On September 15, 2022, President Biden signed a Executive Decree (EO) detailing certain national security risks that the Committee on Foreign Investment in the United States (CFIUS or the Committee) should consider when reviewing transactions.
Although the EO sets out risk factors beyond those in the law that underpin CFIUS operations, the Committee has already focused on many (and arguably all) of the EO factors. However, the EO can resolve disagreements between CFIUS officials — who represent different agencies and often have different views — on certain issues. These questions may include in particular the appropriateness of aggregating interests in several transactions involving the same sector (for example, a foreign investor taking stakes in several microelectronics companies) and whether the investors “have relevant links with third parties who could cause the transaction to pose … a threat”1 (for example, whether a European investor may be dependent on income from China or Russia). Generally, the OE endorses “hawkish” views on these and other issues, and such endorsements in the context of interagency disagreements are likely to result in a gradual tightening of the CFIUS process.
Although not indicated in the EO, we expect that in addition to the variables highlighted in the EO, the Committee will continue to focus on the concerns of investors with ties to China. or Russia.
A presidential decree formally sets out the main areas of interest of CFIUS
President Biden’s EO states that the Committee should consider five sets of factors in its national security reviews, specifically:
- the effect of a transaction on the resilience of critical U.S. supply chains, including those outside of the defense industrial base;
- the effect of a transaction on U.S. technology leadership, including in areas of microelectronics, artificial intelligence, biotechnology and biomanufacturing, quantum computing, advanced clean energy and technologies for climate adaptation;
- industry investment trends;
- cybersecurity risks; and
- risks to sensitive data of US persons.
The “fact sheet” accompanying the EO states that it does not alter the processes or legal jurisdiction of CFIUS, but that the factors described above should be read in conjunction with the already extensive powers of CFIUS. The OE also focuses on inbound investment, as opposed to recent legislative and executive branch deliberations on the possible creation of a “reverse CFIUS” to review and regulate outbound investment to countries like China and Russia.2
The direction of CFIUS is unlikely to change significantly in the near term
Although the EO provides greater formal and public specificity of the Committee, the work of the Committee is unlikely to change significantly. Operating within the broad discretion Congress has granted CFIUS, the Committee has already focused on the key areas highlighted in the OE. As a senior CFIUS administration official put it, “[already] has considered these types of risks when reviewing cases and has taken steps to address these types of risks and will certainly continue to do so.”3 Comments like this have left some Committee observers wondering why President Biden released the EO.
One explanation is that EO is intended, at least in part, to resolve occasional disagreements between CFIUS officials. The various agencies that make up CFIUS and the heads of those agencies often weigh competing considerations differently. For example, an official of the International Trade Administration of the United States Department of Commerce, which has a mandate to promote trade and investment, may place more value on the approval of an investment in a microelectronics company than an official of the National Security Agency of the Ministry of Defense. The Commerce official might argue that a small investment in a small US microelectronics company should not harm national security. The defense official might respond that the fact that the same investor already has investments in a dozen other US microelectronics companies is cause for concern about the ongoing investment.
The EO apparently solves this problem, and one more – whether it is appropriate to consider an investor’s ties to “third parties” (usually the Committee’s concern is China and Russia, as further explained below) – in favor of those with more hawkish views. As a result, while the risk factors set out by the EO have been consistently considered by the CFIUS, the EO appears likely to result in a gradual tightening of the CFIUS process.
CFIUS undeclared geographic focus: China and Russia
The EO and its refined review criteria do not explicitly call on the Committee to report on specific countries in its review, but we expect the Committee to continue to focus on China-related transactions. or Russia. While senior administration officials, in conjunction with the deployment, noted that “there is nothing China-specific about this order or CFIUS,” they noted that the Committee, as it is d use, examines “the contributions which [the] the national security risk generally arises from the review of the foreign acquirer and the assessment of the intent, capabilities and other elements of the foreign acquirer, as well as the U.S. business in which one is invests to assess any potential vulnerability.
Although the Biden administration does not explicitly state that the CFIUS will focus on China or Russia, as noted recently, the Committee’s actions over the past few years suggest that China and Russia are prime targets. CFIUS has been notoriously aggressive and commercially insensitive to any dealings with a China or Russia connection.
For potential foreign investors or acquirers, certain transactions that do not appear immediately linked to China or Russia may be considered as such by the Committee. For example, a UK fund whose general partner includes a Chinese or Russian citizen could be assessed by the Committee as having a higher national security risk profile. Similarly, a Singaporean fund that has a number of small, unaffiliated Chinese sponsors collectively representing a significant portion of the fund could potentially be considered by the Committee to be a Chinese-controlled fund. And, in addition to the potential influence exerted by investors on otherwise innocuous foreign parties, the Committee seems ready to expand its efforts to examine the commercial links that foreign parties may have in countries of concern, even if these commercial the links are not linked to the investment. For example, a German semiconductor maker that uses a Chinese contract factory as a key sourcing partner could come under scrutiny from CFIUS in the future.
As one of the most recent public examples of this China/Russia focus, in early September (and before the EO was released), Snapdragon Chemistry said its previously announced acquisition by Chinese company Asychem, a development and Contract Manufacturing Company (CDMO ), would not proceed because the parties to the transaction had failed to agree with the Committee on terms that would address the Committee’s concerns.4 Asychem had previously been an investor in Snapdragon,5 a US-based company that focuses on continuous manufacturing and early-stage chemical process development services. Its proposed acquisition of the US company was a step too far for CFIUS, reflecting the Committee’s tendency to impose greater scrutiny on transactions where a Chinese buyer could potentially acquire control of a US company with a connection to the bioproduction, drug development, and potentially access to US people’s data – all areas of EO’s focus.
Importantly, President Biden’s EO underscores the US government’s particular focus on national security risks arising from foreign investment and CFIUS’ growing mandate to address those risks. For more information on CFIUS, please contact Stephane Heifetz, Joshua Gruenspecht, or another member of Wilson Sonsini’s national security practice.
 https://www.whitehouse.gov/briefing-room/statements-releases/2022/09/15/fact-sheet-president-biden-signs-executive-order-to-ensure-robust-reviews-of-evolving- national-security-risks-by-the-committee-on-foreign-investments-in-the-united-states/.
 https://www.whitehouse.gov/briefing-room/press-briefings/2022/09/15/background-press-call-on-president-bidens-executive-order-on-screening-inbound-foreign-investments/ .