Impact of New U.S. Outbound Investment Rules on Global Deal Structuring

As of January 2025, new regulations governing outbound investments by U.S. entities have taken effect under the Outbound Investment Security Program (OISP). This regulatory framework, initiated by an executive order from the Biden administration in August 2023, is designed to mitigate risks associated with investments involving counterparties from nations deemed as security threats, specifically China, Hong Kong, and Macau. The OISP's primary goal is to prevent the transfer of U.S. intellectual property, capital, and technological know-how to entities linked to these nations, particularly in sectors critical to national security such as semiconductors, microelectronics, quantum technologies, and artificial intelligence.

The implementation of the OISP marks a significant shift in U.S. foreign investment policy, reminiscent of the Committee on Foreign Investment in the United States (CFIUS), but with distinct operational differences. Unlike CFIUS, which allows for pre-closing reviews of transactions, the OISP places the onus on U.S. entities to self-assess whether their investments are 'notifiable' or 'prohibited'. This is a substantial change from previous practices where foreign entities were often vetted prior to approval.

According to Alain Dermarkar, a partner at A&O Shearman, the OISP requires U.S. persons to conduct rigorous due diligence to determine the nature of their transactions. "U.S. entities must be vigilant in understanding their obligations under this new regime, as the regulations impose a knowledge standard that expects companies to be aware of potential risks associated with their investments," Dermarkar stated in a recent interview.

The potential impact of the OISP on deal structuring is profound. Companies now face the challenge of navigating these regulations while pursuing outbound investments and joint ventures. As Maura Rezendes, a partner at A&O Shearman, explained, "Firms are restructuring their joint ventures to minimize their exposure to OISP scrutiny. By focusing on governance structures and ownership percentages, companies can create partnerships that may not fall under the OISP's purview, even when they involve counterparts from countries of concern."

The OISP delineates specific criteria that classify a joint venture as a ‘person of a country of concern’. Primarily, it assesses the location of the venture's operations, the ownership stakes held by foreign entities, and the governance structure. A joint venture could be considered outside the OISP's scope if it maintains a U.S. headquarters and limits the foreign entity's voting power to below 50%. This flexibility in structuring offers U.S. firms a pathway to engage with international partners while adhering to regulatory constraints.

Experts, including Brendan Holman, an associate at A&O Shearman, emphasize the necessity for strategic planning in light of the OISP. "Firms must evaluate the implications of the OISP at the outset of any deal structuring process. The consequences of non-compliance can be severe, including penalties and restrictions on future investments," Holman warned.

As the OISP persists through changing administrations, it has garnered support across the political spectrum, reinforcing the need for U.S. firms to align their international strategies with national security interests. The new administration has indicated a willingness to expand the scope of the OISP to encompass additional sectors, including biotechnology and advanced manufacturing. This expansion could further complicate the landscape for U.S. investors, necessitating ongoing adaptations to compliance strategies.

In conclusion, the OISP represents a fundamental shift in U.S. investment policy, with significant implications for outbound deal structuring. As regulatory environments evolve, U.S. firms must remain agile and informed, adapting their strategies to navigate the complexities introduced by the OISP. The future of global investments will hinge on how effectively these companies can balance compliance with the pursuit of growth in an increasingly interconnected world.