President Signs Law Amending Exon-Florio Controls on Foreign Investment in the U.S.

On July 26, 2007, President Bush signed into law the Foreign Investment and National Security Act of 2007.1 The Act will become effective 90 days after the President signed it into law.  The law reforms the Committee on Foreign Investment in the United States (“CFIUS”), which is charged with developing and implementing the Administration’s foreign investment policy and with conducting national security reviews under the Exon-Florio provisions of the Defense Production Act.  The Exon-Florio provisions grant the President broad discretion to take any action he considers to be appropriate to suspend or prohibit proposed or pending foreign acquisitions, mergers or takeovers of persons engaged in interstate commerce in the United States which “threaten to impair the national security of the United States.”

To assist in making this determination, the Exon-Florio amendment provides for the President or his designee to receive a voluntary joint notification made by the buyer and seller, through CFIUS, of an acquisition, merger or takeover of a U.S. company by a foreign entity.  Submitting a joint notification allows the parties to a transaction that may have national security implications to obtain the U.S. Government’s approval or disapproval of the transaction under the Exon-Florio amendment before the transaction is completed.  This precautionary measure prevents the circumstance whereby the Government intervenes and “unwinds” a completed acquisition due to U.S. national security interests.

Once CFIUS has received a joint notification, it will review the notification to determine whether the proposed acquisition poses a threat to national security (a 30-day process).  If there appears to be a national security concern presented by the acquisition, CFIUS will undertake a more thorough investigation (a 45-day process), after which a report will be issued to the President, who will decide (within 15 days) whether or not to block the acquisition.

The law enacted last month is an attempt by Congress to address what it perceived to be flaws in the CFIUS process following the failed takeover of the Peninsular & Oriental Steam Company (“P&O”) ports by Dubai Ports World in 2006.  Specifically, Congress felt that (i) CFIUS had too much discretion to select what transactions it would review and investigate; (ii) the definition of national security used by CFIUS to determine whether a review was necessary was outdated in a post-September 11 world; and (iii) Congress did not receive enough information about the transactions being reviewed (or not being reviewed) by CFIUS. 

To address these concerns, some of the key highlights of this reform include:

• The Director of National Intelligence (“DNI”), who heads the U.S. Intelligence Community, has been added to the CFIUS membership.  Under the new law, the DNI is required to (i) analyze national security threats posed by transactions; (ii) seek and incorporate the views of all affected or appropriate intelligence agencies with respect to transactions; and (iii) report findings to CFIUS within 20 days of commencement of the 30-day review period;
• The establishment of a “lead agency” or “lead agencies” for each transaction reviewed by CFIUS.  The Treasury Department would appoint the lead agency, which would be responsible for reporting, monitoring and enforcing mitigation agreements on behalf of CFIUS.  The lead agency would also certify that there are no unresolved national security concerns with respect to an approved transaction;
• A requirement for CFIUS to commence an investigation of transactions that involve an acquisition by a foreign government-owned company unless the Treasury Department and the lead agency determine during the 30-day review that the transaction does not threaten national security;
• An increased focus on critical infrastructure2 in the CFIUS process, including requiring CFIUS to:  (i) consider critical infrastructure as a factor during a review and/or investigation; (ii) under certain circumstances, undertake an investigation of any transaction that would result in the transfer of control of critical infrastructure to a foreign person; (iii) include a detailed discussion in an annual report from CFIUS to Congress on the perceived adverse effects on critical infrastructure resulting from foreign acquisitions; and (iv) enact regulations providing guidance on the types of critical infrastructure-related transactions for which CFIUS would expect to receive a joint notification;
• The ability of CFIUS to impose a mitigation agreement or conditions to mitigate on the parties to a transaction that may threaten the national security of the United States3;
• A requirement that CFIUS publish guidance in the Federal Register on the types of transactions that it has reviewed and that have presented national security considerations; and
• A requirement that CFIUS notify Congress after each review and investigation.

The CFIUS reform law attempts to strike a balance between protecting national security interests and encouraging foreign investment.  By expanding the role of the DNI and mandating new regulations and guidance regarding the types of transactions for which CFIUS would expect a joint notification, the new law lends greater definition to the concept of national security than was previously the case.  The reform law also places greater emphasis on transactions involving critical infrastructure and critical technologies, and CFIUS will have a higher burden to justify to Congress why a proposed transaction does not threaten national security.

With the enhanced Congressional oversight imposed by the reform law, it will be increasingly important for U.S. companies and their potential foreign acquirers to build Congressional support, in addition to the support of the CFIUS member agencies, for the proposed acquisition.

As a result of the reforms adopted in this new law, foreign companies considering U.S. company acquisitions – especially those involving foreign government-owned or controlled acquirers and/or acquisition of critical U.S. infrastructure – should be prepared for heightened scrutiny.  U.S. corporations and their potential acquirers should consider filing a joint notice of any significant acquisition, merger or takeover if there is any risk that the contemplated transaction may implicate national security concerns.

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1 On February 28, 2007, the House passed H.R. 556, the “National Security Foreign Investment Reform and Strengthened Transparency Act.”  On May 16, 2007, the Senate Banking, Housing and Urban Affairs Committee unanimously passed S. 1610, the “Foreign Investment and National Security Act of 2007.”  On June 29, 2007, the Senate unanimously approved S. 1610, and on July 11, 2007, the House accepted the Senate’s legislation and sent the measure to the President for signature.

2 The term “critical infrastructure” means any systems and assets, whether physical or cyber-based, so vital to the United States that the degradation or destruction of such systems or assets would have a debilitating impact on national security, including national economic security and national public health or safety.

3 CFIUS has historically negotiated with parties either to mitigate or to remove matters that raise national security concerns.  Up until now, however, such agreements have been informal in nature.