Clifford Chance

I. Introduction

On July 25, 2023, the US Senate passed an amendment (SA 931) as part of the broader National Defense Authorization Act (NDAA) that authorizes appropriations for fiscal year 2024 for military activities by the Department of Defense, among other things.

This Senate Amendment is described as a "toned-down version" of the bipartisan bill "Outbound Investment Transparency Act," which was initially introduced two years ago to address the national security risk of US investment in foreign adversaries. Although the Senate Amendment does not require a "reverse CFIUS" review process which would largely curtail the outbound US investment, it nonetheless requires US investors to "notify" the Secretary of Treasury of certain investments in a covered foreign entity in key technology sectors, including, for example, artificial intelligence, microelectronics, and semiconductors, in a "country of concern," which currently includes China, Russia, North Korea, and Iran.

After the amendment passed the Senate with strong bipartisan support, the broader NDAA also passed the Senate on July 28. The House passed its version of the NDAA in early July. The Senate and the House will now need to discuss their own versions of the NDAA and negotiate any differences between the two versions of the Act.

While the NDAA amendment is a notification requirement, and not a review process as contemplated by the long-awaited "outbound CFIUS" regime, its passage evidences the increasing support within the U.S. government to implement measures to monitor – and control – outbound US investment. Notably, President Biden is expected to issue an Executive Order that would restrict US investment in Chinese critical technology sectors, which reportedly will be announced in the coming weeks, that would contemplate a review process similar to the existing CFIUS regime.

II. Required Notification

In summary, under the Senate Amendment, a US person will be required to notify the Secretary of the Treasury 90 days after the relevant regulations takes effect, if the US person is engaged in a "covered activity" related to a "covered sector" when the activity occurs in a "country of concern" or involves a "covered foreign entity." Specifically, US persons that plan to engage in a covered activity will be required to submit "complete written notification" to the Secretary of Treasury no later than 14 days before the anticipated completion date if such covered activity is not a secured transaction; and no later than 14 days after the completion date of the activity if the covered activity is a secured transaction.

Although "complete written notification" is not yet defined in the amendment, failure to submit the complete notification will result in the Secretary issuing a notification to the submitting entity explaining why it is incomplete and unacceptable. In addition, failure to comply with the requirements may subject US persons to penalties and enforcement actions, including the President directing the Attorney General to seek appropriate relief in the district courts to enforce any required disclosure. The detailed penalties have not yet been specified in the Amendment.

III. Key Definitions

A "US person" is defined as either an individual who is a citizen, national, or permanent resident in the US or any corporation, partnership, or other entity organized under the laws of the US.

The "countries of concerns" include North Korea, China, Russia, and Iran, as specified in 10 U.S.C. § 4872(d)(2).

A "covered foreign entity" means (1) any entity that is incorporated in, has a principal place of business in, or is organized under the laws of a country of concern; (2) any entity that primarily trades its equity securities on one or more exchanges in a country of concern; (3) any entity in which an entity described in (1) or (2) holds, individually or in the aggregate, directly or indirectly, an ownership interest of greater than 50%; or (4) any other entity that is not a US person but meets the relevant criteria as specified by the Secretary of the Treasury in the upcoming regulations.

The "covered sectors" include (1) advanced semiconductors and microelectronics; (2) artificial intelligence; (3) quantum information science and technology; (4) hypersonics; (5) satellite-based communications; or (6) networked laser scanning systems with dual-use applications.

The term "covered activity" include a broad range of activities by a US person that involves not just equity acquisition of a covered foreign entity, but also any arrangement that could provide the US person control or decision making authority to affect a covered foreign entity's product development in a covered sector in a country of concern, among other things: (1) an acquisition by a US person of an equity interest or contingent equity interest, or monetary capital contribution, in a covered foreign entity, directly or indirectly, by contractual commitment or otherwise, with the goal of generating income or gain; (2) an arrangement for an interest held by the US person in the short- or long-term debt obligations of a covered foreign entity that includes governance rights that are characteristic of an equity investment, management, or other important rights, as defined in the regulations; (3) the establishment of a wholly owned subsidiary in a country of concern, such as a greenfield investment, for the purpose of production, design, testing, manufacturing, fabrication, or development related to one or more covered sectors; (4) the establishment by such US person of a joint venture in a country of concern or with a covered foreign entity for the purpose of production, design, testing, manufacturing, fabrication, or research involving one or more covered sectors, or other contractual or other commitments involving a covered foreign entity to jointly research and develop new innovation, including through the transfer of capital or intellectual property or other business proprietary information; or (5) the acquisition by a US person with a covered foreign entity of operational cooperation, such as through supply or support arrangements; the right to board representation (as an observer, even if limited, or as a member) or an executive role (as may be defined through regulation) in a covered foreign entity; the ability to direct or influence such operational decisions as may be defined through the regulations; formal governance representation in any operating affiliate, like a portfolio company, of a covered foreign entity; or a new relationship to share or provide business services, such as but not limited to financial services, marketing services, maintenance, or assembly functions, related to a covered sectors.