IFLR Awards interview: David Fagan, Jonathan Wakely, and Devin DeBacker of Covington & Burling

What were the key achievements and matters that earned Covington the accolade of CFIUS Team of the Year at the IFLR Americas Awards, and what distinguishes the team?

We are honoured to have been named CFIUS Team of the Year for the fifth consecutive year. We work hard to remain a destination CFIUS practice, equipped to handle the most sophisticated clients, the hardest and most politically sensitive matters, and the most complex and high-stakes transactions. We have a deep team with experience both in and out of government on some of the most complicated and highest-profile matters of the past two decades.

As an illustration, we have secured three of the four presidential approvals in the history of CFIUS – including for the U.S. Steel transaction discussed below. We handle highly publicised matters such as ByteDance/TikTok, negotiating for TikTok a way to continue serving the US market while maintaining the necessary safeguards for US user data and rigorous algorithm security.

For many clients – including leading global financial and strategic investors who are frequent CFIUS filers – we serve as long-term strategic advisers, helping them execute transactions and build relationships with key regulators as they grow in the United States. We are also often called upon to rescue transactions that have run into CFIUS complications or to rehabilitate companies that have had difficult CFIUS experiences. These qualities differentiate our team and allow us to provide effective counsel on our clients’ bet-the-company matters.

How is the team’s work being shaped by recent changes in the US national security regulatory landscape? What developments are having the greatest impact on clients and the advice they require?

The US government continues to expand its view of national security well beyond traditional defence concerns. Issues related to critical technology, supply chains, data security, industrial policy, and economic security now fit squarely into the national security realm. Our team has embraced this evolving definition, and we help clients with issues that sit adjacent to traditional CFIUS filings but implicate many of the same national security interests.

For example, we advise clients on Team Telecom [the US government’s telecommunications national security review committee], outbound investment restrictions, DOJ’s Data Security Program, Commerce’s connected-vehicle regulations, the FCC’s Covered List, and DOE’s bulk-power regulations. Although these regimes involve different legal authorities and regulatory requirements, they reflect – and in many cases grew out of – the same underlying national security concerns that have long animated CFIUS. Our experience allows us to help clients navigate these increasingly interconnected issues across their transactions and business operations.

David, you were recognised in the North America Dealmakers Hall of Fame category. In light of your recent comment that “national security has become a mainstream business issue”, how has client demand changed as these considerations have assumed growing importance?

We’ve seen it change in multiple ways. First, the potential for national and economic security considerations to shape – or limit – investment opportunities through laws and policies has become a C-suite and board issue, driving demand for expert advice and advance planning.

Second, sophisticated clients increasingly recognise that these issues also touch day-to-day compliance and operations. They are adding internal resources, which in turn drives demand for outside counsel advice.

Third, national security is now seen as a key execution issue in global M&A, rather than an afterthought to commercial or other regulatory considerations, such as merger control.

Covington advised U.S. Steel on its partnership with Nippon Steel, which was recognised as IFLR’s M&A Deal of the Year. What were the key challenges in the transaction, and what lessons does it offer for businesses navigating today’s heightened national security review environment?

This was, in every sense, a historic deal. It represented the first time a US president prohibited an acquisition by a company from a US ally, and the first time one president reversed such a decision by another president. It was also the first time the United States received a special share – a so-called golden share – in a US company, giving the government consent rights over certain major decisions concerning U.S. Steel. The deal ultimately secured American jobs and significant investment in key facilities. In our view, it was important not only for the companies, their employees, and their communities, but also for advancing US national and economic security.

This could only have been accomplished if everyone on the parties’ side rowed in the same direction. It is a terrific case study in leadership by both Nippon Steel and U.S. Steel, their unwavering commitment to the partnership, and their determination to fulfil their responsibilities to shareholders, employees, and other stakeholders while pursuing the rule of law.

From a deal standpoint, it also demonstrated the importance of aligning and integrating legal, government relations, and communications strategies across the transaction parties in a deal with this level of publicity and sensitivity.

What do you expect to be the most significant developments for CFIUS and the wider national security regulatory environment over the next 12 months? What key issues should be on businesses’ radar, and how should they prepare for them?

One of the most significant ongoing changes in the national security regulatory environment is the implementation of the Comprehensive Outbound Investment National Security Act (COINS Act).

On October 22, Treasury released a proposed rule that, if finalised, would substantially broaden the reach of its outbound investment programme. It would add biotechnology as a prohibited technology for the first time, expand the current rule’s narrow prohibition on AI-related investment activity to cover the development of any AI system, broaden the scope of prohibited semiconductor technologies, and expand the scope of covered foreign persons to potentially include companies anywhere in the world with minority Chinese ownership and governance rights. These effects are not limited to US companies, as the proposed rule, like the existing restrictions, applies equally to US individuals who serve on boards or have executive responsibilities at non-US companies and funds.

The proposal is intentionally broad and leaves many key questions open, such as what drug-development and other activities involving the use of a ‘biological system’ are in scope, what constitutes a joint venture, how to draw the line between a covered expansion of existing operations in China versus a permissible maintenance of those operations, and what counts as an indirect investment.

We are working with many clients across the biotechnology, AI, and other sectors who are interested in shaping the rule by providing feedback to Treasury and advising them on strategic business planning and transactions.

If finalised in spring 2027 as proposed, the rule will reshape not only how US and non-US investors approach deals in the affected sectors but also companies’ own operations in China in those sectors. Certain deals will be entirely off the table, and due diligence will become more costly and complex.

Companies and investors with exposure in covered sectors will need to assess the rule’s effects on past, pending, and planned transactions, as well as existing operations in China and other countries of concern. They should also update their diligence procedures and map their existing operations, collaborations, and licensing arrangements against the proposed rule.