Skip to content

National Security

On October 17, 2023, the U.S. Government Accountability Office (“GAO”) published a report on mergers and acquisitions (“M&A”) in the defense industrial base. The report details the current M&A review process of the Department of Defense (“DOD”) and provides recommendations to proactively assess M&A competition risks.

Currently, DOD’s Industrial Base Policy (“IBP”) office, with input

On 11 July 2023 the National Security Act 2023 (the Act) received royal assent and became law. The Act addresses trade secret misappropriation in the context of industrial espionage by a foreign government, making the unauthorised conduct of obtaining, copying, recording or retaining a trade secret, or disclosing or providing access to a trade secret, under certain circumstances, a criminal offence. The maximum penalty is 14 years imprisonment and/or a fine (section 2 of the Act).

The trade secrets provision is part of a broader regime introduced by the UK government to address national security threats such as espionage, sabotage and foreign interference. 

One of the conditions that has to be met in relation to the person’s conduct is the “foreign power condition”. The foreign power condition is defined in section 31(1) of the Act as:

(a)the conduct in question, or a course of conduct of which it forms part, is carried out for or on behalf of a foreign power, and

(b)the person knows, or having regard to other matters known to them ought reasonably to know, that to be the case.

In order for section 31(1) to be triggered it is for example sufficient if the conduct is under direction or control of the foreign power or even just carried out with the financial or otherwise assistance provided by a foreign power for that purpose.

It will be interesting to see how the foreign power condition will be applied in practice, in particular where governments have extensive control and ownership over corporations.Continue Reading Trade secrets misappropriation: a new criminal offence in the UK

Earlier this month the Biden Administration released its long-anticipated Executive Order on Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern (“EO”), which imposes (1) prohibitions on certain outbound investments in the semiconductors and microelectronics, quantum information technologies, and artificial intelligence sectors, and (2) mandatory notification requirements for a

Updated August 8, 2023.  Originally posted May 1, 2023.

Last week, comment deadlines were announced for a Federal Communications Commission (“FCC”) Order and Notice of Proposed Rulemaking (“NPRM”) that could have significant compliance implications for all holders of international Section 214 authority (i.e., authorization to provide telecommunications services from points in the U.S. to points abroad).  The rule changes on which the FCC seeks comment are far-reaching and, if adopted as written, could result in significant future compliance burdens, both for entities holding international Section 214 authority, as well as the parties holding ownership interests in these entities.  Comments on these rule changes are due Thursday, August 31, with reply comments due October 2.

Adopted in April, the FCC’s item proposing the new rules also includes an Order requiring all holders of international Section 214 authority to respond to a one-time information request concerning their foreign ownership. Although last week’s Federal Register publication sets a comment deadline for the proposed rules, the reporting deadline for the one-time information request has not yet been established.  However, because the FCC has fulfilled its statutory obligations regarding the new information collection presented by the one-time reporting requirement, carriers — as well as entities holding an ownership interest in these carriers — should prepare for the announcement of the reporting deadline.

The FCC’s latest actions underscore the agency’s ongoing desire to closely scrutinize foreign ownership and involvement in telecommunications carriers serving the U.S. market, as well as to play a more active role in cybersecurity policy. These developments should be of interest to any carrier that serves the U.S. market and any financial or strategic investor focused on the telecommunications space, as well as other parties interested in national security developments affecting telecommunications infrastructure.

Proposed Rule Changes for International Section 214 Authority

The FCC’s proposed changes to its regulation of international Section 214 authorizations generally concern additional compliance, disclosure, and reporting requirements. The FCC’s proposed rule changes are far-reaching, but the most notable of the proposals concern the following:Continue Reading Comments Due August 31 on FCC’s Proposal to Step Up Review of Foreign Ownership in Telecom Carriers and Establish Cybersecurity Requirements

Congressional scrutiny of the U.S. relationship with China marched forward this week as Representatives Rosa DeLauro (D-CT), Bill Pascrell (D-NJ), and Brian Fitzpatrick (R-PA) reintroduced a new and expanded version of the National Critical Capabilities Defense Act (NCCDA)—legislation to create a national security review process for “outbound” transactions by U.S. companies investing overseas.

