United States: New Federal Waters To Navigate For Foreign Investment In The United States

The federal government is moving toward increased scrutiny of foreigners’ efforts to acquire "critical infrastructure" in the United States, particularly assets that could be related to national security. This means that foreign companies, especially those controlled by foreign governments, generally should expect more extensive reviews and investigations of mergers, acquisitions or takeovers that may affect sensitive U.S. assets.

This movement – embodied in legislation that has passed both the House and Senate unanimously, though in different forms – follows the dispute over last year’s offer by Chinese National Offshore Oil Co. (CNOOC) to buy Unocal and this year’s controversy that blocked Dubai Ports World’s purchase of a British company that manages significant U.S. port facilities.

The main concern triggered by the congressional action is whether any law ultimately enacted will, to some degree, discourage foreign direct investment (FDI) in the United States. FDI in this country already has fallen well below the record high of $300 billion reached in 2000, with China and India since overtaking the United States as the leading FDI destinations. Whether FDI in the United States is hurt by the new legislation will depend on whether a House-Senate conference, to be held after Congress reconvenes in early September, adopts a final bill that is closer to the House or Senate version.

The U.S. business and financial communities and U.S. subsidiaries of foreign companies prefer the House bill (H.R. 5337). That measure chiefly aims to improve the management of the Committee on Foreign Investment in the United States (CFIUS), the interagency body which scrutinizes FDI transactions. They generally oppose the Senate bill (S. 3549), which would make broader CFIUS changes.

Among other issues, the Senate bill would:

• Require notifications of acquisitions by foreign government controlled entities of "critical infrastructure" and mandate investigations of such transactions. In contrast, the House bill would not mandate notifications but would add critical infrastructure as a factor to be considered by CFIUS in its review.

• Require notification of selected members of Congress while reviews and investigations are being conducted and require the notification of governors in states with critical infrastructure assets that are being acquired. The House bill includes more limited congressional notification provisions and notification would not take place until after an investigation has been completed. The House bill also does not require notification of state officials. In the past, CFIUS has been scrupulous in protecting information submitted to it during reviews and investigations. The broad notification provisions in the Senate bill risk leaking confidential information and politicizing the review and investigation process.

• Trigger longer processing times by allowing any CFIUS agency to request a 30-day extension of the initial review period, which could still be followed by a 45-day investigation. The House bill would permit extension of the 45-day investigation period but only if two -thirds of the CFIUS members involved in the review request the additional investigation by roll call vote.

• Introduce new factors into the review and investigation process including: (1) potential effects on critical infrastructure, including major energy assets; (2) potential effects on U.S. critical technologies; (3) projected long-term U.S. energy needs; and (4) other nations’ adherence to nonproliferation control regimes, records of cooperating with the United States in counter-terrorism efforts, and the potential for transshipment or diversion of technologies with military applications.

Opponents of various Senate provisions have drawn lines in the sand. During House floor debate, for example, Financial Services Committee Chairman Michael Oxley (R-OH) stated: "We simply must not drive off those who want to make the wise investment in our great economy," adding: "Our friends in the other body should understand that no bill would be a preferable alternative to a bad bill . . ." On the other side of the Capitol, Senator John McCain (R-AZ) said he had assurances that his beliefs that the Senate bill contained excessive CFIUS notification requirements and would result in too many investigations would be addressed in conference with the House. "If they are not," he said, "I will be forced to object to the conference report."

It is unclear, however, whether some Senate provisions will end up in the final bill, especially with mid-term elections looming and the CNOOC and Dubai Ports World furors only recently in the past.

There is, after all, a considerable history of tension between the U.S. desire to welcome foreign investment, which has played such a key role in the development of the nation, and public concern during various periods about foreigners owning U.S. assets. Public apprehension emerged strongly, for example, over German ownership of U.S. chemical and other plants around World War I, when Congress passed the Trading With the Enemy Act. CFIUS was established by Executive Order in 1975 at a time of hand-wringing over Arab petrodollar investments in the United States.

Other fears surfaced in the 1980s when worries centered on Japanese purchases of noted U.S. real estate assets and Fujitsu’s plan to buy Fairchild Semiconductor. The Fujitsu-Fairchild transaction led directly to the 1988 enactment of the Exon-Florio Amendment to the Defense Production Act, which for the first time empowered the President to block transactions on national security grounds.

In the early 1990’s, a French government-owned company’s plan to buy the missile division of LTV Aerospace and Defense resulted in the 1992 passage of the "Byrd Amendment" to Exon-Florio, which requires investigations of acquisitions by foreign government owned companies that could affect national security.

