New Outbound Investment Rules: Implications for Asian Deals

Summary

• The new restrictions will target private equity, venture capital, and strategic investments involving Chinese activities in quantum computing, artificial intelligence (AI) and advanced semiconductors and microelectronics.
• New restrictions aim to block access to unique intangible benefits of support from U.S. investors.
• Risks of liability from constructive knowledge of a target companies' involvement in sensitive activities may require new due diligence and contracting practices, adding to the complexity and timeline of potential negotiations.

On August 9, 2023, U.S. President Joseph Biden signed a long-anticipated Executive Order (EO) authorizing new restrictions on certain investments by U.S. persons involving China's high tech sector.  The U.S. Treasury Department concurrently released an Advanced Notice of Proposed Rulemaking (ANPRM) soliciting public comment on proposed implementation approaches.  As the AMPRM did not include full draft regulations and the comment period closed on September 28, 2023, the new restrictions are unlikely to take effect until 2024.   Nevertheless, investors and companies active in the high-tech sector within China and beyond should anticipate significant shifts in due diligence practices and deal structures.

Declaring a National Emergency

Invoking the President's broad statutory powers under the International Economic Emergencies Act (IEEPA) and the National Emergency Act, the EO declares a "national emergency" to address the perceived threat to U.S. national security arising from China's advancement in "sensitive technologies and products critical" for its "military, intelligence, surveillance, or cyber-enabled capabilities."  The ANPRM proclaims that the new restrictions will target scenarios in which the Chinese government may "exploit U.S. outbound investments" to develop these capabilities, but "is not intended to impede all U.S. investments into [China] or impose sector-wide restrictions on United States person activity."  Echoing widespread concerns in Washington about the potential vulnerability of China's private sector to government control, the ANPRM specifies risks that the Chinese government may "direct" or "compel" Chinese entities to "obtain", "share," or "transfer" sensitive technologies.