Supply Chain Impact Gets Prominent Placement in New CFIUS Executive Order
Noting that “unfair trade practices by competing countries,” among other things, had “emptied” the U.S. industrial base and “siphoned off innovation,” one of President Biden’s first acts as president was to issue an executive order directing federal agencies to assess “supply chain resilience” – an issue that has taken center stage during the COVID pandemic and has yet to be resolved.
On September 15, President Biden issued a new executive order – Executive Order 14083 (“EO”) – which directed the Committee on Foreign Investment in the United States (“CFIUS”) to focus on certain key factors when considering assessment of the national security impact of a given foreign investment. In the long history of CFIUS, the OE is the first executive order to provide presidential guidance on CFIUS exams.
The new EO begins by noting that “[C]some [inbound] foreign investment can undermine Supply Chain resilience efforts and therefore national security by making the United States vulnerable to future supply disruptions.(Emphasis added.) The priority attention given to “supply chain resilience” was no surprise, given the earlier executive order, and echoed concerns expressed for years, both in and out of CFIUS reviews. . As Mark Twain is reputed to have observed, “History does not repeat itself, but it often rhymes”.
Although some commentators have argued that the EO is merely following current practice, the reality is that the EO is providing formal presidential leadership where there was none before. Already. As the administration made clear during a closed-door briefing on the eve of the EO’s release, the order is designed and intended to inform investors that some issues matter more than others. Supply chain resilience is one such issue.
The OE makes it clear that it is forward-thinking – concerned about the impact of foreign investment on future and near-term supply chain disruptions. The EO states that
[t]These vulnerabilities can arise if an investment changes  ownership,  rights, or  control over certain manufacturing capabilities, services, critical mineral resources or technologies fundamental to national security – including because they are essential to the resilience of the United States supply chain – to a foreign person who could take action that threatens to harm the national security of the United States as a result of the transaction, or to other foreign persons, including foreign governments,
to whom the foreign person conducts business, investment, uneconomicalWhere other ties (links with relevant third parties) [sic] that could cause the transaction to pose a threat to national security. (Emphasis added.)
There’s a lot to unpack here. The EA emphasizes that the impact of a transaction on supply chain resilience is not only factor to consider – but it is nevertheless a factor that MUST be considered. He clarifies that the scope is not limited to ownership, but incorporates the transfer of rights and control – and that issues can arise in manufacturing, services, critical minerals and critical technologies. Additionally, and especially importantly, it indicates that the President expects CFIUS to assess the national security impact of a wide range of relationships involved in the transaction – including non-economic relationships ( for example, family ties) and relationships with third parties (for example, important customers and suppliers).
Naming Names – Top Business Areas of Concern: A Roadmap for Deal Teams
The EO also directs CFIUS to assess “if applicable, the effect of the Covered Transaction on supply chain resiliency and security, both on-base and off-base.” defense industry, in manufacturing capabilities, services, critical mineral resources or technologies that are fundamental to national security, including:
biotechnology and biomanufacturing
advanced clean energy (such as battery storage and hydrogen)
climate adaptation technologies
critical materials (such as lithium and rare earths)
elements of the agricultural industrial base that have implications for food security,
and any other sector identified in Section 3(b) or Section 4(a) of Executive Order 14017 of February 24, 2021 (U.S. Supply Chains)” [for example, high capacity batteries, including electrical vehicle batteries]
It could hardly be clearer. The EO spells out, with precision, a series of key industries and notes that CFIUS review may be required even if a transaction is outside of the defense sector. In doing so, it sets a roadmap for deal teams evaluating potential targets – and for targets evaluating potential partners. No industries are on the table – but those industries are in the crosshairs. And, again, the EO stresses that the review should extend, where appropriate, to “relevant links with third parties that could cause the transaction to pose [a threat to the supply chain.]”
