New Legislative Proposals for Outbound US Investment

Background

Global events in the last two years have been anything but ordinary. The world succumbed to the global COVID-19 pandemic, the trade war between the United States and China does not appear to be relaxing, and Russia invaded the Ukraine. These events, collectively, have shifted certain tendencies of the United States government both domestically and abroad. One such shift is the growing bipartisan sentiment in Congress against foreign adversaries in favor of protecting U.S. supply chains and capital investment.

Recent proposed legislation manifests this sentiment. In June 2021, the Senate passed the U.S. Innovation and Competition Act (“USICA”)^[i] and in February 2022, the House passed the America Creating Opportunities for Manufacturing, PreEminence in Technology and Economic Strength Act (“America COMPETES Act”).^[ii] Both bills were drafted to boost U.S. economic competitiveness while limiting U.S. exposure to global supply chain risks through enhancing scrutiny of U.S. investment abroad.

On June 13, 2022, Senators John Cornyn (R-TX) and Bob Casey (D-PA) proposed a reconciliation of each bill’s outbound investment review mechanisms to fashion one comprehensive proposal: the National Critical Capabilities Defense Act of 2022 (“NCCDA”).^[iii] The NCCDA follows closely to the Senators’ previous proposal, the National Critical Capabilities Defense Act of 2021, which was later incorporated into the America COMPETES Act.^[iv] Although the exact language of the NCCDA is not publicly available, we anticipate it to closely resemble the language of its first iteration featured in the America COMPETES Act.

The NCCDA seeks the creation of the Committee on National Critical Capabilities (“CNCC”) to regulate and review outbound U.S. investment and business activities. Similar to the authorities vested with the Committee on Foreign Investment in the United States (“CFIUS”), the CNCC will be vested with the power to review, and establish procedures for, certain U.S. investments and business activities abroad.

CNCC Specifics

Covered Transactions and National Critical Capabilities

Like CFIUS, it appears the CNCC will have the authority to review “Covered Transactions” which may have major implications on “National Critical Capabilities” (“NCCs”). Under the NCCDA, Covered Transactions subject to review by the CNCC will likely include any transaction by a U.S. business that either (1) shifts or relocates to a “Country of Concern,” or transfers to an “Entity of Concern,” any essential element affecting the supply chain of one or more NCCs, and (2) any transaction by a U.S. business that could result in an unacceptable risk to an NCC.^[v]

We anticipate that NCCs will be broadly defined and include every aspect of the critical infrastructure and supply chain for any of the covered technologies and industries. It is also likely to incorporate the Critical and Emerging Technologies List Update published in February 2022.^[vi] This list includes Financial Technologies, Semiconductors and Microelectronics, Communications and Networking Technologies, to name a few. Moreover, we anticipate the NCCDA will require annual reporting to Congress highlighting new industries or technologies the CNCC believes should be brought within its scope.^[vii]

Countries and Entities of Concern

The CNCC will only have the authority to review Covered Transactions, which must either be in a Country of Concern, or involve an Entity of Concern. Countries of Concern will likely be determined, at least in part, by the U.S. Department of State and will include those countries which are subject to strict sanctions by the United States. At a minimum, Countries of Concern will include China, the Democratic People’s Republic of Korea, Russia, and Iran.^[viii] We also anticipate Countries of Concern will include those on the State Department’s list of Countries of Particular Concern,^[ix] as well as those on the International Trade Administration’s list of Non-Market Economy Countries.^[x]

The NCCDA’s predecessor defined an Entity of Concern broadly as an entity that either (1) has a parent domiciled in a Country of Concern, or (2) is directly or indirectly controlled by, or subject to the influence of, a foreign person that has a substantial nexus with a Country of Concern.^[xi] We expect that the language of the proposed NCCDA will be similar.

The CNCC Review Process

The CNCC’s review process is most likely to resemble that of the CFIUS review process. There will likely be a mandatory notification provision requiring any U.S. business planning to engage in a Covered Transaction to submit a written notification to the CNCC within forty-five (45) days of closing the Covered Transaction.^[xii] The CNCC will then determine whether the transaction is likely to result in an unacceptable risk to an NCC within 60 days.^[xiii] In weighing the risk posed by a Covered Transaction, the CNCC will likely consider some, if not all, of the following factors:^[xiv]

1.  
   1.  
      1. the long-term strategic economic, national security, and crisis preparedness interests of the U.S.;
      2. the history of distortive or predatory trade practices in each country in which a foreign person that is party to the transaction is domiciled;
      3. the control and beneficial ownership of each foreign person that is party to the transaction; and
      4. the impact on the domestic industry and resulting resiliency, including domestic skills base, taking into consideration any pattern of foreign investment in the domestic industry.

