October 18, 2007

CFIUS Calls for Comments From Industry on the New Foreign Investment and National Security Act

Holland & Knight Alert
Ronald A. Oleynik | Antonia I. Tzinova

On July 26, 2007, President Bush signed the Foreign Investment and National Security Act of 2007 (FINSA), Public Law No. 110-049, which amends Section 721 of the Defense Production Act of 1950, 5 U.S.C. App. § 2170 (2006), commonly referred to as the “Exon-Florio.” The new legislation came as a result of the year-and-a-half political debacle arising from the proposed acquisition of operating rights to six U.S. ports by Dubai Ports World, a firm owned by the United Arab Emirates.

The political debacle brought to light the fact that Congress and the public were generally not familiar with the review process conducted by the Committee on Foreign Investment in the United States (CFIUS), and therefore Congress felt the need to improve the process. Congress has struggled for the last year-and-a-half with the proper level of government control of certain foreign investment. Fortunately, the new law strikes a reasonable balance between heightened political accountability with respect to national security and the long-held U.S. policy to encourage foreign investment.

On October 24, 2007, FINSA will go into effect. As part of the change, CFIUS must issue regulations implementing the new legislation, as well as guidance on the types of transactions that CFIUS has reviewed and that have presented national security considerations. To get a better understanding of the private sector views on issues relating to the existing national security review process, as well as issues raised by FINSA, CFIUS is inviting both written and oral comments from the industry.1

Some Key Issues Raised by the New Legislation

FINSA Codifies Some of the Existing Practices

  • It creates a statutory basis for the establishment of CFIUS, initially created under an Executive Order.
  • It preserves the 30-day initial review and the 45-day investigation periods.
  • It establishes a procedure for withdrawals and re-submission of notifications. It also requires that CFIUS tracks transactions withdrawn from the review or investigation process.
  • It establishes a procedure for executing mitigating agreements between the parties to the transaction and the agency overseeing the targeted industry (i.e., the lead agency designated for each specific transaction).
  • It formalizes the role of the intelligence community in the review process by requiring the Director of the National Intelligence to submit an analysis of the national security impact of each proposed transaction.

Heightened Political Accountability

The overall structure of the legislation suggests that many provisions were included for political reasons, with little impact on CFIUS powers under the existing law. For example, many in the industry are concerned that whenever a transaction will allow a foreign government to acquire control over a U.S. business, or when a foreign person will acquire a critical infrastructure company, FINSA calls for a mandatory investigation. However, FINSA provides that in such cases an investigation is not necessary if the heads of Treasury and the lead agency jointly agree that such a transaction “will not impair national security.” In practice, this provision differs from the existing review regime only by placing the responsibility to make such a determination on politically appointed members of the agencies rather than career employees.


CFIUS Broad Discretion Emphasized


CFIUS has broad discretion under the current law to review transactions that could pose a threat to national security. The term “national security” was intentionally left undefined in the original legislation, and is construed broadly by the U.S. Government. The goal was to create a mechanism to review foreign investment in U.S. companies that are operating in the defense field (in parallel with the FOCI mitigation process), but also for technology and telecommunications companies not engaged in classified government work.

FINSA clarifies that the term national security may relate to homeland security issues, critical infrastructure, or critical technologies. However, the definition of critical infrastructure, as systems and assets which are “so vital to the U.S. that their incapacity or destruction would have a debilitating impact on national security,” simply emphasizes the broad discretion of CFIUS with respect to national security, rather than creating an environment of economic protectionism.

Evergreen Provisions

FINSA gives CFIUS the right to re-examine an approved transaction where the Committee finds that the parties submitted false or misleading information, or omitted material facts during the review process; or if a party intentionally breaches a mitigation agreement and the Committee determines that there is no alternative remedy. This has been interpreted by some to take away from the finality of the review process. However, we do not view these evergreen provisions as a substantial departure. The government always has a right under a number of criminal statutes to investigate and prosecute for making false statements to the government.

Congressional Oversight

In an attempt to provide greater oversight, Congress demanded to be provided notice of each transaction, but only after CFIUS has concluded its review, and subject to confidentiality provisions intended to protect the parties’ proprietary information. In light of the heightened political accountability, such notification must be certified by the chairperson of the Committee and the head of the lead agency. Other types of congressional oversight include annual reporting on investment trends with respect to types of investments, investors’ nationality, targeted sectors of the U.S. industry and practices adopted by foreign acquirers.

New Regulations and CFIUS Call for Input From the Industry

FINSA requires the President of the United States to direct the issuance of implementing regulations, including civil penalty provisions and mitigation agreements. Proposed regulations will be published in the Federal Register and be subject to notice and comment before they become final.

In order to get an initial understanding of the industry views on the new law and its effect on foreign investment in the United States, CFIUS has issued a Federal Register notice requesting comments from the private sector. Topics of particular interest include:

  • procedural issues relating to the review process, including pre-filing, filing of voluntary notice, unilateral initiation of review by CFIUS, withdrawal of notice, refiling of notice, and notice to filers of the results of a review or investigation
  • definitional issues, including the definitions of “control,” “foreign person,” “person engaged in interstate commerce in the United States,” “critical infrastructure,” and “critical technologies”
  • mitigation agreements, including determinations of the need for risk mitigation, scope of provisions, compliance monitoring, modification, and enforcement, including civil penalties and other remedies for breach
  • confidentiality issues
  • collection of information from filers, including personal identifier information and information to aid CFIUS in determining jurisdiction and whether the transaction raises national security considerations
  • emerging trends in international investment and their relevance to the CFIUS process, including legal structures for effecting acquisitions of U.S. businesses

Written comments are due by December 7, 2007. Oral comments may be presented at a public meeting that CFIUS will hold on October 23, 2007.

1 See Regulations Pertaining to Mergers, Acquisitions and Takeovers, 72 Fed. Reg. 57900 (Oct. 11, 2007) (hereinafter, Federal Register notice).

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