Exon-Florio, CFIUS & Foreigners
April 1, 2006
Dennis L. Bryant- New York
*Originally published in the April 2006 issue of Maritime Reporter
From the earliest days of our independence, the United States has both
welcomed and been leery of foreign investment in the US economy. In the
immortal words of Yogi Berra, the last several months have been a case of déjà
vu all over again.
On February 13, 2006, talk radio’s Michael Savage, in his program “The Savage
Nation,” and Lou Dobbs, in his television show “Lou Dobbs Tonight,” complained
about the pending acquisition of the Peninsular & Oriental Steam Navigation
Company (P&O) by Dubai Ports World (DPW). The concern was that P&O, a British
corporation, among its many worldwide holdings, operated six port facilities in
the United States and that, with the planned acquisition, those US assets would
be operated by an Arab corporation, in which the Government of the United Arab
Emirates is a major shareholder.
On February 16, Senator Charles Schumer (D-NY) called a press conference to
denounce the pending acquisition. Depending on your favorite metaphor, the
issue quickly turned into a feeding frenzy, a snowball rolling downhill, or the
perfect storm. Congressional Representatives and Senators, who only weeks
before had expressed no interest in maritime security, were drafting
legislation, holding press conferences, and appearing on news programs all for
the purpose of saving America from the imminent arrival of weapons of mass
destruction through foreign-controlled US ports.
The ports of the United States are largely owned by state and local
government agencies. The thousands of individual port facilities are leased to
thousands of maritime companies. Some of these companies specialize in
operating port facilities. Some ship-owning companies operate their own
facilities in order to ensure convenient access for their ships. Shipping is an
international business and the vast majority of ship-owning companies are
domiciled outside the United States. Not surprisingly, the majority of port
facilities in the United States are now operated by companies domiciled outside
the United States. How did a large, but otherwise routine, commercial
transaction that included as a minor aspect the transfer of operation of six US
port facilities from one foreign company to another foreign company end up in a
political firestorm?
With the onset of the Cold War in 1945, it became apparent to persons in the
federal government that efforts must be made to keep national defense assets out
of the hands of America’s enemies (i.e., the Communist countries, such as the
USSR and Red China). Initially, this was done on an ad hoc basis. In 1950,
Congress enacted the Defense Production Act to provide some guidelines and
standards, as well as specific legal authority. In 1975, following the OPEC oil
embargo, President Ford issued an Executive Order establishing the Committee on
Foreign Investment in the United States (CFIUS) to administer the process of
monitoring foreign investment in US industry and assets. Initially, the focus
was on companies that manufactured weapons and defense systems.
After an attempt in 1987 by Japan-based Fujitsu Ltd. to acquire majority
ownership of Fairchild Semiconductor Corporation, Congress adopted a significant
amendment to the Defense Production Act. Known informally as the Exon-Florio
bill (after its principal proponents – Senator Exon from Nebraska and
Representative Florio from New Jersey), the 1988 legislation formalized the role
and authority of CFIUS in the review process. The Defense Production Act of
1950, as amended by the Exon-Florio bill, grants the President authority to
block proposed foreign acquisitions of companies engaged in interstate commerce
in the US where that acquisition threatens to impair the national security.
Review of a proposed acquisition, merger, or takeover is particularly intense
where the proposed activity is by an entity controlled by or acting on behalf of
a foreign government. The President can suspend or prohibit the proposed
activity, but only if there is “creditable evidence” that the foreign investment
will impair national security. The statute does not define “national security,”
but the term is to be interpreted broadly without limitation to a particular
industry.
US Department of Commerce records indicate that, as of 2004, foreign direct
investment in the United States amounted to more than $1.5 trillion. The United
Kingdom is the largest foreign direct investor ($252 billion), followed by Japan
($177 billion), the Netherlands ($167 billion), Germany ($163 billion), and
France ($148 billion). In 2004, the direct investment in the United States by
companies from the United Arab Emirates was shown to be approximately $24
million, but this data only counts ownership or control, by one foreign
resident, of 10% or more of the voting securities of an incorporated US business
enterprise or the equivalent interest in an unincorporated US business
enterprise. It is estimated that UAE companies have invested approximately $1
billion in US assets, but, because the ownership percentage is generally low,
most of these investments do not show up in government statistics.
US port facilities are currently operated by companies domiciled in the
United Kingdom, Denmark, Japan, South Korea, Taiwan, Singapore, and China, and
this listing is far from complete. Ships from virtually every nation enter and
depart US ports daily, carrying cargoes from everywhere. The majority of the
crewmembers on these ships are from third world nations. All the ships adhere
to internationally-agreed security standards and are subject to examination by
the US Coast Guard. The cargoes are subject to examination by the US Customs
and Border Protection. The crews are subject to examination by the US
Immigration and Customs Enforcement. The US port facilities themselves
(regardless of the nationality of the operating company) must comply with USCG
security regulations, must prepare a facility security plan, must have the plan
reviewed and approved by the Coast Guard, and are subject to both regular and
random USCG inspections. The proposed acquisition of the six US port facilities
by DPW was examined by CFIUS, which found no “creditable evidence” that the
transfer would impair national security.
While there is certainly room for improvement in maritime security, US ports
and US port facilities are significantly more secure today than they were in
2001. That we don’t feel more secure is more a matter of perception than
reality. That we are comfortable with a British company operating various US
port facilities (remembering that a significant percentage of Britons are of
Arab descent), but uncomfortable with an Arab company operating those same US
port facilities (even though much of the senior management of the Arab company
are US citizens), is a reflection of both long-term history and recent
experience. We live in an international community. We are engaged in a global
war against terrorism (sometimes called “the Long War”). We need to and have
enlisted the cooperation and assistance of many international partners,
including Middle Eastern nations. The United States owes it to our
international partners (and to the citizens of the United States) to act in a
thoughtful, deliberate manner with regard to homeland and international
security.
Knee-jerk responses are the opposite of leadership.