Oversight in Flux? The National Security and Investment Act and Committee on Foreign Investment in the United States

A UK perspective – Daniel Hamilton

It is sixteen months since the United Kingdom’s new National Security and Investment Act (NSI) entered into force.

With effect from January 2022, entities wishing to acquire assets in seventeen key sectors of the British economy – including advanced robotics, artificial intelligence, civil nuclear, satellite and space technologies, defence, energy and transport – have been mandated to submit “notifications” relating to certain transactions to a new Investment Security Unit administrated by the UK Government.

In order to trigger a “notification”, the proposed acquisition must be issued if an entity seeks to increase their shares from 25% or less to more than 25%, from 50% or less to more than 50% or from less than 75% to 75% or more, or if they acquire voting rights that would allow them to pass or block resolutions governing the affairs of the entity.

The NSI regime plays, in its scope and intentions, a similar role to the Committee on Foreign Investment in the United States (CFIUS).

Both regimes have been established in order to introduce severe civil and, in extreme cases, legal sanctions for the failure to notify government of deals relating to “key” assets.  Both regimes have been fashioned in such a way as to respond to very real fears that hostile regimes such as the People’s Republic of China and Russian Federation may pursue acquisitions to further their goal of gaining access to sensitive information that can be used to serve malign political, economic and intelligence-based agendas.  Both, the respective UK and US governments have argued, that the regimes are intended not to be overly burdensome on business while also ensuring appropriate due diligence over landmark deals.

In its original form, the NSI “notification” trigger was originally intended to kick in as low at 15%, but this was removed by ministers over fears it would be seen as overly heavy-handed or bureaucratic when compared to the scope of CFIUS. The US regime does, however, go one step further in that CFIUS can not only force the abandonment of a deal but the divestiture of existing assets.

At the end of its first year, the NSI regime had resulted in the UK Government denying permission for a total of five deals – all of which related to China-linked attempts to acquire scientific or infrastructure assets.

While the blocking of five deals during a year may sound like a relatively meagre amount, it is important to note that CFIUS issued explicit pre-transaction “blocks” on only four deals between 2017 and 2022. This figure is, of course, misleading given the number of companies that voluntarily choose to abandon deals prior to CFIUS wielding the final axe but nevertheless hints at a willingness on the part of the UK Government to use its newfound NSI powers in an affirmative manner. To be more specific, since 2017 there have been 66 instances where parties abandoned the transactions after either CFIUS informed the parties that it was unable to identify mitigation measures that would resolve its national security concerns, or it proposed mitigation measures that the parties chose not to accept. During that time there have been an additional 4 presidential decisions to block or prohibit a transaction.

Similarly, the total number of notifications that are being made in the United Kingdom significantly outstrips that made in the US under the scope of CFIUS. In 2021, a total of 272 notifications were made in the US whereas in the UK, a similar number were made in the first three months of NSI regime being in operation.

The reason for this disparity is debatable but it is likely that much of it is to do with companies acting with an abundance of caution towards a new regulatory regime whose scope – and fangs and claws – is yet to be fully established.  In contrast, investors and counsel in the United States have operated alongside various iterations of CFIUS since the mid-1970s.

It is worth noting, however, the United States, is still relatively new to the process as modified through the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) legislation passed in 2018 that provided expansive new powers to CFIUS. 2021 represented the first full year in which CFIUS operated under these new authorities and there has been, as in the UK, some uncertainty as a result. As such, it is notable that the 436 total transaction reviews (covering declarations and notices) triggered in the US in 2021 represented a 45% increase over 2020.

While China has been the focus of much of the attention paid to NSI, Russia’s invasion of Ukraine has had an interesting impact upon its work.  Prior to the war, it would not have been unusual to see cash-rich Russian firms looking to make acquisitions in the UK that would naturally have required investigation prior to being allowed to proceed.  The war has effectively now made this eventuality a moot point given the extensive range of sanctions that have sensibly been imposed on capital flows from Russia to the US, UK and European Union.  This will have had a direct impact on the number of “notifications” received from Russia; further shifting the focus of in the UK back towards China. The issue of deals involving the Russian Federation appears to be a lesser one when it comes to CFIUS, with only 8 filings related to Russia issued in 2021, as opposed to 45 for China alone the previous year.

As the year progresses, the UK’s NSI regime will remain somewhat of a novelty for the British business and investor community – something to be heeded, to be submitted to but also something not yet fully understood.

The experience of CFIUS in the United States does, however, demonstrate that the type of vigilance and due diligence mandated on business need not be onerous or restrictive; a position British business will likely increasingly recognise.

A US perspective – Cory Fritz

Nearly 50 years since its conception, CFIUS is more relevant and powerful than ever. Due in part to expanded authorities gained through FIRRMA legislation in 2018, and growing U.S. scrutiny of deals touching China, CFIUS fielded a record 436 filings in 2021 – a 45 percent increase over 2020. That’s not to mention the 135 non-notified transactions that CFIUS investigated that year.

The current U.S. administration, in seeking to address perceived threats in key sectors including financial services, manufacturing and technology, is concurrently engaged in multilateral diplomacy to strengthen screening processes among allies and tightening the focus of domestic regulatory agencies.

In October of last year, President Biden signed the first ever Executive Order pertaining to CFIUS. Specifically, the E.O. directs CFIUS to consider the impact of a transaction on five key areas, including:

• Critical U.S. supply chains;
• S. technological leadership in areas such as artificial intelligence, quantum computing and advanced clean energy;
• Trends of consolidation in certain industries;
• Cybersecurity; and,
• Personally identifiable information of U.S. persons.

It’s important to note that in this moment of U.S. political partisanship, support for strengthening national security screenings for inbound and outbound investments is decidedly bipartisan. A new select panel in the House of Representatives focused on threats posed by China was established by a vote of 365-65 in January. It is widely expected that this committee will use its investigative powers to highlight risks associated with Chinese foreign direct investment in the U.S., creating new layers of political risk.

Further, Congressional leaders of both parties have been quite vocal in recent months about the risks posed by foreign-owned technology platforms operating in the U.S., introducing new legislation to strengthen the hand of regulators.

While CFIUS remains highly technical in its confidential reviews of national security risks, it’s no longer the obscure “black box” it once was. Members of Congress, advocacy groups, and other policy influencers have grown more comfortable in launching public advocacy campaigns – through news media, political forums, and more – urging CFIUS to take various actions.

In this delicate geopolitical environment, it’s critical to have a communications plan that complements the legal strategy to address concerns, mitigate political risk, and clearly define the benefits of a transaction to help secure clearance.