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  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  :
- Notification to the US Department of the Treasury (Treasury) of investments in countries of concern—to include China—related to national critical capabilities, which include
- batteries with dual-use applications
- quantum technologies
- artificial intelligence
- satellite-based communications
- network laser scanning systems with dual-use applications; and
- any other export-controlled technology deemed relevant to US national security interests.
- Notification to Treasury of the establishment of any subsidiary or joint ventures in China whose purpose includes production, design, testing, manufacturing, fabrication, or research involving one or more national critical capabilities sectors
- Definitions of activities covered by the legislation—i.e., covered activities
- Timelines for submission of the notifications:
- US companies would need to notify Treasury with a written filing no later than 14 days before the expected completion of the covered activity
- US companies may notify Treasury 14 days post-closing for secured transactions (a term that appears to be undefined)
- Authority to refer covered activities to the attorney general to determine whether the activity should be prohibited or otherwise mitigated
- Authority to collect information on covered activity that has not been notified to Treasury—a process that appears comparable to the non-notified process for inbound foreign direct investment reviews by the Committee on Foreign Investment in the United States (CFIUS)
- Development of regulations to manage the process
- Currently affects the following countries: China, Russia, Iran, and North Korea
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.
WHAT DOES THIS MEAN?
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:
- It may incentivize the administration to issue its EO and thereby proactively manage an outbound review approach. If the president issues an EO, the president may delegate responsibility to his agency of choice, but the budget for the additional taskings will be driven by Congress. The delegated agency will still need to draft regulations and establish internal expertise to manage the reviews—a similar issue that we have seen with the CHIPS Act implementation, where the Department of Commerce needed to stand up a complete organization and hire from outside the US government assist in the implementation of the review and funding requirements of that Act.
- It may delay issuance of an EO, as the administration has heard from investors that significant concerns exist with a review of outbound investments. Understanding that legislative authorities take more time and consensus among members of Congress, the administration may wait for the articulation of congressional intent to determine the scope of its authorities before proceeding with such a regime.
- The administration may issue its EO, but Congress may decide to withhold funding for the implementation if Congress does not view the EO as aligned with congressional intent. The EO, therefore, while effective, would be difficult to operationalize.
Whichever approach ultimately prevails, investors should expect at least the following:
- More critical evaluations of investments made overseas and particularly in China
- Establishment of objective records that highlight the deal valuations to assess whether notifications may be needed based on a de minimis threshold for reporting.
- More US government outreach to investors to request information on proposed outbound investments
- Recalibration of timelines for investments—the need for additional diligence, US government outreach, difficulties in collecting information from target companies, and changes in risk tolerances can individually or collectively delay investment timelines
- Reassessment of how and under what circumstances deal representations remain effective
- Evaluation of anticipated countermeasures that may affect the scope and extent of outbound investments
 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.