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Senators Introduce Compromise Proposal Regarding Review of Outbound Investment | Insights


On February 4, 2022, the House passed the America Creating Opportunities for Manufacturing, Pre-Eminence in Technology, and Economic Strength Act (“America COMPETES Act”) as a counterproposal to the Senate’s U.S. Innovation and Competition Act (“USICA”), which passed on June 8, 2021. The House and Senate bills are now in conference to reconcile the draft language of both bills. See Sidley’s prior alert on the USICA available here.

The House bill included provisions establishing an outbound investment national security review mechanism, but the Senate bill did not. However, on June 13, 2022, Senators John Cornyn, R-Texas, and Bob Casey, D-Pa., offered a compromise proposal for the House and Senate conferees that would create an inter-agency committee (the Committee on National Critical Capabilities, or “CNCC”), similar to the Committee on Foreign Investment in the United States (“CFIUS”), which would have the authority to review, mitigate, or prohibit as necessary, certain activities in a “country of concern” or involving an “entity of concern” that implicate certain “national critical capabilities.” However, CNCC jurisdiction would not be limited to investments into countries of concern.

This proposal makes it more likely that new export review procedures could become law, whether in a final USICA/COMPETES Act package or through future legislation. If the legislation does not pass, it is conceivable that the Biden Administration would consider an executive order (“EO”) that would include some aspects of the proposal.

This update provides an overview of the Cornyn-Casey proposal, including the contemplated scope of the CNCC’s jurisdiction and authority, and compares the Senate and House versions of the proposed mechanism. A copy of the House bill is available here.

CNCC Review

The Cornyn-Casey draft calls for the creation of the CNCC to assess whether “covered activities” are likely to result in an “unacceptable risk” to one or more “national critical capabilities.”

Parties engaged in such covered activities would be subject to mandatory notification requirements. Similar to the CFIUS process, if the risk cannot be mitigated, the CNCC could recommend that the President of the United States take appropriate action, including by mitigating, suspending, or prohibiting the covered activity. If not notified, the CNCC would also have the authority to initiate a unilateral review of covered activities. The CNCC would then have 45 calendar days to review the activity and negotiate mitigation, as necessary.

The Scope of “National Critical Capability” Is Extremely Broad

The bill defines “national critical capability” as

(i) certain sensitive supply chains (e.g., manufacturing and advanced packaging, large-capacity batteries, critical minerals and materials, and pharmaceuticals and active pharmaceutical ingredients),

(ii) critical and emerging technologies (e.g., artificial intelligence, bioeconomy, and quantum information science and technology), including those sectors specified in the Critical and Emerging Technologies List Update of the National Science and Technology Council, dated February 2022,

(iii) manufacturing and other capabilities necessary to produce critical goods and materials and other essential goods and materials, including sectors underlying those sensitive supply chains identified in (i), and

(iv) other industries, technologies, and supply chains which may be identified by the CNCC.

“National critical capability” does not appear to be confined to activities or operations conducted in the United States or by U.S. persons.

The list of national critical capabilities is extremely broad. The Critical and Emerging Technologies List Update of the National Science and Technology Council (available here) lists over 19 fields and 100 subfields of critical and emerging technologies, including such broad categories as “advanced computing” (covering subfields like “computing architectures” and “data storage”), “advanced engineering materials” (covering subfields like “materials with new properties” and “materials with substantial improvements to existing properties”), “advanced and networked sensing and signature management” (covering subfields like “payloads, sensors, and instruments,” “transportation-sector sensing,” “security-sector sensing,” “health-sector sensing,” “energy-sector sensing,” “building-sector sensing,” and “environmental-sector sensing”), and “financial technologies” (covering subfields like “distributed ledge technologies,” “digital assets,” “digital payment technologies,” and “digital identity infrastructure”).

The Scope of Covered Activity Is Extremely Broad

“Covered activities” would include:

1) Any activities by U.S. or foreign persons and their respective affiliates that:

a) builds, develops, produces, manufactures, fabricates, refurbishes, expands, shifts, services, manages, operates, utilizes, sells, or relocates a national critical capability to or in a country of concern;

b) shares, discloses, contributes, transfers, or licenses to an entity of concern 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 by an entity of concern or in a country of concern; or

c) invests in, provides capital to, or consults for, or gives any guidance, related to enhancing the capabilities or facilitating access to financial resources for a national critical capability for an entity of concern or a country of concern.

2) Any activity by a recipient or beneficiary of financial assistance, including grants, tax incentives, or other types of funding, under [the not-yet-passed Bipartisan Innovation Act or similar act] with respect to an entity of concern or in a country of concern.

3) Any activity by an entity that benefits from annual procurement that exceeds a level to be specified of goods or services by a U.S. national security agency with respect to an entity of concern or in a country of concern.

These activities could cover routine IP licensing or establishing foreign joint ventures, if there is a nexus with a country of concern or entity of concern. It would even cover, for example, the establishment of wholly U.S.-owned manufacturing subsidiaries in countries of concern. It would also cover certain loans or other financing arrangements, and even certain consulting services.

