Historically, the most sensitive technologies were developed through government and defense funding specifically for national security or defense-related purposes. However, this once easily definable basket of technologies has expanded in recent years in response to rapid innovation led by private industry. These cutting-edge technologies, such as quantum computing and artificial intelligence, will likely underpin important civilian and military/intelligence functions alike, making it increasingly difficult for CFIUS to cleanly separate national security-sensitive activity from ordinary commercial activity. Compounding the matter for transaction parties, CFIUS increasingly requires them to demonstrate that their transaction does not pose a security risk. This stands in contrast to the previously longstanding US open investment policy, where the burden lay with the Committee to demonstrate transaction-specific risk. This change in posture presents significant challenges for parties engaging in a transaction involving an emerging technology that may have speculative future relevance to national security. In such cases, it is often the investor, not CFIUS, that is compelled to prove a negative.

From a CFIUS perspective, there are numerous points of continuity between the Trump and Biden administrations. CFIUS during the Trump administration embraced a staunchly critical view of Chinese investment but fundamentally approached CFIUS cases consistently with the longstanding US policy of open investment, focusing on articulable national security concerns arising from a specific transaction and pressing to clear transactions efficiently if there were no concerns or the concerns were resolved. In the Biden years, CFIUS has retained the concerns over China but has taken a broader view of CFIUS’s national security authority in ways that have broadened the range of transactions affected by the process, resulting in an overall more challenging process. For instance, the Biden administration has been more inclined to view mitigation agreements as a tool to advance general national security policy rather than as an instrument to address only risks arising from a specific transaction. Consequently, there has been an increase in the number of transactions being mitigated, including from US allies and partners not traditionally subject to mitigation agreements. It also imposes on them onerous terms once largely reserved only for foreign investors perceived to carry heightened national security risk, such as those in China. This shift in approach is driven by two main factors: the reduction in investments from China, which allows for increased scrutiny of investors from elsewhere, and a broader shift in how CFIUS now assigns the burden of proof when assessing national security risks.

CFIUS faces mounting pressure from all angles, including Washington think tanks, political commentators, the popular press, state governments, Congress, and segments of the executive branch. Some within these groups would have CFIUS treat certain types of transactions and foreign investors categorically, even if the facts of the particular transaction do not justify such treatment. There has also been a push from politicians and some political officials to use CFIUS as an instrument to address non-national security-related policy goals, such as commercial trade imbalances, and labor and environmental concerns. This may pose a greater risk to CFIUS moving forward. When CFIUS bases its decisions on a thorough analysis of the facts, it operates more predictably and effectively in addressing national security risks. Increasing top-down demands to make decisions driven by political objectives rather than factual evidence result in inconsistent outcomes, diverging from the Committee’s established practices. Politicization of the process could compromise its ability to address national security concerns effectively and consistently.

Companies that have open conversations with the Committee about the commercial needs of the parties and the commercial viability of mitigation and who engage the Committee in an attempt to explore options to address the Committee’s concerns often have more productive negotiations and improved outcomes. Being prompt and responsive to Committee mitigation proposals is important to maintaining a positive dynamic with the Committee, as underscored in proposed changes to the CFIUS regulations. That said, such positive engagement is more difficult when there are starkly divergent views between the buyer and seller. Thus, it is important for the buyer and seller to think through the mitigation scenarios jointly as early in the process as possible, if not before filing, so there is a common base for discussion with CFIUS, in case CFIUS determines that mitigation is necessary.

Today, proactive engagement with the Committee ahead of filing is a key part of clearing a complex transaction. In Brian’s experience, transaction parties and counsel who engaged the Committee early and addressed potential issues upfront significantly increased their chances of success compared to those that simply filed and “hoped for the best.” Early engagement allows parties to pre-emptively resolve issues or devise solutions, improving their odds of clearance and sometimes eliminating the need for mitigation. Such proactive approaches have resulted in transactions clearing without going to investigation, saving 45 days on the transaction timeline. In other cases, even when the Committee initially expected that a transaction could not be mitigated, extensive engagements with CFIUS enabled parties to propose novel mitigation that effectively addressed CFIUS’s concerns.

There are many ways to engage CFIUS. Taking a combative stance, dismissing concerns or withholding material information is counterproductive. An adversarial approach tends to hinder the possibility of a timely, positive response. By contrast, a conciliatory and collaborative approach is more likely to succeed. Investors should recognize that CFIUS is often not monolithic on a given issue. The member agencies frequently grapple internally with whether something constitutes a potential risk, the severity of that risk, and whether it can be mitigated. While lack of engagement with parties can be frustrating, it often occurs because the Committee is simply not yet in a position to offer a unified view on a specific issue. The potential for internal division within CFIUS underscores the importance of early engagement. Parties should take the initiative to drive the conversation as much as possible and proactively address potential concerns raised by the Committee.