If the CNCC finds the risk to be unacceptable, then, similar to CFIUS, the CNCC will make a recommendation to the president for appropriate action to mitigate the risk.^[xv]

Failure to File

As discussed above, the proposed NCCDA will require that all U.S. businesses engaging in a Covered Transaction submit a written notification to the CNCC. Failing to file a mandatory written notice with the CNCC may result in penalties, though the extent of those penalties is unclear. Using CFIUS as a guide, however, an entity failing to provide notification to the CNCC may be subject to a fine near $250,000 or the value of the transaction, whichever is greater.^[xvi] Under CFIUS, the executive branch may sue to void any Covered Transaction that has not been approved by the committee. The predecessor to the NCCDA conferred identical powers to the president,^[xvii] thus we expect the president will possess the same power under the NCCDA. Accordingly, a safe practice for any U.S. entity that may be subject to a mandatory filing with the CNCC is to seek legal advice on whether a filing is required.

Looking Ahead

It is in the best interests of clients and companies to begin considering how a review committee like the CNCC will impact their businesses when enacted in one form or another. Although business-minded groups and lawmakers have criticized and pushed back against an outbound investment review committee,^[xviii] shared sentiment among both houses of Congress makes it increasingly likely that a bill allowing for significant federal oversight will be enacted in the near term.^[xix] Whether such oversight comes in the form of legislation taking the form as proposed by Senators Cornyn and Casey, or though executive enactment is unknown. What is known, however, is that the trend for this degree of oversight and regulation exists and we believe it is only a matter of time before it is law.

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[i] United States Innovation and Competition Act of 2021, S. 1260, 117th Cong. (2021).
[ii] America COMPETES Act of 2022, H.R. 4521, 117th Cong. (2022).
[iii] Madeline Shi, US Could Target Tech Investors’ Favored Sectors in Move to Limit Capital Flow to China, PITCHBOOK (June 23, 2022), https://pitchbook.com/news/articles/united-states-tech-investment-china-companies-legislation
[iv] National Critical Capabilities Defense Act of 2021, H.R. 6329, 117th Cong. (2021).
[v]America COMPETES Act, Title X § 1001(5)
[vi] NAT’L SCI. & TECH. COUNCIL, CRITICAL AND EMERGING TECHNOLOGIES LIST UPDATE (Feb. 2022), https://www.whitehouse.gov/wp-content/uploads/2022/02/02-2022-Critical-and-Emerging-Technologies-List-Update.pdf
[vii] America COMPETES Act, Title X § 1001(5)(A)(ii)
[viii] America COMPETES Act, Title VI § 10651(3)
[ix] U.S. DEP’T OF STATE, COUNTRIES OF PARTICULAR CONCERN (Nov. 15, 2021), https://www.state.gov/countries-of-particular-concern-special-watch-list-countries-entities-of-particular-concern/#CountriesofParticularConcern
[x]INT’L TRADE ADMIN., COUNTRIES CURRENTLY DESIGNATED BY COMMERCE AS NON-MARKET ECONOMY COUNTRIES (2022), https://www.trade.gov/nme-countries-list
[xi] America COMPETES Act, Title X § 1001(8)
[xii] Foreign Investment Risk Review Modernization Act of 2018, H.R. 5841, 115th Cong. Title III § 302(a)(v)(II)(cc) (2018)
[xiii] America COMPETES Act, Title X § 1003(b)
[xiv] America COMPETES Act, Title X § 1005
[xv] America COMPETES Act, Title X § 1003(1)(B)(i)
[xvi] 31 CFR § 800.901(b)
[xvii] America COMPETES Act, Title X § 1004
[xviii] Coalition Letter on the National Critical Capabilities and Defense Act by U.S. Chamber of Com. et al., to the Members of U.S. Cong. (June 23, 2022) (on file with author)
[xix] Gavin Bade, Lawmakers Push New Compromise for Screening American Investments in China, POLITICO (June 13, 2022), https://www.politico.com/news/2022/06/13/lawmakers-push-new-compromise-for-screening-american-investments-in-china-00039282