What does the market look like? What is the history of the investor in the industry? CFIUS needs to know
The EO also clearly states that the CFIUS review must involve an assessment of:
the degree of diversification through alternative suppliers along the supply chain, including suppliers located in Allied or Partner Economies;
whether the US business that is a party to the covered transaction supplies, directly or indirectly, the US government, energy industrial base, or defense industrial base; and
the concentration of ownership or control by the foreign person in a given supply chain,
among other factors that the Committee deems appropriate in determining whether the subject transaction may compromise the resilience and security of supply chains critical to national security.
The OE therefore requires that CFIUS examine the market in which the American company operates to assess the impact of a transaction on “the resilience and security of supply chains essential to national security”. First, the EO states that CFIUS review must extend to other sources of supply – including (and this is important) “suppliers located in Allied or Partner Economies”. This is mandatory. Therefore, when due diligence on a potential transaction, it will be important to determine whether other sources of supply are available – if not domestically, then at least in allied countries and among reliable foreign partners (e.g. , the Five Eyes, South Korea, Japan). If so, a deal can be salvaged — or salvageable — even if national sources are few and far between.
Second, the OE is also careful to highlight three customers that are particularly close to its heart: the US government, the energy industrial base, and the defense industrial base. This is obviously not the total sum, but the impact of a deal on these three customers should be considered. No real surprises here, but the industrial base can cover a lot of territory. If the “lack of a horseshoe nail” can bring down a kingdom, the lack of a ball bearing or a custom semiconductor can have an equally outsized effect.
Finally, the EO clarifies what CFIUS lawyers have been observing for some time: concentration of ownership by a foreign investor in a given industry is a potential problem, even if a transaction, taken by itself, poses no perceived threat. .
How should deal teams read EO?
What does this mean for deal teams considering the prospect of CFIUS review?
- The Role of a Target in Critical Supply Chain Issueseven if it is a small company, and even if it is outside the traditional defense sector.
- Some industries matter the most, and investments in these industries should be considered mandatory candidates for CFIUS review – all as stated – with precision – in the EO. Bypassing CFIUS review in such cases on the grounds that the filing is apparently voluntary runs the significant risk that the transaction will be called for post-closing review.
- The market matters – Parties must fully understand the industry as well as the target – and must assess potential alternative sources of supply. This is not an antitrust review – this is a national security review. What matters is not only the existence of alternative sources, but also how quickly they can deliver and their track record as suppliers.
- The history of an investor in a market is important. An investor who acquires their second, third or fourth company in a given industry, regardless of antitrust considerations, will be subject to scrutiny and may be pushed back, even if the company is otherwise “clean” and the transaction poses no significant threat in and of itself.
- Third-party relationships are important. Even if an investor poses no apparent risk, CFIUS may view its relationships with third parties as problematic – for example, significant customers or suppliers in sanctioned countries or “countries of concern” that may influence the investor’s management of its new US asset, or kick technology transfer risk.
As always, preparation is key, which is why it’s important to work with attorneys experienced in CFIUS exams. The fact that a transaction triggers one or more factors highlighted in the EO does not mean that a transaction is at risk of rejection – but it does mean that parties must know and understand these factors – and be prepared to respond to them. difficult questions during the CFIUS exam.
Supply chain resilience isn’t the only consideration in the EO. The OE also requires CFIUS to assess the impact of foreign investment on US technology leadership, industry concentration, cybersecurity and sensitive personal data. In all cases, reviews should include an assessment of the risks posed by entanglements with third countries. In future alerts, we will detail the other components of this historic command.
 See Executive Order 14017, available at: https://www.whitehouse.gov/briefing-room/presidential-actions/2021/02/24/executive-order-on-americas-supply-chains/  Our September 19 Customer Alert provided insight into OE – the first executive order to provide presidential guidance on the scope and substance of CFIUS reviews. Available at: https://www.stroock.com/news-and-insights/cfius-due-diligence-just-got-a-whole-lot-harder. Given the importance of OT, today’s Customer Alert, one of many we plan to write, breaks down its building blocks to give full attention to the issues it raises. .