"National security" was deliberately left undefined in the Exon-Florio Amendment and the implementing regulations. Clearly, the intent was to prevent foreign control (especially foreign government control) of U.S. defense and intelligence capabilities, including plants, technology, personnel or materials comprising the defense industrial bases. Over the years, however, CFIUS has also reviewed and investigated transactions in sectors other than defense, including technology, telecommunications, energy and natural resources.

As in the past, today’s legislation provides few details on what is meant by national security or the concept of "critical infrastructure." The House and Senate bills take differing approaches to the definition of this new term. Closely mirroring the definition of critical infrastructure at § 1016(e) of the USA PATRIOT Act, the Senate bill defines critical infrastructure to mean "any systems and assets, whether physical or cyber-based, so vital to the United States that the incapacity or destruction of such systems and assets would have a debilitating impact on security, national economic security, national public health or safety, or any combination of those matters." The Senate bill would require the Secretary of the Treasury and Secretary of Defense to jointly issue regulations to interpret how this definition will apply to particular transactions. The House bill leaves the term "critical infrastructure" undefined, but in what it calls a clarification states that the term "’national security’ shall be construed to include ‘homeland security,’ including its application to critical infrastructure."

In the wake of the CNOOC and Dubai Ports World uproars, foreign attempts to acquire U.S. energy or port facilities clearly can be expected to be put under a microscope. The Senate bill, in fact, specifically cites "major energy assets" as an example and mandates that CFIUS consider the "long-term projection of United States requirements for sources of energy." It also requires CFIUS to weight a transaction’s effect on U.S. "critical technology."

It is conceivable, moreover, that CFIUS reviews and/or investigations will reach well beyond traditionally covered transactions, especially if members of Congress prod the Committee to do so. That, at least, is suggested by the House legislative history. During floor discussions preceding the House vote, for example, Representative Carol Maloney (D-NY), a co-sponsor of H.R. 5337, noted that she had urged CFIUS to review the acquisition of a U.S. electronic voting firm by a company with strong Venezuelan ties. House Majority Whip Roy Blunt (R-MO), also a sponsor of the legislation, cited Maloney’s example approvingly during the floor debate.

On the other hand, during this year’s legislative cycle, as in past years, "economic security" has been proposed as one of the criteria for Presidential action under Exon-Florio, which would open the door to blocking any transaction on protectionist or nationalistic grounds. These proposals, however, have consistently been rejected.

The Structure of CFIUS. There are numerous differences between current practice and the House and Senate bills, both of which would codify CFIUS and its operations. For example, at present the Secretary of the Treasury is designated as CFIUS Chairman. Other CFIUS members include the Secretaries of Commerce, Defense, State and Homeland Security, the United States Trade Representative, the Chairman of the Council of Economic Advisers, the Attorney General, the Director of the Office of Management and Budget, the Director of the Office of Science and Technology Policy, the Assistant to the President for National Security Affairs and the Assistant to the President for Economic Policy. The Treasury Department’s Office of International Investment administers CFIUS reviews and investigations.

Under H.R. 5337, CFIUS would be expanded to 14 members, with the Secretaries of Homeland Security and Commerce added as vice chairs and the Secretary of Energy included as a member. On the other hand, S. 3549 would reduce CFIUS membership to 8 and designate the Secretary of Defense as co-chair.

Review and Investigation Periods. At present, filing a CFIUS notification is voluntary. It is not a violation to proceed without notifying CFIUS, even if a transaction is clearly subject to the law, although failure to file could expose the transaction to the risk of blocking. Once notification is submitted, an initial 30-day review is conducted. If CFIUS then determines that an investigation is warranted, the investigation period is 45 days, after which the President has 15 days to act.

As noted above, the House bill would retain the 30-day review and 45-day investigation. It would permit an added investigation of up to 45 days only if two-thirds of CFIUS members involved in the investigation, by roll-call vote, request one. The Senate bill, on the other hand, mandates notification of certain critical infrastructure transactions and it would allow an extra 30-day review at the request of any CFIUS agency that believes a covered transaction could pose a national security threat. Investigations would still last 45 days.

The Role of the Intelligence Community. Both measures also codify the role of the U.S. intelligence community in the CFIUS process, though again in different ways.

Under the House bill, the Director of National Intelligence (DNI) would analyze potential security threats but would not be a CFIUS member. The intelligence community would have 30 days to analyze proposed transactions that CFIUS plans to scrutinize, and it would have to complete its work at least a week before the end of a CFIUS review. It could, however, continue its analysis during any subsequent CFIUS investigation if intelligence issues are not fully resolved during the initial review.

Under the Senate bill, the DNI would be added as a CFIUS member. An intelligence report on transactions to be examined would have to be completed at least 15 days before CFIUS completes its initial review, but intelligence community work would continue during the rest of the review and during any subsequent CFIUS investigation.

The following is a side-by-side comparison of the House and Senate bills.

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