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Committee on Foreign Investment in the United States CFIUS Background
CFIUS
U.S. and foreign companies involved in cross-border transactions involving foreign direct investment should carefully consider the need to file a CFIUS notification regarding any potential transaction.
A major political firestorm which started in early 2006 over foreign direct investment in U.S. companies and national security concerns ended quietly on July 25, 2007, when President Bush signed into law the Foreign Investment and National Security Act of 2007 (“FINSA”)(Pub. L. No: 110-49). While coming to a quiet close, this new law made significant changes to the manner in which the United States will scrutinize foreign direct investment in United States’ companies.
While the new law increases the oversight role of the Congress, the final text is remarkable in that it essentially codifies existing Committee on Foreign Investment in the United States (CFIUS) practice and removed political aspects of earlier versions of the legislation. Nevertheless, certain amendments are significant. The list of factors which must be considered by CFIUS during any review has been expanded and includes consideration of any national security impact on U.S. critical infrastructure (including energy assets) and on U.S. critical information technology. In addition, the amendments codify the use of mitigation agreements to address any national security concerns and provide authority for monitoring and enforcement of such agreements. While undergoing a CFIUS review provides a “safe harbor” when approved, the amended statutory language does clarify that CFIUS may re-open any transaction previously reviewed if it is learned that false or misleading material information was submitted or if a party materially breaches a mitigation agreement.
Both industry and government officials have stated that this new CFIUS law strikes the proper balance between protecting national security interests and encouraging foreign investment. The new law, however, places a much greater focus on transactions which may threaten critical infrastructure and continues to provide the President with broad latitude in defining “national security.” Thus, U.S. corporations and their foreign suitors should proceed cautiously and consider filing notice of any significant proposed acquisition, merger, or takeover.
Key Provisions of the New Law
In addition to providing a statutory basis for CFIUS (historically it operated by Presidential Executive Order), the FINSA implements the following new provisions to the Committee’s structure and operations:
- Creates a new Assistant Secretary at the Department of Treasury with CFIUS-related duties.
- Requires an increased focus on any acquisition, merger, or takeover that may involve critical infrastructure.
- Designates a lead agency to supervise the process if the transaction falls into its area of jurisdiction.
- Formalizes the role of the National Intelligence Director in the process.
- Mandates a second-stage 45-day investigation of proposed acquisitions by state-owned foreign companies. Also, for any transaction, allows for second-stage and more detailed investigation if the Treasury Department recommends and the rest of the panel agrees to such a need.
- Continues the time period for the process – 30 days for a review; 45 days for an investigation; and, 15 days for the President to make a final decision.
- Formalizes allowing the President to suspend or prohibit any transaction that threatens national security.
- Requires the tracking of any withdrawn transactions to prevent potential risks that have been identified.
- Establishes Congressional reporting requirements – notification at the conclusion of any 30-day review and a report after the completion of every second-stage investigation; and, Congress can request a classified briefing on any transaction.
In January 2008, President Bush issued an amendment to Executive Order 11858 that clarifies how the administration will be implementing the FINSA. In addition, the Treasury Department is in the process of writing new regulations to implement FINSA and the amended executive order, with the goal of finalizing those regulations by the end of April 2008.
Recent Legislative History
The debate over foreign investment in the United States, national security risks, and the proper role of government oversight and control resulted from Dubai Ports World’s acquisition of operations at six U.S. port terminals in 2006. DPWorld is controlled by the United Arab Emirates, and Congressional and public outcry over the transaction quickly ensued. The CFIUS, an interagency committee created by executive order, approved this acquisition, but the matter quickly turned into a political issue because of perceived security concerns. DPWorld eventually agreed to divest itself of the six port terminal operations, but the political debate continued and criticism built over the manner in which the government reviews and approves foreign investment in the United States.
Although both the House and Senate passed CFIUS reform legislation in 2006, significant differences between the chambers’ versions caused the legislation to die at the end of the 109th Congress. During the 110th session of Congress, both chambers again introduced reform legislation and debated the matter, but at a less politically heated level.
The House unanimously passed its version of CFIUS reform legislation (H.R. 556) on February 28, 2007. The Senate lagged in taking up the issue but in May introduced its version (S. 1610) which tracked many key provisions of H.R. 556. Senator Dodd acknowledged that the committee used the House bill as a “baseline” given that numerous business groups had voiced support for that bill’s less restrictive provisions. This support was significant as these same business groups had strongly opposed last year’s Senate CFIUS bill, which they argued would have politicized the process by requiring Congressional notification before any final determination.
On June 29, the Senate substituted its own language (i.e., S. 1610) into H.R. 556 and passed the measure by unanimous consent. On July 11, 2007, the House agreed to the Senate version and passed the bill by a vote of 370-45. President Bush signed the bill into law on July 25, 2007. The business community, including the Business Roundtable and U.S. Chamber of Commerce, commented favorably on the final bill stating that it “will protect our national security and American jobs while restoring certainty to the CFIUS process.”