The bill

On March 21, 2023, the Department of Commerce (“Commerce”) published a Notice of Proposed Rulemaking (the “Commerce Proposed Rule”) to implement certain provisions of the CHIPS and Science Act of 2022 (“CHIPS Act”) that place restrictions on certain activities of businesses receiving federal funding pursuant to the CHIPS Act (“Commerce Guardrails”).  On the same day

On the heels of Russia’s invasion of Ukraine, pandemic-induced supply chain disruptions, and U.S.-China tensions over Taiwan, 2022 accelerated a sweeping effort within the U.S. government to make national security considerations—especially with respect to China—a key feature of new and existing regulatory processes. This trend toward broader national security regulation, designed to help maintain U.S. strategic advantage, has support from both Republicans and Democrats, including from the Biden Administration. National Security Advisor Jake Sullivan’s remarks in September 2022 capture the tone shift in Washington: “…[W]e have to revisit the longstanding premise of maintaining ‘relative’ advantages over competitors in certain key technologies…That is not the strategic environment we are in today…[w]e must maintain as large of a lead as possible.”

This environment produced important legislative and regulatory developments in 2022, including the CHIPS and Science Act (Covington alert), first-ever Enforcement and Penalty Guidelines promulgated by the Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”) (Covington alert), President Biden’s Executive Order on CFIUS (Covington alert), new restrictions under U.S. export control authorities targeting China (Covington alert), and proposals for a new regime to review outbound investments by U.S. businesses (Covington alert). The common thread among these developments is the U.S. government’s continuing appetite to use both existing and new regulatory authorities to address identified national security risks, especially where perceived risks relate to China.

With a Republican majority in the U.S. House of Representatives riding the tailwinds of this bipartisan consensus, 2023 is looking like a pivotal moment for national security regulation—expanding beyond the use of traditional authorities such as trade controls and CFIUS, into additional regulatory domains touching upon data, communications, antitrust, and possibly more. In parallel, the U.S. focus on national security continues to gain purchase abroad, with foreign direct investment (“FDI”) regimes maturing in tandem with CFIUS, and outbound investment screening gaining traction, for example, in the European Union (“EU”). It is crucial for businesses to be aware of these developments and to approach U.S. regulatory processes with a sensitivity towards the shifting national security undercurrents described in greater detail below.Continue Reading Will 2023 Be an Inflection Point in National Security Regulation?

On February 7, 2023, the House Committee on Armed Services (the “Committee”) held a hearing entitled “The Pressing Threat of the Chinese Communist Party to U.S. National Defense.” This hearing marked the Committee’s first in the 118th Congress and it focused on U.S. strategic competition with the Chinese Communist Party (“CCP”) of the People’s Republic of China (“PRC”). This overview is the first in a series of legislative updates we will provide on congressional oversight activities related to China throughout the Congress, including specific activities focused on trade controls, supply chain dependencies, and PRC-sourced telecommunications infrastructure in U.S. networks.

Admiral Harry Harris, USN (Ret.), former commander of U.S. Pacific Command, and Dr. Melanie Sisson, Foreign Policy Fellow at the Strobe Talbott Center for Security, Strategy, and Technology, appeared before the committee as witnesses. The substance and tenor of their testimony, reflected throughout the hearing from member statements, was bipartisan agreement that the PRC and the CCP pose a significant threat to the United States and its way of life.

Key members to watch this Congress, all of whom participated in the hearing, include, Representative Mike Gallagher (R-WI), HASC Member and Chairman of the House Select Committee on the Strategic Competition between the United States and the CCP, as well as Select Committee Members Rob Wittman (R-VA), Jim Banks (R-IN), Seth Moulton (D-MA), Andy Kim (D-NJ), Mikie Sherrill (D-NJ), and newly elected Carlos Gimenez (R-FL).

