U.S. Foreign Investment and National Security Act of 2007
The collapse of the $2 billion deal to acquire computer networking company 3Com by a private equity firm with a minority Chinese-controlled partner highlights the formidable control over certain foreign investments resulting from the enactment of the U.S. Foreign Investment and National Security Act of 2007 (“FINSA”).
Post-9/11 concerns regarding U.S. national security, the congressional uproar over the proposed acquisition by a Dubai-owned company of control of a series of U.S. port terminals, and China’s proposed 2005 acquisition of UNOCAL resulted in the enactment of FINSA, which became law on October 26, 2007. The FINSA Regulations, discussed below, were proposed in June 2008 and became effective December 22, and expand the scope of potentially affected transactions, while adjusting the filing burdens initially proposed.
FINSA amended Exon-Florio, (the Exon-Florio Amendment to the Defense Production Act of 1950), the existing U.S. legislation which permits voluntary notification of foreign investments in the U.S., with the notification then triggering review of the acquisition by the Committee on Foreign Investment in the United States (“CFIUS”), a 12-member body including the Treasury, Commerce, Defense, State, and Homeland Security Departments, the Office of Management and Budget, Council of Economic Advisors, Office of the United States Trade Representative, National Economic Council, National Security Council, and the Office of Science and Technology Policy. FINSA adds the Department of Energy as a 13th member of CFIUS, and permits the President to name additional Executive Office agencies as CFIUS members.
While Exon-Florio notifications have been voluntary in the past, CFIUS retained the power to review any transaction, even after it had closed, to identify U.S. security concerns and to address them. Notification remains voluntary under FINSA, but CFIUS also retains its unilateral review power, and therefore any proposed acquisitions which might prompt U.S. security concerns should be evaluated for voluntary filing.
FINSA continues the Department of the Treasury as the CFIUS chair. The Secretary of the Treasury will designate one or more of the CFIUS members to be the lead agency in any investigation, and the Director of National Intelligence (“DNI”) is now also required to analyze the U.S. nationalsecurity implications of any transaction which is reviewed.
As at present, a 30-day CFIUS review can be voluntarily initiated by a transaction party, or CFIUS caninitiate its own review. (This review period and the other relatively short periods designated during the investigation process can be extended significantly through several devices available to CFIUS in the present law and in FINSA).
If a foreign government controls the acquirer, as with the Dubai and UNOCAL transactions, the acquisition will attract a review, as will deals involving critical U.S. infrastructure (such as the proposed ports acquisitions), significant energy assets, or critical technology.The 3Com transaction involved a privately-controlled Chinese company, not directly controlled by the PRC.
CFIUS review can be curtailed if there is a joint, senior-level determination by thelead agency and the Department of Treasury that the transaction will not involve a U.S. national security threat.
The CFIUS review under FINSA must determine whether (1) the transaction could result in control by aforeign person of a U.S. person engaged ininterstate commerce, (2) there is credibleevidence to support a belief that the foreignperson might take action that threatensto impair U.S. national security and (3) thereare any other laws that provide adequateauthority to protect national security. Under FINSA, any transaction party can instigate a CFIUS review, and the President, CFIUS itself, or any CFIUS member can require an investigation in certain cases, and can also require CFIUS to review again a previously reviewed transaction, if the lead agency finds an intentional breach of a prior mitigation agreement and all CFIUS members agree that no other remediesare available to deal with the breach.
Upon completion of the 30-day review with no further action contemplated, the Secretary of Treasury and the head of the lead agency must transmit a certified notice to members of Congress reporting the results of its review.
If a transaction is found by CFIUS to threaten to impair U.S. national security and that threat has not been “mitigated” during the initial 30-day review period, then a 45-day investigation is initiated by CFIUS. Following completion of the 45-day investigation, the Secretary of Treasury and the head of the lead agency must transmit to specifically designated members of Congress a certified written report on the results of the investigation, unless the proposed transaction has been sent to the President for decision. The 3Com transaction collapsed without a formal action on the application, based on advice to the parties that CFIUS would oppose.
While the CFIUS review is underway, FINSA requires the DNI to solicit the views of all appropriate intelligence agencies, to “expeditiously carry out a thorough analysis” of any threat to national security posed by the transaction, and to provide the DNI analysis to CFIUS no later than 20 days after the date on which notice of the transaction is accepted by CFIUS.
FINSA continues the existing Presidential authority to suspend or prohibit a proposed transaction. Once a 45-day investigation is complete, CFIUS must provide a report and recommendation to the President, who then has 15 days to determine whether to suspend or prohibit a proposed transaction. The President may also direct the Attorney General to seek appropriate relief, including divestment in the case of a completed transaction, to enforce the President’s decision.