CFIUS and National Security
CFIUS is a multi-agency committee established within the Executive Branch that historically has monitored the impact of and coordinated U.S. policy on foreign investment in the United States. In 1988, Congress expanded the mandate for CFIUS through what is commonly referred to as the Exon-Florio Amendment to the Defense Production Act of 1950. This Amendment authorized the President to investigate foreign acquisitions, mergers and takeovers of U.S. companies, and where necessary, suspend or prohibit any foreign acquisition for national security purposes. CFIUS is headed by the Department of the Treasury. One key factor for CFIUS officials in any review is the application of the term "control". The term is certainly applicable in instances where the foreign investor would hold ownership of a majority of a U.S. company. However, the term may also be applied and affect any CFIUS analysis in situations where a foreign investor may only be purchasing a minority stake, but such an investment could be deemed as a dominant minority ownership.
Until February 2006, CFIUS was relatively unknown. This panel is charged with reviewing any proposed foreign acquisition, merger or takeover of U.S. companies to ensure that the transaction will not threaten national security. Unfortunately, the term “national security” is undefined leaving the government with broad discretion to interpret the term and determine whether a particular transaction constitutes a risk.
Companies and their counsel should consider notifying CFIUS of a transaction if it will allow a foreign entity to control a U.S. company and the deal arguably could raise political, and of national-security related concerns. For example, investors from countries like China, Russia, and the Middle East will likely receive heightened scrutiny. Furthermore, you should consider notifying CFIUS if the proposed investments involve “critical infrastructure” – defined as systems or assets so vital to the United States that a breakdown in them “would have a debilitating impact on national security, national economic security, national public health or safety.” President Bush has identified eleven sectors of critical infrastructure:
• Agriculture & Food
• Water
• Public Health
• Emergency Services
• Defense Industrial Bases
• Telecommunications
• Energy
• Transportation
• Banking & Finance
• Chemical Industry & Hazardous Materials
• Postal Services & Shipping
CFIUS review is also critical in transactions involving a foreign acquisition of U.S. defense contractors having sensitive, export-controlled technologies or information. Finally, investments by a foreign national government, or an entity controlled by a foreign government, raise a clear case for CFIUS review.
Filing CFIUS Notifications
While providing notification to CFIUS of a transaction involving foreign investment remains voluntary, good corporate policy dictates that parties to a proposed transaction involving foreign acquisition of a U.S. company engage in this review process. The multi-agency committee does retain the right to review in the future any acquisition that was not notified or reviewed by CFIUS. In addition, failure to seek a review could result in the U.S. government stepping in at a later, post-transaction, date to unwind the deal or to place certain restrictions on the acquisition that may significantly alter the terms of the transaction. No public notice of the review is given and all information is strictly confidential, except as required by certain administrative or judicial actions.
When CFIUS receives notice of a proposed acquisition, it circulates that notice and any supporting documentation to its member agencies, which include the Departments of Defense, Commerce, Treasury, State, Homeland Security, and Justice. CFIUS clears most reviews of proposed transactions in 30 days or less. If the transaction raises national security concerns, the review proceeds to a second-stage investigation, which must be concluded within 45 days. If the transaction involves a foreign company which is owned or controlled by a foreign government, the 45-day investigation is mandatory. At the conclusion of such an investigation, the President has 15 additional days in which to determine what action, if any, is necessary to protect national security. Under current law, the review and investigation can take no more than 90 days from the time the parties submit a complete filing. Given this tight schedule and the often time-sensitive nature of any acquisition, we normally recommend to clients that we coordinate with the CFIUS staff well in advance of any transaction deadline. In certain circumstances, we also recommend advance coordination with other executive agencies and Congressional committees.
Affect of Recent CFIUS-related Events and Reform
CFIUS has stated that it “seeks to serve U.S. investment policy through thorough reviews that protect national security while maintaining the credibility of our open investment policy and preserving the confidence of foreign investors here and of U.S. investors abroad that they will not be subject to retaliatory discrimination.” Most recently, the President reaffirmed “our commitment to open economies and our policy of welcoming foreign investment and the important economic benefits that such investment brings.” At the same time, he recognized that recent reforms to the law set forth procedures for protecting our national security, “recognizing that our openness is vital to our prosperity and security.”
In light of the political fallout from the Dubai Ports World transaction in 2006, CFIUS filings have increased significantly, and reviews (particularly the more in-depth second-stage 45 day investigations) have reportedly increased by 350 percent. Furthermore, CFIUS is now much more likely to seek to implement security (or “mitigation agreements”) to which the parties to any transaction must agree to and adhere to post-transaction in order to address any security concerns, and to assess significant financial penalties for any violations of agreements or conditions placed on foreign investors by the U.S.
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