We expect these members will work together over the coming months to advance legislative measures in the defense authorization bill to address perceived threats posed by the CCP, particularly after its recent deployment of a surveillance balloon over the United States and military exercises near “Taiwan”.Continue Reading Public Policy Update:  Key Takeaways from the House Armed Services Committee Hearing on the Chinese Communist Party Threat to U.S. National Defense

Overview

On January 25, 2022, the House of Representatives unveiled the America Creating Opportunities for Manufacturing, Pre-Eminence in Technology, and Economic Strength Act of 2022 (H.R. 4521) (“America COMPETES”), which is companion legislation to the United States Innovation and Competition Act (S. 1260) (“USICA”) passed by the Senate last summer. At over 2,900 pages, the legislation is an omnibus package of incentives and proposed funding for technology areas (principally semiconductors), supply chain proposals, investments in science, technology, engineering, and mathematics (“STEM”), and other pieces of legislation—all directed squarely at enhancing the United States’ competitive position against China.

Nestled within America COMPETES is a 25-page legislative proposal to create an inter-agency process—National Critical Capabilities Reviews—to review and regulate outbound investment (the “Outbound Review Process”). If enacted, the United States would become the first major Western advanced economy to adopt a broad-gauged outbound investment screening process, raising the prospect of a new era in national security-based reviews and restrictions of international investment flows.

To be sure, the concept of an outbound review process in the United States is not new—it first arose in early drafts of what ultimately became the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), which updated the statutory authorities governing the Committee on Foreign Investment in the United States (“CFIUS”). More recently, both Senators and House Members have pushed legislation nearly identical to the proposal in America COMPETES, including an attempt last summer by Senators Bob Casey (D-PA) and John Cornyn (R-TX) to add an outbound investment review process as an amendment to USICA. The Casey-Cornyn proposal ultimately was not included in USICA, partly because of pushback by the U.S. business community based on its breadth, but the Biden Administration, notably in a speech last summer by National Security Advisor Jake Sullivan, has signaled potential support for an outbound review process. Thus, while it is by no means certain that the Outbound Review Process will be enacted, the prospect is more real than ever given potential bipartisan support within Congress and alignment between Congress and the Executive Branch.

Outbound Review Process

The stated rationale for an outbound screening process is to safeguard against the U.S. becoming dependent on China for critical parts of the supply chain and production capabilities. The concerns that motivated earlier attempts to regulate outbound investment, however, were centered on technology transfers to China, especially through joint ventures. Among some policymakers, there is a broader view that investments by U.S. companies in China that can help China advance its own capabilities, even if only through financing, should be curbed.

Against that backdrop, the Outbound Review Process, as proposed, is both sweeping in scope and lacking in specifics. As proposed, the legislation would establish a new committee—the “Committee on National Critical Capabilities” (the “Committee”)—that would be chaired by the U.S. Trade Representative (“USTR”) and composed of a number of Executive Branch Agencies.[1]  Modeled to an extent on CFIUS, the Committee would have the authority to review certain transactions that may impact “national critical capabilities.” Specifically, the Committee could review any transaction by a United States business that “shifts or relocates to a country of concern, or transfers to an entity of concern, the design, development, production, manufacture, fabrication, supply, servicing, testing, management, operation, investment, ownership, or any other essential elements involving one or more national critical capabilities,” or “could result in an unacceptable risk to a national critical capability” (a “Covered Transaction”).

As a definitional matter:

  • Much like in the CFIUS regime, the term “United States business” means a “person engaged in interstate commerce in the United States.” The full scope of this is not clear and is a source of ambiguity and tension in CFIUS. This ambiguity would be more acute in legislation that, unlike CFIUS, does not have a 30-plus year history of practice, and that screens outbound capital flows. For example, as drafted, the legislation could arguably capture investments by U.S.-headquartered companies or financial sponsors that are made out of their foreign-based subsidiaries or funds.
  • “Country of concern” means 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, or any non-market economy that is later identified by the Committee.
  • “Entity of concern” means any entity “the ultimate parent entity of which is domiciled in a country of concern; or that is directly or indirectly controlled by, owned by, or subject to the influence of a foreign person that has a substantial nexus with a country of concern.” Thus, for example, the definition could capture companies from allied countries that have substantial minority shareholdings from, or operations in, China or Russia (or other foreign adversaries). (The term “substantial nexus” is not defined.)
  • While the legislation would defer the full definition of “national critical capabilities” to implementing regulations, it suggests that at a minimum the term would mean “systems and assets… so vital to the United States that the inability to develop such systems and assets or the incapacity or destruction of such systems or assets would have a debilitating impact on national security or crisis preparedness” and could include articles in the following general categories, along with any others identified through implementing regulations:
    • medical supplies, medicines, and personal protective equipment;
    • articles essential to the operation, manufacture, supply, service, or maintenance of critical infrastructure;
    • articles critical to infrastructure construction after a natural or manmade disaster;
    • components of systems critical to the operation of weapons systems, intelligence collection systems, or items critical to the conduct of military or intelligence operations; and
    • services critical to each of the foregoing.

