Ready for the U.S. Outbound Investment Executive Order?

Why were the agency reports prepared, and what is their significance?

The U.S. omnibus spending bill for FY 2023 (the Consolidated Appropriations Act, 2023 (Public Law 117-328)) required that the agencies prepare the reports. Reflecting the strong congressional support for an Outbound CFIUS mechanism, the same law “encouraged [the agencies] to consider establishing a program to address national security threats emanating from outbound investments from the United States in certain sectors that are critical for U.S. national security.”

The agency reports were written at a high level and do not bind the Administration in terms of how the Outbound CFIUS mechanism may be structured. However, the agency reports provide the first signals of the approach the Administration might take. 

What technologies will the executive order likely focus on?

The agency reports state that the mechanism will “focus on investments that could result in the advancement of military and dual-use technologies by countries of concern” and that “[t]he investments that would be subject to the program are of a nature that they are not presently captured by export controls, sanctions, or other related authorities.” Exactly what this means in practice is unclear. 

At a minimum, the technologies of concern would not be limited to those currently controlled for export. In recent years, Commerce has faced criticism for not acting swiftly enough to identify and control emerging and foundational technologies that may raise national security concerns. The Outbound CFIUS mechanism may allow the Administration to be more nimble in addressing transfers of U.S. technology (through, e.g., licenses, sales of equipment or otherwise) that are not currently controlled.

In addition, certain technologies are currently controlled only if they are developed in or exported from the United States. An Outbound CFIUS mechanism could cover activity that would facilitate the development of these technologies even if they are not developed in or exported from the United States (e.g., capital contributions to facilitate indigenous Chinese development of sensitive technologies).

What kind of controls might be imposed?

The agency reports indicate that the overall objective of the program will be to “prevent[ ] U.S. capital and expertise from being exploited in ways that threaten U.S. national security while not placing an undue burden on U.S. investors and businesses” and “prevent U.S. private capital from financing adversary advances in critical sectors that undermine U.S. national security.” The agency reports provide scant details on how such objectives would be met, stating only that “[a]ction may include prohibiting certain investments and/or collecting information about other investments to inform potential future action.” 

In light of the report language, we expect that there will be a focus on transparency, that is, mandatory reporting requirements of investments in certain sectors. The U.S. government would leverage that information to improve and likely expand the Outbound CFIUS mechanism beyond the scope of its initial implementation.

If the Outbound CFIUS mechanism at the outset prohibits certain investments outright or provides the government the authority to block such investments, we expect that these controls will target the semiconductor sector. Other sectors may include, for example, artificial intelligence, biotechnology, quantum computing, or clean energy technology, although restrictions in these areas may come sometime after the initial implementation of the Outbound CFIUS mechanism. The restrictions might cover any type of investment, for example, capital injections and equity purchases, joint ventures, establishment of foreign subsidiaries, or transfers of technology.

How will the Outbound CFIUS mechanism operate?

As with CFIUS, Treasury will lead the effort but will work closely with Commerce and other agencies. The Outbound CFIUS mechanism will likely begin as a pilot program, and the agencies expect to allow public input. Companies and investors should take advantage of the opportunity to provide comments and input to help shape how the mechanism develops. 

Will other countries adopt similar mechanisms?

The U.S. government has successfully encouraged its allies to adopt CFIUS-like mechanisms. It appears that the U.S. government is already doing the same with respect to a possible Outbound CFIUS mechanism. Indeed, the agency reports state that “[w]ork is also ongoing to engage with international partners and allies on the topic.”

Sidley’s five key client takeaways

Even a scaled-back Outbound CFUS mechanism would be complex, unprecedented, and potentially highly disruptive. Companies should start thinking about how an Outbound CFIUS mechanism may affect their operations. Below we outline five takeaways that companies should already be considering.

1. Supply Chain Impact – If an Outbound CFIUS mechanism forces U.S. companies to redirect investment away from China and other “countries of concern,” it could add to the numerous measures currently enforced by the U.S. government (e.g., the Uyghur Forced Labor Prevention Act) that dramatically affect the development, growth, and maintenance of supply chains. The mechanism could further shift manufacturing and other operations to other countries. It could also be particularly disruptive if it were to limit support for existing operations in China and other “countries of concern” but would, at minimum, affect the development of future supply chains.
2. Divestment Risk – An Outbound CFIUS mechanism could allow the U.S. government to require divestment of investments, similar to how the CFIUS process operates for inbound investments. According to reports, the risk of the Outbound CFIUS mechanism’s being applied retroactively is low. However, if an Outbound CFIUS regime authorizes divestment orders with respect to future investments that close without prior clearance, then the consequences of not seeking clearance in the first instance could be particularly disruptive. 
3. Remedies – It will be important to monitor the extent to which the U.S. government works with investors to develop an understanding of the rules regarding Outbound CFIUS. For example, it remains unclear whether the U.S. government will allow companies time to understand the rules of the road or will take a much more aggressive approach. Companies will need to be careful to ensure compliance and avoid hefty fines, other penalties, or reputational harm. 
4. Compliance Cost and Conflicting Requirements – Companies may incur compliance costs, if, for example, a company enters into a mitigation agreement with the U.S. government. Compliance may be complicated by the fact that any mitigation agreement could pertain, directly or indirectly, to the operation of a foreign entity on foreign soil, and foreign governments may put in place conflicting regulatory regimes. For example, conducting on-site audits in a foreign jurisdiction could prove challenging if the local government seeks to limit or prohibit those activities.
5. Overlapping Regimes – Many fear that an Outbound CFIUS mechanism would create duplicative regimes (e.g., export control regulations already regulate the export of U.S. technology) and add to administrative burdens. As noted, the agency reports indicate that the investments subject to the Outbound CFIUS mechanism are “not presently captured by export controls, sanctions, or other related authorities.” However, the categories of technologies that the mechanism targets will surely overlap with technologies that are controlled for export (even if the investments themselves might not be covered by export control regimes).

While few details are currently available regarding the potential Outbound CFIUS mechanism, investors and potential investors should assess their potential vulnerability and consider whether and how such a mechanism could affect their existing investments and future investment strategy. The first few years of an Outbound CFIUS mechanism are likely to be a time of tremendous legal uncertainty, and companies will likely need experienced CFIUS counsel to help them work their way through this new process.