Raising the Bar? Biden Administration Adds New Evaluation Criteria to CFIUS Reviews

On September 15, 2022, President Biden signed an Executive Order (EO) directing the Committee on Foreign Investment in the United States (CFIUS or the Committee) to specifically consider certain factors when reviewing the national security implications of in-bound foreign investments in U.S. companies (covered transactions).

Although CFIUS’s jurisdiction remains unchanged, the EO effectively draws focus to five factors that the Committee shall consider when reviewing covered transactions. Notably, the EO also represents the first time that a president — in the nearly 50-year history of CFIUS — has issued a formal directive modifying the Committee’s review processes.

Executive Order

Per the EO (and further explained in an accompanying Fact Sheet), the White House is instructing the Committee to consider the following additional factors when assessing the national security risks posed by a covered transaction:

1. Industry Investment Trends: The EO provides that the Committee shall consider, as appropriate, the risks arising from a covered transaction in the context of multiple acquisitions or investments in a single sector or in related sectors. Per the White House, this criterion is necessary because “[c]ertain investments by a foreign person in a sector or technology may appear to pose a limited threat when viewed in isolation, but when viewed in the context of previous transactions, it may become apparent that such investments can facilitate sensitive technology transfer in key industries or otherwise harm national security.”

To assist the Committee’s review of this factor, the Committee may request for the U.S. International Trade Administration to provide the Committee with an analysis of the industry or industries in which the U.S. business operates and the cumulative control of, or pattern of recent transactions by, a foreign person in that sector or industry.

2. Risk to Cybersecurity: The EO also states that the Committee must consider whether a covered transaction provides or may provide a foreign person, or their relevant third-party ties, with direct or indirect access to conduct cyber intrusions or other malicious cyber-enabled activity, in addition to “the cybersecurity posture, practices, capabilities, and access” of all parties to the transaction that could allow a foreign person, or their relevant third-party ties, to manifest such activities.
3. Risks to U.S. Persons’ Sensitive Data: The EO further requires the Committee to consider whether a covered transaction involves a U.S. business with access to a U.S. person’s “sensitive data” and whether the foreign investor has, or the parties to whom the foreign investor has ties, have sought or have the ability “to exploit such information to the detriment of national security, including through the use of commercial or other means.”

In addition to the three new factors described above, the EO also provides expanded direction with respect to two existing statutory factors:

4. Resilience of Critical U.S. Supply Chains: To mitigate the risks of “future supply disruptions of critical goods and services[,]” the EO provides that the Committee must consider, as appropriate, a covered transaction’s effect on supply chain resilience and security, both within and outside of the defense industrial base. These considerations include “the degree of diversification through alternative suppliers across the supply chain, including suppliers located in allied or partner countries;” supply chain relationships with the U.S. government; and “the concentration of ownership or control by the foreign person in a given supply chain.”
5. U.S. Technological Leadership: Finally, the EO directs the Committee to consider whether a covered transaction “could reasonably result in future advancements and applications in technology that could undermine national security[,]” and whether a foreign person involved in the transaction has ties to third parties that may pose a threat to U.S. national security. The EO specifically identifies sectors that are deemed “fundamental” to U.S. technological leadership, including, but not limited to, “microelectronics, artificial intelligence, biotechnology and biomanufacturing, quantum computing, advanced clean energy, and climate adaptation technologies.” The EO includes instructions for the Committee to consider whether a covered transaction involves “manufacturing capabilities, services, critical mineral resources, or technologies” in these “fundamental” sectors.

As to each of the new and/or expanded national security factors listed above, the EO directs the Committee to consider, in addition to the risk profile of the foreign person involved in the transaction, whether the foreign person has “commercial, investment, non-economic, or other ties (relevant third-party ties)” with other foreign persons, including foreign governments, that may pose a threat to U.S. national security via the transaction at issue.

Looking Ahead

Per its 2021 annual report, CFIUS reviewed a record number of transactions in 2021 — the first full year in which the committee operated under regulations implementing the 2018 Foreign Risk Review Modernization Act (FIRRMA).

Although, historically, CFIUS has considered most, if not all, of the factors described in the newly issued EO, the EO nevertheless reflects the Biden administration’s burgeoning efforts to police inbound foreign investment — efforts that appear to include an increase in national security reviews initiated by the Committee (as opposed to self- or third-party reporting).

For More Information

For more information on how the EO could affect your company or any transactions in which you are currently engaged or contemplating, please do not hesitate to contact the authors below or any other member of the Faegre Drinker Customs and International Trade Team.