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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

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

As we navigate a presidential transition over the coming months, what should we expect in terms of continuity and change when it comes to national security priorities and investments?

Regarding policy priorities, there will be several areas of continuity with the Trump administration, with some adjustments to how they are pursued. These include: prioritizing the

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