CFIUS has the power to review and mitigate national security concerns arising from certain foreign investments in U.S. businesses. CFIUS has reportedly informed Borqs that HHE’s solar energy storage system and EnergyShare technology for Multi-Dwelling Residential Units has been “deemed a critical technology and therefore a potential national security risk” that CFIUS could not mitigate short of a divestiture. Borqs’ divesture of HHE touches on a variety of areas that illustrate current CFIUS priorities. Some important takeaways are below.

• CFIUS is particularly aggressive in asserting its authority for transactions that implicate critical technologies. CFIUS has jurisdiction over transactions where a foreign person, like Borqs, acquires either control over, or certain less-than-controlling triggering rights in,¹ a critical technology U.S. business, like HHE. See 31 C.F.R. § 800.401(c). A critical technology U.S. business is one that “[p]roduces, designs, tests, manufactures, fabricates, or develops one or more critical technologies.” 31 C.F.R. § 800.248. Specifically, “critical technologies” includes items controlled for national security reasons under the Commerce Control List set forth in the Export Administration Regulations. 31 C.F.R. § 800.215(b). In most circumstances where CFIUS identifies national security concerns arising from a transaction, CFIUS will seek to impose mitigation measures that are adequate and appropriate to address the concerns. However, given CFIUS’s heightened sensitivity surrounding critical technology U.S. businesses, CFIUS may be more likely to conclude that no package of mitigation measures short of a divestiture would be sufficient to address the national security concerns arising from such transactions.

• After President Biden’s CFIUS executive order, advanced clean energy technology is a top area of focus for CFIUS. In September 2022, President Biden issued Executive Order 14083, the first-ever formal presidential directive to enumerate specific risk factors that CFIUS should consider when reviewing transactions within its jurisdiction. Under the Executive Order, one risk factor for CFIUS to consider is a transaction’s potential harm to U.S. technological leadership in key areas affecting U.S. national security, which includes advanced clean energy technology. HHE’s critical technology related to solar energy storage systems and EnergyShare technology is consistent with such advanced clean energy technology. The Executive Order states that transactions in these categories present special risks to national security and therefore CFIUS must assess: (1) whether a transaction may result in advancements or applications that could undermine U.S. national security; and (2) whether a foreign person in the transaction has ties to third parties that pose a threat to national security. With regard to Borqs and HHE, CFIUS was reportedly concerned that, through Borqs’ software development and hardware sourcing capabilities in China, the Chinese government could gain significant visibility and exert influence over HHE’s business operations and receive access to HHE critical technology. The concerns articulated by CFIUS to Borqs align with the risk factors outlined in the Biden Executive Order. Accordingly, the Biden CFIUS Executive Order may be one of the best resources for foreign investors and U.S. businesses to consider when assessing the risk of undergoing a CFIUS review.

• CFIUS reviews and subsequent mitigation decisions can be complicated, time-consuming, and conclude well after a transaction has closed. Borqs’ announcement of CFIUS’s letter and the intended divestiture of HHE in December 2022 occurred more than a year after Borqs’ acquisition of HHE closed in October 2021. Many nonpublic variables could have resulted in such a long timeframe between closing and the announced mitigation of divestiture. But, at the very least, it appears likely that CFIUS undertook a lengthy review of Borqs’ acquisition of HHE. Parties to a transaction within CFIUS’s jurisdiction should remain vigilant of potential complications and how they will impact the timing and effectiveness of a transaction—especially when investing in sensitive technologies identified by the U.S. government that will give rise to divestiture as a potential outcome that CFIUS will seek.

In this changing landscape of CFIUS regulations and guidance, anyone contemplating a transaction of any size should seek CFIUS counsel if the deal involves a non-U.S. investor and critical technology, critical infrastructure, sensitive personal data, or real estate involving airports, maritime ports, or near military or other sensitive government facilities.

* Cynthia Karnezis is a law clerk in our Washington office.

¹ These triggering rights in a critical technology U.S. business are: (1) access to the U.S. business’s material nonpublic technical information; (2) membership or observer rights, or the right to nominate an individual to a position on, the U.S. business’s board of directors or equivalent governing body; or (3) any involvement, other than through voting share, in the substantive decision making of the U.S. business regarding its critical technologies. 31 C.F.R. § 800.211(b).