Overview of the Proposed “Reverse CFIUS” Process via the National Critical Capabilities Defense Act of 2022

On June 12, 2022, a bipartisan group of Senate and House lawmakers announced agreement on a new draft of the National Critical Capabilities Defense Act of 2022 (NCCDA), which would establish an expansive outbound review mechanism for investments and other transactions in specified countries of concern, including China. The draft is based on a bill introduced in the Senate last year that ultimately was not included in the U.S. Innovation and Competition Act (USICA), which passed, while the House included a similar measure in its America COMPETES Act, which also passed, and the two bills are now in conference.

If enacted, the NCCDA would establish a new interagency panel to review and potentially prohibit outbound transactions on national security grounds. The Committee on National Critical Capabilities (CNCC) would function in a manner similar to the Committee on Foreign Investment in the United States (CFIUS), which reviews inbound foreign investment. Both U.S. persons and foreign entities that engage in or plan to engage in a “covered activity” would be required to submit a mandatory written notification 45 days before engaging in the activity. It is not clear how the requirement would apply to a foreign entity that does not have a connection with the United States.

“Covered activities” include an extraordinarily wide range of transactions including any activity by a U.S. person or a foreign entity or their affiliates that:

• 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;
• Shares, discloses, contributes, transfers, or licenses to an entity of concern any design, technology, intellectual property, or knowhow, 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
• 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.”

Covered activities would also include transactions by certain entities that receive financial assistance pursuant to the Bipartisan Innovation Act (the presumed name of the legislation that emerges from conference), as well as activities by entities that benefit from government contracts over a certain amount (to-be-determined) with a U.S. national security agency with respect to an entity of concern or a country of concern.

In addition to China, “countries of concern’ include Russia, Iran, North Korea, Cuba, and Venezuela. The term “entity of concern” is broadly and vaguely defined to include entities “affiliated with” or “influenced by” a country of concern. Covered activities would not include de minimis value transactions, as well as “ordinary business transactions,” which generally include transactions involving the sale or license of a finished product.

“National critical capabilities” are defined as those identified necessary for supply chains identified pursuant to the supply chain review mandated by Executive Order 14017, including:

• semiconductor manufacturing materials,
• large capacity batteries,
• critical minerals and materials,
• pharmaceuticals and active pharmaceutical ingredients, and
• “critical and emerging technologies,” such as artificial intelligence, bioeconomy, and quantum information science and technology.

Once a notification is submitted, the CNCC would undertake a review to determine if the activity is likely to result in “an unacceptable risk to one or more national critical capabilities.” If it determines such a risk exists, it will make a recommendation to the President to address the risk, including imposing mitigation measures, potentially including disinvestment. The Committee would also have the authority to initiate investigation of a covered activity if a notification is not submitted.

Although the lawmakers announcing the agreement characterized the bill as a “refined proposal,” it is still extremely broad. Key terms and concepts are vague and ill-defined or left to regulators to fill in the blanks, and industry groups including the U.S. China Business Council and the U.S. Chamber are raising their voices in opposition.