Key Takeaways
- The Biden Administration appears to be moving forward with plans to establish a mechanism through Executive Order to review outbound investments from the United States to protect U.S. national security.
- Recent reporting suggests that the Executive Order may be released before the start of the upcoming Group of Seven (“G7”) summit that begins on May 19th, which would provide President Biden an opportunity to build consensus around (and gain support for) the U.S. proposal as well as encourage the establishment of similar outbound investment review mechanisms in the G7’s respective home countries.
- Furthermore, the Biden Administration’s Executive Order has been positioned as only the first step towards the establishment of a more comprehensive outbound investment review regime. Members of Congress, among others, may consider the mechanism to be established by Executive Order to be necessary but not sufficient.
- Below, we provide an overview of what we know so far (and what questions remain) about the Biden Administration’s proposed outbound investment review mechanism and how it might impact costs, timing, and decision-making regarding certain U.S. entities’ outbound investments.
Background
Currently, the U.S. government reviews inbound foreign investments in and acquisitions of U.S. businesses to determine the impact on U.S. national security via the Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”). CFIUS has the authority to impose mitigation measures, suspend transactions, and, where appropriate, recommend that the President block or unwind transactions.
The concept of a U.S. outbound investment review mechanism is not new and has been considered previously by Congress. For example, early drafts of what eventually became the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), which updated and expanded the statutory authorization for CFIUS, also contained a U.S. outbound investment review mechanism, but the proposal did not make it into the enacted legislation.
Discussion of a U.S. outbound investment review mechanism was renewed in 2021. At the time, the U.S. supply chain crisis motivated Congress, as did the desire to prevent U.S. supply chain components from benefitting certain countries of concern, such as China and Russia. At present, motivating concerns also include the desire to prevent capital flows into sectors of the Chinese economy that support the Chinese government’s “military-civil fusion” regime, which seeks to develop the most technologically advanced military by removing barriers between civilian and defense sectors (see our previous OnPoint discussing more about this regime here).
Other countries – including China, Taiwan, and South Korea – already employ some form of an outbound investment review mechanism. However, if adopted in the United States, the U.S. outbound investment review mechanism would be the first of its kind in a major Western economy, and its adoption could have potential ripple effects. For example, there have been recent statements of support for the development of an equivalent European Union (“EU”) regime by senior EU officials, and the European Commission announced last fall that the EU’s export control regime will be re-examined to determine if an outbound investment review mechanism should be enacted.
Biden Administration’s Proposal
In its 2022 National Security Strategy (released in October 2022), the Biden Administration made clear its preference for a U.S. outbound investment review mechanism but did not offer specifics about potential parameters. Below we outline the limited reported information known to us with respect to the Biden Administration’s proposal under consideration.
Preparing for What’s Next
As discussed above, the Biden Administration’s U.S. outbound investment review mechanism proposal is expected to center on investments that “could result in advancement of military and dual-use technologies by countries of concern” that are not currently captured through existing measures (e.g., export controls and sanctions). However, this does not mean that a broader U.S. outbound investment review mechanism (that covers a wider range of industry sectors) is not possible. Indeed, the Biden Administration’s proposal is widely viewed as the first step in a likely series of actions designed to help strengthen U.S. national security. Something more closely resembling a “reverse CFIUS” mechanism is still possible (though not likely in the near term).
As shared in public reporting, the Biden Administration has been focused on consulting and engaging with U.S. allies, most notably the G7, to determine the scope of a potential common outbound investment review mechanism. Cross-border coordination and support will remain a priority for this administration.
Companies and investment funds should begin preparing for “Day 1” of the coming U.S. outbound investment review mechanism, such as by engaging in the following initial actions:
- Review current risk exposure (e.g., portfolio investments, joint ventures) in advanced technology sectors and countries of concern as well as any potential investments in the same;
- Identify potential areas for diversification; and
- Develop new investment strategies for certain industrial sectors or potential countries of concern.
Conclusion
Although a U.S. outbound investment review mechanism has not yet been established, it appears the first step will come from the Biden Administration, not Congress, and the establishment of such mechanism will take the form of an Executive Order outlining the contours of the Biden Administration’s proposal. It now seems to be a matter of when, not if, a U.S. outbound investment review mechanism will become law.
Dechert will continue to monitor this space and report on significant developments.
