Originally published in the Houston Business Journal, September 2007.
Foreign investment in the United States is once again under the microscope. National security and protection of the economy were the drivers for a new law that will lead to more federal government review of foreign purchases of American companies.
In 2006, the U.S. government’s Committee on Foreign Investment in the United States, or CFIUS, allowed Dubai- Ports World, an Arabcontrolled company, to acquire P&O, an international company that manages American ports. Because of the concerns about port security in the post-Sept. 11 years, the acquisition quickly became a political hot potato.
In reaction to the public protest, Congress has changed the role of CFIUS, formerly a quiet interagency review process for acquisitions of defense manufacturers or specialized technology companies by foreign companies. Now CFIUS could become a political forum where a much wider range of deals will be scrutinized and many more economic interests will have the chance to support or oppose a given acquisition.
Opponents of a foreign acquisition, including perhaps domestic bidders for a target company, will be able to raise challenges to a proposed deal. Other stakeholders, for example, labor unions, will be able to demand extended review of the terms of transactions. Public relations, timing issues and transactional complications can threaten deals that once would have been approved with little notice or controversy.
Foreign investors have reacted unfavorably to the new law that could lead to restrictions on what has traditionally been, and probably remains, one of the most open economies in the world.
Because the CFIUS changes are so recent, participants in international transactions must carefully monitor the development of new procedures and practices at CFIUS.
CFIUS has reviewed thousands of transactions since 1988 when it was given power to block foreign acquisitions that threaten U.S. national security. Only a very small percentage of deals has been formally investigated, and only one was blocked — the attempted 1992 acquisition of an aerospace parts manufacturer by the Chinese government. The existence of a CFIUS review process, however, probably has discouraged some acquisitions, and an informal consultation process at CFIUS has influenced many more deals.
The Dubai Ports World acquisition and the resulting out cry convinced Congress that informal processes at CFIUS needed to be formalized. Congress drafted a bill that adds new triggers to review and investigation and holds CFIUS to a higher, faster standard for approving transactions. In late February 2007, the U.S. House of Representatives agreed to the new standards by passing H.R. 556. The Senate passed its version in June and, after the two houses agreed on a conference version, President Bush signed the new bill into law in July.
H.R. 556 makes a number of changes to CFIUS practice, including:
- The president, acting through CFIUS, isrequired to conduct more investigations of the effect of a transaction on the national security of the U.S. CFIUS voting procedures make it easier to initiate an investigation.
- CFIUS must conduct an investigation of a transaction if it is determined that the acquirer is foreign government-controlled.
- The universe of companies that could affect national security was expanded to include companies providing infrastructure and homeland security defense, and there is no specific bar to further expansion of the concept.
- Congress must be notified of more CFIUS processes than before.
- A person from a country that has provided support for international terrorism (and the government of such country) will be barred from acquiring American companies.
Dealing With CFIUS
Although entering the CFIUS review process is voluntary, CFIUS may initiate are view and can order an acquisition unwound retroactively. Acquiring companies, targets and other participants in a foreign acquisition should keep this in mind:
- More filings for review of inbound acquisitions will be necessary, especially if the acquirer is from a country that has economic, political or military tensions withthe U.S. or with an economy dominated by the government.
- The new CFIUS procedures will mean more staff involvement, more bureaucracy and more explanation of deals. Transaction timing issues will become more important.
- The CFIUS process, with its expanded exposure to political influence, could become an offensive weapon for parties who feel threatened by a foreign acquisition and want to stop it; the elastic concept of national security fits many activities today.
- More information about deals will become public. Domestic bidders for a company will be able to make a national security-based argument against the foreign deal. All involved parties must be prepared to meet with legislators, administration officials, regulators, community leaders, labor unions and other stakeholders to argue their cases. Press strategy to inform the media about the transaction will be crucial.
- For acquirers, legal strategies must be built to support the deal. For example, CFIUS and other U.S. agencies endorse a number of management techniques to minimize the level of foreign control and influence.
Recognizing the importance of foreign investment in the U.S., Congress and the administration have emphasized their intent is not to let the new laws disrupt or block routine foreign investments and acquisitions. The new law will, however, raise the cost and lower the chance for approval of foreign acquisitions and could discourage or defeat some investments.
It remains to be seen whether the national security benefits of the new law will outweigh the risk of reduced foreign investment in America.
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