The US Senate approved an amendment to the National Defense Authorization Act adding mandatory notifications of certain outbound investments in certain countries, including the People’s Republic of China.
Outbound investment reviews have been a focus of US government attention [1] recently, culminating in both executive branch and congressional interest in implementing a review framework to manage capital flows outside of the United States. In part, an interest in this type of review process arose in 2017, as Congress considered the Foreign Investment Risk Review Modernization Act of 2018, where initial drafts included a provision to review joint ventures and other investments made by US persons outside of the United States.
Those terms were quickly removed from the ultimate legislation and considered covered by US export control laws and regulations. Recent action by Congress may bring this process to fruition more quickly than an executive order (EO).
Fast forward to July 2023 and both the executive branch and Congress continue to discuss an outbound investment review regime but with more concrete details. Although the executive branch has been discussing a possible EO on outbound investment for at least two years, Congress has taken the first step towards establishing such a process. On July 25, 2023, by wide margins, the US Senate approved an amendment to the National Defense Authorization Act (NDAA) to add mandatory notifications of certain investments in the People’s Republic of China.
The Outbound Investment Transparency Act (OITA), drafted and sponsored by Senators John Cornyn (R-TX) and Bob Casey (D-PA), would require US companies to notify the US government of investments in certain Chinese sectors, but does not authorize blanket investment bans in those areas. The OITA is a more limited version of a broader bill sponsored by Senators Cornyn and Casey in 2022 that would have established a more detailed interagency process for reviewing investments in China involving specific critical and emerging technologies sectors, as well as critical minerals supply chain matters. See National Critical Capabilities Defense Act (draft 2021).
Congress shelved this bill in favor of moving forward with the CHIPS and Science Act. The CHIPS and Science Act does not directly address outbound investment reviews but lays the groundwork for identifying the national security concerns that could apply in this kind of review process.
The Cornyn-Casey amendment to the NDAA, which passed by a vote of 91-6, would require the following [2] :
The Senate does not act alone, however, and the amendments passed by the Senate will need to be coordinated and reconciled with the House of Representatives version that passed earlier in July, which did not include a similar investment notification process.
Congress and the president consider the NDAA must-pass legislation based on its importance to national security requirements. Including this amendment in the NDAA maximizes the potential for passage and, as noted below, may result in more immediate action by the president to move forward with an EO.
The US-China relationship remains a matter of interest for both global and domestic policy related to trade, supply chains, and industrial base requirements. The Senate amendment highlights this focus and identifies areas where investors will likely face additional scrutiny.
Increasing geostrategic tensions between the United States and China have placed multinational companies in the difficult position of managing the more assertive use by the United States and its allies of export controls and sanctions to address these tensions, while at the same time evaluating the impact of countermeasures adopted by China. This has affected the value of investments based on the enhanced regulatory requirements that now require a more detailed review.
Managing this process will require a more robust understanding of how, where and under what circumstances outbound investments occur. Whether the ultimate process will require only notification or notification/approvals, investors will need to develop a more finessed diligence process to assess when and how notifications will be needed.
Pragmatically, until the Senate and House amendments reconcile their versions, the NDAA passes, and the president signs the bill, Treasury will not be drafting regulations to implement an actual review program based on legislative action. This does not prevent Treasury from proceeding with the establishment of a program based on a potential EO, but practical limitations exist.
This recent congressional push, however, may result in one of several outcomes:
Whichever approach ultimately prevails, investors should expect at least the following:
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[1] Historically, the United States has prior experience with outbound investment analyses when President Lyndon Johnson issued EO 11387 in 1968 to allow for the review by the US Department of Commerce of capital flows to developing, developed, and underdeveloped countries. See EO 11387 (January 1, 1968) (Governing Certain Capital Transfers Abroad). This regime was managed by the Department of Commerce, Office of Foreign Investment Review (OFIR), through 15 CFR Part 1000. Between 1970 and 1986, the OFIR conducted limited reviews and evaluated a narrow set of overseas investment primarily in the developed world, as the purpose of the review process was to retain capital investment in the United States rather than utilize US capital for overseas growth and expansion. See our prior LawFlash: Avoiding Past Mistakes in US Outbound Investment Regulation: Key Questions for Congress to Consider.