Congress Contemplates Committee to Review Outbound Investment

By: Derrick Kyle, Senior Associate
Date: 04/23/2022

On February 4, 2022, the House of Representatives passed the National Critical Capabilities Defense Act of 2021 (“NCCDA”) as part of the much larger America Creating Opportunities for Manufacturing, Pre-Eminence in Technology, and Economic Strength Act of 2022 (“COMPETES Act”). The COMPETES Act has many aims related to shoring up domestic manufacturing, protecting technology capabilities, and generally, as the name suggests, improving the country’s competitiveness with the rest of the world, primarily China.

There is plenty to unpack in the huge COMPETES Act, which is the House’s counterpart to the Senate’s U.S. Innovation and Competition Act (“USICA”) passed in June 2021. But it is the NCCDA that is grabbing headlines because of its proposal to create a committee to review outbound investments by U.S. persons.

Practitioners, companies, and investors involved in mergers, acquisitions, and other forms of inbound foreign investment have become familiar with these types of analyses, including occasional filings before the Committee on Foreign Investment in the United States (“CFIUS”), which reviews and takes action to address national security concerns arising from certain investments and real estate transactions involving foreign persons. This is especially true since the jurisdiction of CFIUS to review transactions has increased over the past few years due to the passage of 2018 Foreign Investment Risk Review Modernization Act “(FIRRMA”). In addition, many other countries actively review inbound foreign direct investment in the name of national security.

Mechanics of the Proposed Outbound Investment Review

The NCCDA seeks to establish a Committee on National Critical Capabilities (“CNCC”) to be chaired by the U.S. Trade Representative and composed multiple other executive agencies, including, among others, the Departments of Commerce, Treasury, State, Defense, Justice, and Energy. Variously described as “reverse CFIUS” or “outbound CFIUS,” commentators have pointed out that the broad review of outbound investment transactions would be the first of its kind in a major modern Western economy. The CFIUS comparisons are warranted because the initial drafts of FIRRMA included an outbound investment screening mechanism.

If the legislation is enacted in present form, the CNCC will have jurisdiction to review “covered transactions,” defined as a transaction by a U.S. 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.” Like the CFIUS reviews, the “covered transactions” listed above also include transactions designed or intended to circumvent or evade review by CNCC. Subsequent regulations would further define the scope of “covered transactions.”

A “country of concern” is defined in reference to other legislation. Specifically, a “country of concern” has the meaning of a “foreign adversary” in Section 8(c)(2) of the Secure and Trusted Communications Act of 2019 and may include a nonmarket country as defined in the Tariff Act of 1930. An “entity of concern” is an entity (1) with an ultimate parent domiciled in a country of concern, or (2) controlled, owned, or subject to the influence of a foreign person with a substantial nexus with a country of concern. The larger purpose of the COMPETES Act, the definition of “country of concern,” and the current geopolitical climate make clear that the primary target of the outbound investment review regime is China.

The NCCDA has identified specific categories of “national critical capabilities” subject to review by the proposed CNCC but the finalized list of capabilities would be determined in subsequently promulgated regulations. At present, the identified categories include:

  • The production, in sufficient quantities, of

    • 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;

  • Supply chains for and services critical to the production of each of the foregoing; and

  • Essential supply chains for the Department of Defense.

The NCCDA also identifies industries of particular focus for potential national critical capabilities, including energy, medical, communications, defense, transportation, aerospace, robotics, artificial intelligence, semiconductors, shipbuilding, and water, including water purification. There is obvious overlap between the identified industries and the critical infrastructure and critical technologies over which CFIUS exercises jurisdiction.

Parties to a covered outbound investment transaction would be required to submit a notification to CNCC. Unlike the CFIUS process, where notifications are largely voluntary, the contemplated notification process to the CNCC would be mandatory. Upon receipt of a notification, the CNCC would have 60 days to determine if the proposed transaction would create an unacceptable risk to the critical capability involved in the transaction. If such a risk were deemed to exist, the CNCC would refer the transaction to the President, who could suspend or prohibit the transaction or impose measures to mitigate the risk to the critical capability.

Importantly, the CNCC would also have unilateral power to review transactions where the parties to a covered transaction fail to submit a notification. As seen with recent CFIUS action related to non-notified transactions, the ability to unilaterally review an investment transaction can have devastating consequences for parties to a deal, including the divestment of an acquired company. (See our previous article on CFIUS handling of non-notified transactions, CFIUS Heightens Scrutiny of Non-Notified Transactions.)

Government Contractor Supply Chain Disclosure

Section 1010 of the NCCDA includes a requirement to revise the Federal Acquisition Regulations, which are applicable to government contractors’ procurement activities, to require prospective contractors for an executive agency to “disclose the supply chains the person would use to carry out the contract and the extent to which the person would depend on articles and services imported from foreign countries, including the percentage of such materials and services imported from countries of concern.” The failure to make such a disclosure would be a material determinant in rejecting a prospective contract.

Next Steps

Prior to enactment, the differences between the COMPETES Act and the Senate’s USICA will need to be reconciled, and it is not certain that the NCCDA will survive this process. As an important note, the primary proponents of the NCCDA, Senators Casey (D-PA) and Cornyn (R-TX), failed in their attempts to include the NCCDA in the USICA in 2021. Despite support from the Biden administration, the proposed outbound investment review framework faces significant backlash from the investment and larger business community. However, with Washington’s bipartisan frustration with China’s continuing economic ascension, often aided by U.S. capital investment in critical industries, there is the potential for the NCCDA or a similar outbound investment review mechanism to be enacted in the near future.

The attorneys at Torres Trade Law will continue to monitor the progression of the NCCDA and any future proposals for U.S. Government review of outbound investment. For now, it’s business as usual for outbound investments, while inbound foreign investment remains subject to CFIUS review. If you have any questions about the topics covered in this article or the CFIUS review process, please do not hesitate to contact us.