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New outgoing investment assessment process becomes more likely

New outgoing investment assessment process becomes more likely

So you want to build a new manufacturing plant in China, or just add some options to your existing plant? Well, the US government may want to take a look at that transaction – and may soon have the authority to stop that transaction.

On June 13, a two-part group of U.S. lawmakers issued a new draft National Critical Capabilities Defense Act of 2022 (Revised NCCDA) proposing to establish outbound investment reviews.

The concept of outgoing investment assessments—screening of US investments abroad! – may sound new, but it is not completely new. The proposal has been introduced several times before in Congress, but has not yet come close to a decision or implementation. However, this legislation seems to have the support of two parties and is considering an enormous scope, so it is worth examining what may come into force over the next year or two.

Who conducts the review

Under the proposed law it is National Critical Capabilities Committee (CNCC) will review outbound investment transactions and act as the reverse version of the United States Foreign Investment Committee (CFIUS). The CNCC will be composed of at least the heads of twelve US government agencies, and the president of the committee will serve as chair, a very similar organization to the CFIUS.

The goal of the review

The purpose of the committee will be to oversee US capital flows to countries and entities considered to be foreign opponents of US national security interests (eg China and Russia), and to implement a screening mechanism for these investments.

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Requirements and scope of the review

The proposed legislation will require a mandatory notification 45 days before a covered transaction is carried out when it involves “countries of concern” or “units of concern”. It targets entities domiciled in a problem country (China, Russia, Iran, North Korea, Cuba and Venezuela) as well as entities “affiliated” or “influenced by” the same countries. The extent of “influenced by” has not yet been determined, but it is conceivable to give the committee a fairly wide margin of maneuver for its assessment.

The scope of the measure is further expanded by the fact that it will not only apply to investment transactions, but it may also cover any activity of a US or non-US entity or its affiliates such as:

  • builds, develops, manufactures, manufactures, manufactures, refurbishes, expands, shifts, operates, manages, operates, exploits, sells or relocates a national critical capacity to or in a country of concern;

  • share, disclose, contribute, transmit or license to an affected entity any design, technology, intellectual property or know-how, including through open source technology platforms or research and development, that supports, contributes to or enables a national critical capability of a concern entity or country of concern; ; or

  • provides capital to, consults for, or provides some guidance, facilitates access to financial resources for a national critical capacity for a concern unit or a country of concern.

Such large development projects, R&D cooperation or even foreign production can all be subject to screening and restrictions by the committee.

The following industries are considered national critical capabilities: energy; medical; communications, including electronic and communications components; defense; transportation; space travel; robotics; artificial intelligence; semiconductors; shipbuilding; water. The draft does not distinguish between types of artificial intelligence.

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Exceptions from the review

The revised NCCDA lists three types of exceptions: transactions under the committee de minimis rule, which is not yet fully defined; transactions that took place before the date of entry into force of the legislation; and regular business transactions. The latter includes the sale, transfer, licensing or delivery of certain finished goods, goods and services if the US entity generally makes such services available to all its customers; and / or if the transaction does not normally result in a foreign person gaining access to critical technology.

The committee’s powers of attorney

In the event that the transaction is considered a risk to national security, the committee may require the investing company to enter into a mitigating agreement that addresses the national security issues, suspends the investment or prohibits the investment completely. The chairman of the committee can also make recommendations to deal with the identified risks. Some transactions may be blocked by the committee while it is reviewing transactions. If the entity has not submitted a written notice, the committee has the authority to unilaterally review the transaction. A civil fine of up to $ 250,000 may be imposed in the event of failure to comply with the mandatory notification requirement and in the event of a breach of mitigating agreements.

What comes next

Many aspects of the legislation are still unclear (definition of the terms, scope of measures) and significant revisions are likely. On June 23, a coalition letter was published on the Revised NCCDA, which strongly criticized the latest draft. The authors of the letter consider the proposal too broad in scope and say that it will lead to “unworkable compliance concerns” as well as a heavy compliance burden for both US entities and the US government.

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* Claire Le Tollec is a legal consultant at the firm’s Brussels office.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XII, Number 189

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