New Presidential Executive Order on National Security Factors for CFIUS

The President has issued the first executive order providing formal direction to the Committee on Foreign Investment in the United States (“CFIUS”) on the risks that it should consider in its examination of foreign investment transactions.  While Executive Order 14,083 of September 15, 2022 (the “Executive Order”) is not likely to change substantially CFIUS’s approach to assessing transactions’ national security risks, it reinforces the priority that the Biden administration attaches to U.S. technological leadership, supply chains and certain other factors as important considerations for CFIUS transaction screening. 

Key Takeaways

1. The Executive Order does not change CFIUS’s processes or CFIUS’s jurisdiction and does not appear likely to have a significant impact on the outcome of most CFIUS reviews and investigations.
   
   
2. The Executive Order directs CFIUS to consider five national security factors.
   
   
   • Two of the factors are identified in governing legislation (section 721 of the Defense Production Act, as amended):
     
     • Critical U.S. supply chain resilience, both within and outside the defense sector.
     • U.S. technological leadership in areas impacting national security.
   • The Executive Order adds three factors not identified in governing legislation:
     
     • Aggregate industry/sector investment trends that may affect the U.S. national security impact of a given transaction.
     • Cybersecurity risks.
     • Risks to U.S. persons’ sensitive data.

   These factors are not new areas of focus for CFIUS.  Rather, the Executive Order appears to be intended to formalize and make transparent certain CFIUS areas of attention.  The order also seems to be intended to help businesses and investors better identify what CFIUS will view as being important national security risks and to assist them in deciding whether to submit transactions to CFIUS.
   
   

3. The Executive Order instructs CFIUS to prioritize specified industries as it conducts transaction screening. CFIUS has long focused on these industries.
   
   
   • For both critical U.S. supply chains resilience and U.S. technological leadership, the Executive Order enumerates the following industries:
     
     • Microelectronics;
     • Artificial intelligence;
     • Biotechnology and biomanufacturing;
     • Quantum computing;
     • Advanced clean energy; and
     • Climate adaptation technologies.
   • The Executive Order also directs CFIUS to focus on the following additional sectors when considering U.S. supply chain resilience:
     
     • Critical materials (such as lithium and rare earth elements);
     • Elements of the agriculture industrial base with implications for food security; and
     • Other sectors identified in Executive Order 14,017 of February 24, 2021 (America’s Supply Chains), which include, among others, high-capacity batteries, pharmaceuticals, public health, the information and communications technology industrial base, the energy sector industrial base and the transportation sector industrial base.

   The focus on U.S. technological leadership in the above industries is consistent with other recent U.S. government actions.  For example, the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act, which Orrick analyzed in a recent alert, will provide billions of dollars with the goal of advancing U.S. technological leadership in semiconductors and will effectively prohibit certain funding recipients from engaging in various expansion efforts in China.
   
   

4. While preserving the transaction-by-transaction basis of CFIUS’s review, the Executive Order directs CFIUS to consider systemic threats and vulnerabilities resulting from foreign persons’ multiple acquisitions or investment patterns in a single or related sectors or businesses. Accordingly, transaction parties should understand that CFIUS’s examination of the national security implications of a specific transaction is to take into account broader industry trends.
   
   
5. The Executive Order directs CFIUS to assess whether foreign investments in U.S. businesses that have access to or store U.S. sensitive personal data (“SPD”), including health and biological data, involve a foreign person that might take actions that threaten to impair U.S. national security. The Executive Order takes a broad view of SPD beyond the definition in CFIUS regulations, emphasizing the emerging risk that large sets of unidentifiable data – which would not fall within the definition of SPD – can now be easily re-identified and de-anonymized as a result of advances in technology.
   
   
6. While the Biden administration has emphasized that the Executive Order is not country specific, the order targets “foreign adversaries” and other “countries of special concern.” This appears intended to address perceived national security risks posed by China and Russia, particularly with respect to critical technologies.
   
   
7. The Executive Order formalizes CFIUS’s practice of probing for threats related to the foreign investor’s commercial, investment, non-economic, or other ties with other foreign persons, including foreign governments (“third party ties”). This is consistent with CFIUS’s practice of frequently asking detailed questions about a foreign investor’s ties to Chinese or Russian parties during its examination of a transaction.
   
   
8. The administration may take other actions in the coming months that are intended to address perceived China-related national security risks. The U.S. government reportedly continues to consider outbound investment review and enhanced export controls focused on semiconductors.