Once notified, a CFIUS withdrawal requires approval in writing by the Department of the Treasury. If a withdrawal is approved, CFIUS must nonetheless establish interim protections to address specific concerns that have been raised regarding the transaction, a resubmission timetable if appropriate, and a process to track any actions taken by a party to the transaction prior to resubmission.
FINSA continues the 5 factors designated in Exon-Florio for consideration by CFIUS and by the President:
(1) the domestic production needed for projected national defense requirements;
(2) the capability and capacity of domestic agencies to meet national defense requirements;
(3) the control of domestic industries and commercial activity by foreign citizens as it affects
U.S. ability to meet national security requirements;
(4) the potential effects of the acquisition on sales of military goods, equipment, or technology to countries supporting terrorism or countries of concern regarding missile or chemical/biological weapons proliferation; and
(5) the potential effects on U.S. international technological leadership in areas affecting national security.
FINSA also added six new factors for mandatory consideration:
(6) the potential national security-related effects on United States critical infrastructure, including major energy assets;
(7) the potential national security-related effects on United States critical technologies;
(8) whether the covered transaction is a foreign government-controlled transaction;
(9) as appropriate, a review of the current assessment of (A) the adherence of the subject country to nonproliferation control regimes, including treaties and multilateral supply guidelines, (B) the relationship of such country with the United States, specifically on its record on cooperating in counter-terrorism efforts; and (C) the potential for transshipment or diversion of technologies with military applications, including an analysis of national export control laws and regulations;
(10) the long-term projection of United States requirements for sources of energy and other critical resources and material; and
(11) such other factors as the President or CFIUS may determine to be appropriate, generally or in connection with a specific review or investigation.
FINSA codified the current Exon-Florio procedure of using “mitigation” measures to remedy transactions that may pose a threat to U.S. national security. CFIUS or a lead agency is authorized to “negotiate, enter into or impose, and enforce any agreement or condition with any party to a covered transaction in order to mitigate any threat to the national security of the United States that arises as a result of the transaction.” FINSA provides that mitigation measures should be premised on risk-based analyses and monitored by a designated CFIUS agency, which must provide reports to CFIUS on the implementation of the mitigation measures.
As at present, confidential information provided during a post-FINSA investigation will be provided to Congress only after the relevant Congressional committee provides an assurance of confidentiality.
As noted above, FINSA requires extensive reports to Congress on completed CFIUS investigations and these reports will become public except to the extent they contain classified information.
FINSA also requires the Secretary of the Treasury to submit annual reports, including reports with respect to investments in the United States by foreign governments or persons that comply with any boycott of Israel or do not ban organizations designated by the State Department as foreign terrorist organizations.
The Treasury Department’s final regulations under FINSA became effective December 22, 2008, and further guidance is expected in due course on the types of transactions that could expect objections. Under the Regulations, preclosing voluntary compliance continues to be encouraged, as well as CFIUS consultations prior to formal notification. The concept of “control” versus “influence” is clarified somewhat, and certain minority shareholder protection rights are now specifically not “control.” The regulations provide a safe harbor for passive investments under 10% of the voting securities of the U.S. business, provided control is not intended and the investor does not have a board seat. This is a significant dilution of the safe harbor as originally understood. Under the regs, even collateralized loans with the usual negative covenants are not covered unless there are equity characteristics, and collateral can be realized upon in default provided that management rights remain onshore. Convertibles will be evaluated depending on the rights appurtenant. One welcome clarification is that CFIUS clearance enables additional acquisitions as well, without returning for further CFIUS review, but only if the original transaction was cleared. The final regs also improve the scope of the information required to be filed, as compared with the proposed regs, while enabling CFIUS to penalize false filings and breaches of mitigation agreements, which now may provide for liquidated damages in the event of a breach.
With the final regulations now in place, FINSA presents the latest effort to balance the tremendous benefits to the U.S. economy from the massive foreign investment here with the constant concerns for U.S. national security which expanded geometrically after September 11, 2001. Transaction parties now must more seriously evaluate CFIUS voluntary filings in close cases, to avoid a unilateral investigation by CFIUS, especially if a specific transaction might attract strong anti-takeover animus by a target, by Congress or another constituency, or in the press. Particularly sensitive areas would include foreign government acquisitions, or transactions involving infrastructure, defense, technology or communications such as the 3Com deal. Just as with the antitrust review under the U.S. Hart-Scott-Rodino premerger notification process, CFIUS review will significantly affect the schedule for and expense of any possibly covered U.S. acquisition, and, depending on the facts, could well present a substantive impediment to completion of the deal.
Questions regarding FINSA or U.S. acquisitions in general may be directed to Robert A. McTamaney (firstname.lastname@example.org) of our New York office.
“CFIUS” Exon-Florio Amendments Increase Scrutiny of Foreign Investment in the U.S.
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