Moreover, the legislation requires a study of the following additional industries to identify other critical capabilities:

  • Energy
  • Medical
  • Communications, including electronic and communications components
  • Defense
  • Transportation
  • Aerospace, including space launch
  • Robotics
  • Artificial intelligence
  • Semiconductors
  • Shipbuilding
  • Water, including water purification

Continue Reading National Security Update—The House of Representatives Proposes an Outbound Investment Review Regime as Part of the America COMPETES Act

On Wednesday 28 April, the UK Parliament adopted the National Security & Investment Law (“NS&I Law”).  The law received Royal Assent the following day and will come into legal effect in late 2021.

The NS&I Law will introduce mandatory notification and pre-clearance requirements for transactions in 17 ‘core’ sectors.  This long-awaited piece of legislation, has passed through Parliament substantially un-amended, except that the investment threshold for mandatory notification has been raised from the acquisition of a 15 per cent. to 25 per cent. interest in shares or voting rights in an acquisition target. The UK Government retains extensive discretion to “call-in” investments for review, both within and outside the 17 ‘core’ sectors, including (i) acquisitions of control of assets and (ii) equity investments below the 25% threshold where “material influence” is acquired, if it reasonably suspects that a transaction gives rise to national security risks.

In the period since the National Security and Investment Bill was published in November 2020, the UK has left the European Union and the UK government has moved to refresh its approach to inward investment more generally (with a particular focus on technology). Through the launch of the Advanced Research and Innovation Agency (“ARIA”); a renewed focus for the UK’s Infrastructure Bank; the establishment of a planned new ‘Office for Investment’ (led by Lord Grimstone); and the establishment of the Investment Security Unit (“ISU”, which will receive and manage notifications under the NSI Law), the landscape for investment in the UK is much-changed. Investment-related concerns feature across a range of UK Government policies and priorities, not least the UK’s Integrated Review of foreign and defence policy (published in March 2021) having highlighting a number of tense relationships with countries from which investment may attract greater scrutiny.

During this period, the UK government has continued to use its existing powers to investigate transactions on national security grounds under the public interest invention regime established under the Enterprise Act 2002. Of particular interest in this regard was the decision, on 19 April 2021, by the Secretary of State for the Department for Culture Media & Sport to issue a public interest intervention notice in respect of the proposed acquisition of the UK semi-conductor company ARM Limited by Nvidia Corporation.

Scrutiny of Foreign Investment

The adoption of the NS&I Law brings the UK in line with many other countries that have enhanced their powers to scrutinise foreign investment during the past two years and particularly over the last year, influenced by COVID-19 and other global trade and supply concerns. The UK’s Five-Eyes partners all have well-established regimes for the review of foreign investment – several of which have been recently updated.  The European Union began cooperating in the review of foreign direct investment (“FDI”) in October 2020 under the EU FDI Regulation and via individual Member State laws, newly adopted or recently expanded.

What is significant about the UK’s NS&I Law is that is introduces mandatory notification obligations for investments into the UK where none have existed before – contrasting with the UK’s merger control regime under which filing is voluntary and associated public interest intervention laws (each under the Enterprise Act 2002) under which the UK Government discretion to intervene in transactions where certain defined public interest considerations are raised.

Under the NS&I Law, transactions subject to mandatory filing obligations and completed without clearance will be deemed void, ushering in a suspensory review regime in the UK for qualifying transactions for the first time. This change in approach has led to concern from the UK’s business and investment and innovation communities, as well as politicians, that the NS&I law will act to deter investment in the UK. There is concern, in particular, that uncertainty for investors is presented by the absence of a definition “national security”, potentially allowing the UK Government considerable discretion in the application of the new NS&I regime.
Continue Reading UK National Security & Investment Law is Approved by Parliament