Categories (2) and (3) would seem to cover any activities with an entity of concern or country of concern – even if such activities are not connected to a national critical capability – by a person who receives the specified types of government assistance or participates in specified types of government procurement.

“Country of Concern” Is Limited But “Entity of Concern” Is Broad

At this time, “countries of concern” are defined as “foreign adversaries,” which currently include China, Russia, Iran, North Korea, Cuba, and Venezuela.

An “entity of concern” is defined as an entity “influenced by” or “affiliated with” a “country of concern,” though the draft legislation does not make clear what it would mean to be “influenced by” a country of concern.

Exclusions Are Narrow

The Cornyn-Casey proposal would exclude from covered activities those activities considered “ordinary business transactions.” The proposal would treat the sale or purchase of goods and other items, for example, to be an ordinary business transaction, but the list in the legislation appears to cover only a very narrow set of services. That said, the draft legislation would allow the CNCC to expand the list of ordinary business transactions through regulations.

Factors the CNCC Will Consider

Factors to be considered by the CNCC in its review of the risk arising from a given transaction include:

(1) the economic, national security, intelligence, military, health, and agricultural interests of the United States;

(2) the history of distortive or predatory trade practices in each country in which a covered activity occurs;

(3) control and beneficial ownership of each foreign person that is a party to the transaction;

(4) impact on the domestic industry, taking into consideration any pattern of foreign investment in the domestic industry; and

(5) if the activity could, directly or indirectly, support, enhance, or enable the capabilities of a country of concern or entity of concern.

Differences Between the House and Senate Versions of the Outbound Investment Review Mechanism

  • The Cornyn-Casey proposal expands upon the definition of covered activities included in the House bill.
    • The House bill covers transactions that shift or relocate to a country of concern, or transfer to an entity of concern, the design, development, production, manufacture, fabrication, supply, servicing, testing, management, operation, investment, ownership, or any other essential elements involving one or more national critical capabilities, as well as any other transaction that could result in an unacceptable risk to a national critical capability.
    • In addition to the activities covered by the House bill, the Senate amendment covers: (i) the transfer, licensing, or sharing of designs, technology, intellectual property, or know-how to entities of concern that support or enable certain national critical capabilities; and (ii) the provision of investment, capital, guidance, or consulting related to enhancing the capabilities or facilitating access to financial resources for a national critical capability by entities or countries of concern.
  • The definition of covered activities in the Cornyn-Casey proposal captures certain activities not directly tied to national critical capabilities, including activities with respect to an entity of concern or in a country of concern by parties that may benefit from certain U.S. government financial assistance, or from certain (to be identified) levels of annual procurement in goods or services by a U.S. national security agency.
  • With this expansion of covered activities, the Cornyn-Casey proposal also introduces certain exceptions to the definition of “covered activity,” including transactions with a de minimis value (though what qualifies as de minimis is not established), transactions that take place before the bill is implemented, and certain “ordinary business transactions,” as defined in the legislation.
  • The House bill defines covered activities as transactions by only a U.S. business. However, the Cornyn-Casey version also captures activities conducted by a “foreign entity or an affiliate of a United States person or an affiliate of a foreign person.”
  • The Cornyn-Casey version of the investment review mechanism limits the definition of countries of concern to only “foreign adversaries,” whereas the House version also includes countries that have been determined to have non-market economies pursuant to the Tariff Act of 1930.
  • The Cornyn-Casey version further limits the definition of entities of concern to only entities influenced by or affiliated with countries of concern, whereas the House version would expand this definition to include entities whose ultimate parent is domiciled in a country of concern. That said, as noted above, the definition of which entities are influenced by countries of concern is not clearly defined and could potentially capture a broader universe of entities, including entities whose parents are domiciled in countries of concern.
  • Under the House version of the bill, the agency tasked with chairing the CNCC would be the U.S. Trade Representative. However, the Cornyn-Casey version does not assign this role to any given agency at this time, leaving the language open for further negotiation.

Next Steps

There has been significant pushback from industry groups with respect to the establishment of an outbound investment review mechanism, and it is unclear whether this proposal will be included in its current form, significantly modified, or included in a final legislative package at all. It also remains unclear whether the House and Senate will reach an agreement on the larger package.

On June 21, 2022, Speaker Nancy Pelosi, D-Calif.; Senate Majority Leader Chuck Schumer, D-N.Y.; Senate Minority Leader Mitch McConnell, R-Ky.; and House Minority Leader Kevin McCarthy, R-Calif., plan to meet to discuss the USICA. Leadership is cognizant that if a deal is not reached by July 4, 2022, and legislation is not passed by the August recess, it may not pass during this Congress.

Still, it is prudent for companies to start thinking about how the establishment of an outbound investment review mechanism might affect their operations. In the event that these restrictions do not become law this year, developing workable restrictions on outbound investment activities will likely continue to receive significant attention from policymakers in the future.



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