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Maura Rezendes speaks to Financier Worldwide on CFIUS executive order and evolving U.S. national security

A&O’s Maura Rezendes has been featured in the February edition of Financier Worldwide. In the Q&A below she discusses Executive Order 14083, which provides formal Presidential direction on the risks that CFIUS should consider when reviewing transactions. Maura also elaborates on best practice for foreign investors and her predictions for future foreign investment activity in the U.S.

Could you provide an overview of why Executive Order (EO) 14083 – the first official national security guidance related to foreign direct investment since 2008 – was issued? To what extent does it reinforce the US’ commitment to the primacy of national security and ensuring future US scientific and technological leadership in critical sectors?

EO 14083 introduced an expanded range of national security factors that the Committee on Foreign Investment in the United States (CFIUS) must consider when evaluating inbound investment into the US. The effort was intended to continue to safeguard against potential national security risks from “competitor or adversarial nations”, with a particular focus on enhancing US supply chain resilience and preserving US technological leadership. Although EO 14083 applies to all “covered transactions”, it is widely understood as a response to the concerns that CFIUS has most recently raised in blocking transactions involving Chinese investment in the US technology sector, including several proposed Chinese investments in the semiconductor sector.

Drilling down, what are the key takeaways from EO 14083? In what ways does it alter the dynamic between the Executive Branch and the Committee on Foreign Investment in the United States (CFIUS)?

EO 14083 is a “formal Presidential direction on the risks that the Committee should consider when reviewing a covered transaction”. In that regard it is a significant development in the CFIUS landscape. In essence, EO 14083 now mandates that CFIUS considers certain factors it previously had the discretion to ignore.

How beneficial will the new EO be in helping CFIUS determine transactions that present potentially unacceptable risks to US national security? What new factors will CFIUS now have to consider in its transaction reviews?

EO 14083 emphasises the areas that CFIUS should afford increased attention to, including, but not limited to, the following. First, the control of domestic industries and commercial activity by foreign citizens as it affects the capability and capacity of the US to meet the requirements of national security. Second, the potential effects of the proposed or pending transaction on US international technological leadership in areas affecting US national security. Third, the risks arising from the covered transaction in the context of multiple acquisitions or investments in a single sector or in related manufacturing capabilities, services, critical mineral resources or technologies. Fourth, whether a covered transaction may provide direct or indirect access to capabilities or information databases and systems on which actors could engage in malicious cyber-enabled activities affecting the interests of the US or US persons and the cyber security posture, practices, capabilities and access of both the foreign person and the US business that could allow a foreign person to take actions that threaten to impair the national security of the US. Fifth, whether a covered transaction involves a US business that has access to US persons’ sensitive data or has access to data on sub-populations in the US that could be used by a foreign person to target individuals or groups of individuals in the US in a manner that threatens national security. And lastly, whether a covered transaction involves the transfer of US persons’ sensitive data to a foreign person who might take actions that threaten to impair the national security of the US as a result of the transaction. 

To what extent do these new factors replace or replenish the existing national security factors that CFIUS already considers, and which are included in its regulations?

These factors do not replace, but do in part replenish and augment, the existing national security factors that CFIUS already considers. EO 14083 emphasises areas requiring consideration by CFIUS, directing CFIUS to focus on areas of particular concern as a response to certain transactions reviewed by CFIUS in recent history.

What additional considerations do foreign acquirers targeting US assets now need to make when planning their deals?

These new rules fortify what CFIUS has already been doing – that is, focusing on enhancing US supply chain resilience and preserving US technological leadership, while seeking to safeguard sensitive data, resources and infrastructure. Even when a transaction does not facially involve one of the factors identified in EO 14083, parties – buyers, sellers and targets alike – should expect CFIUS focus and inquiries on these factors.

What essential advice would you offer to both buyers and sellers discussing inbound US deals in light of EO 14083? What steps can they take to improve their chances of a successful deal that clears regulatory approvals?

Transaction parties should think carefully, and proactively, about the presentation of contemplated transactions to CFIUS. Parties should likewise anticipate the potential questions that CFIUS may ask, and plan their transactions and construct their broader investment strategies geared toward the best chance of successfully navigating CFIUS clearance.

Looking ahead, what are your predictions for foreign investment activity into the US over the months and years ahead? How are national security concerns, and the transactional review process, likely to shape prevailing trends?

With the release of the ‘CFIUS Enforcement and Penalty Guidelines’ in October 2022, we expect to see increased focus on enforcement related to the following types of CFIUS-related violations. First, failure to timely submit a mandatory declaration or notice. Second, conduct that is prohibited by or otherwise fails to comply with CFIUS mitigation agreements, conditions or orders. And third, material misstatements in or omissions from information filed with CFIUS, and false or materially incomplete certifications filed in connection with assessments, reviews, investigations or CFIUS mitigation, including information provided during informal consultations or in response to requests for information. We further expect to see a higher degree of scrutiny on non-notified transactions, thus requiring a hyper-diligent approach to considerations around whether a filing is mandatory or would otherwise be prudent, particularly given that there is no statute of limitations on enforcement.

This article has been reproduced with permission from Financier Worldwide.