlier this month, a Chinese foreign ministry spokesperson criticized the US for applying an “over-generalized” concept of national security and conducting “unreasonable” investment reviews and warned against further restrictions on “on normal economic and trade co-operation between China and the United States.”
If the legislation does not pass before the August recess, it may be incorporated into the must-pass annual defense spending bill, the National Defense Authorization Act (NDAA), later this fall.
Either way, US businesses that operate in targeted sectors/industries and countries of concern should be aware that it appears very likely the US government will establish some form of national security screening mechanism for outbound investments.
We will continue to monitor developments related to the NCCDA and provide further updates accordingly. If you have any questions, please reach out to one of the authors or your DLA Piper contact.