Treasury Department Issues Proposed Regulations Governing Review of Foreign Investment in the United States

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With an estimated two trillion dollars controlled by sovereign wealth funds, investments in the United States by entities associated with foreign governments have been an increasing part of the M&A landscape.
United States Finance and Banking
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With an estimated two trillion dollars controlled by sovereign wealth funds, investments in the United States by entities associated with foreign governments have been an increasing part of the M&A landscape. Investments such as the proposed acquisition of Unocal by a Chinese government-owned company, the proposed acquisition of a British company, which held the rights to manage a number of U.S. ports, by a Dubai-owned company, and the proposed takeover of 3Com by a private equity firm with a Chinese-controlled entity as a minority partner have called into question considerations of U.S. national security. Consequently, the U.S. Congress has focused more sharply on how the U.S. government should review these transactions to ensure there is no threat to national security. In this regard, in 2007, Congress passed and President Bush signed into law the Foreign Investment and National Security Act of 2007 ("FINSA"),1 which amended the existing legislation dealing with review of foreign investment for national security concerns, section 721 ("section 721") of the Defense Production Act of 1950 ("DPA"), commonly known as the Exon-Florio provision. FINSA became effective on October 24, 2007. On April 21, 2008, the U.S. Department of Treasury issued proposed regulations2 to implement FINSA. The proposed regulations would take the place of the Treasury Department's existing Exon-Florio regulations set forth at 31 C.F.R. Part 800.3

Although the proposed regulations are generally consistent with FINSA, they do clarify the process and expand the scope of the investigatory period. Parties to investment in the United States should be aware of the more extensive examination of foreign investment transactions, particularly with respect to any foreign investment, direct or indirect, by which such foreign person can exercise any "control" to ". . . determine, direct, or decide important matters affecting an entity." Further, transactional documents should incorporate provisions providing for the consequences of such review by FINSA.


DPA authorizes the President of the United States to review mergers, acquisitions or takeovers of U.S. companies or assets by foreign-owned or foreign-controlled entities, which could result in foreign control of any person engaged in interstate commerce in the United States, to determine if such transactions threaten the national security of the United States. The President has delegated responsibility to the Committee on Foreign Investment in the United States ("CFIUS"). CFIUS is an interagency committee chaired by the Secretary of the Treasury and is comprised of other representatives of the U.S. government. FINSA establishes CFIUS by statute, as it existed previously only by presidential mandate.

Under FINSA, CFIUS continues to have the power to review any transaction, even after it has closed, to identify and address U.S. national security concerns. However, parties to a transaction that would result in foreign control of a "person" engaged in interstate commerce in the United States (referred to in the proposed regulations as a "covered transaction") may voluntarily file a notification with the Department of Treasury to afford CFIUS an opportunity to review the transaction and address any potential national security concerns prior to closing. FINSA codifies aspects of the structure, role, process and responsibilities of the executive branch departments in review of such covered transactions for national security concerns.

FINSA provides for a 30-day CFIUS review of covered transactions to determine the effect of the transactions on national security and to address any threat posed by such transactions. The Department of Treasury will designate a "lead agency" to conduct the review. The lead agency, on behalf of CFIUS, may negotiate, enter into or impose, and enforce mitigation agreements with parties to the transaction to address any deemed threats to national security. An official at the Department of Treasury must provide written notice to the parties to a covered transaction of a determination by CFIUS whether or not to undertake an investigation and/or to conclude action under section 721.

FINSA requires an additional 45-day investigation in cases where the transaction:

  • threatens to impair national security and that threat has not been mitigated prior to the conclusion of the initial 30-day review;

  • involves a foreign government-controlled transaction(s);

  • would result in foreign control over critical infrastructure; or

  • results from the recommendation of the lead agency, with the concurrence of the other CFIUS members.

To ensure appropriate accountability for CFIUS decisions, FINSA requires that, for any covered transaction on which CFIUS has undertaken an investigation and has determined to approve the subject transaction, a high-level official of the Department of the Treasury and of the lead agency must certify to Congress that there are no unresolved national security issues in order for the transaction to be cleared within the initial review. If a 45-day investigation is initiated and any national security concerns remain unresolved at the end of such investigation, the transaction must be referred to the President, who then must make a determination within 15 days on whether to approve or block the transaction.

Where a covered transaction does present national security concerns, FINSA provides statutory authority for CFIUS, or a lead agency acting on behalf of CFIUS, to enter into mitigation agreements with parties to the transaction or impose conditions on the transaction to address these concerns. This authority enables CFIUS to mitigate any national security risk posed by a transaction, instead of recommending to the President that the transaction be prohibited because it could impair U.S. national security.

FINSA provides that CFIUS may reopen its review of a transaction on which it previously concluded action under section 721 if a party to the transaction submitted false or misleading material information or omitted material information. CFIUS may also reopen a review where a party to a transaction intentionally and materially breaches a mitigation agreement or condition, and no other remedies are available to address the breach. FINSA also provides CFIUS with authority to impose civil penalties for violations of section 721, including violations of any mitigation agreement.



The proposed CFIUS regulations retain many of the basic features of the existing Exon-Florio regulations. The system continues to be based on voluntary notices to CFIUS by parties to transactions, although CFIUS retains the authority to review a transaction of which it has not been voluntarily notified. The principal new development with regard to the procedures for filing notice to CFIUS is that the proposed regulations make explicit CFIUS' current practice of encouraging parties to contact and engage with CFIUS before formally filing. Such pre-notice consultations may help ensure that reviews of covered transactions are concluded as efficiently as possible.

Key Aspects of Proposed Regulations

  • The proposed regulations would continue to consider foreign acquisition of 10 percent or less of a U.S. business to be other than a "covered transaction" if the transaction is "solely for the purpose of investment." However, it is important to note that those "safe harbor" provisions do not automatically exempt such a transaction from CFIUS review. For example, a transaction involving a foreign person with an ownership interest of 9 percent of a U.S. business that has the right to determine, direct, or cause decisions regarding important matters could be deemed a "covered transaction."

  • The proposed regulations reaffirm the focus on foreign control of an entity engaged in interstate commerce in the United States. The proposed regulations adopt the long-standing approach of defining "control" in functional terms as the ability to exercise certain powers over important matters affecting a business. Control is not defined in terms of a specified percentage of shares or numbers of board seats.

  • The proposed regulations have expanded the procedures to make explicit the opportunity for interaction between CFIUS and the parties to a transaction before a notice is formally filed. Information provided to CFIUS as part of a pre-notice consultation becomes part of the formal notice and is accorded the existing confidentiality protections of section 721(c).

  • The proposed regulations have expanded the scope of information required to be submitted to CFIUS to include additional data that CFIUS has routinely requested of parties in connection with a voluntary notice. This includes, for example, additional information regarding ultimate and intermediate parents of the foreign person making the acquisition; identification of any special government rights over the foreign person making the acquisition; and personal identification information for certain key personnel.

  • There are also new requirements that the purchase agreement or other similar documents establishing the terms of the investment transaction must reflect all terms agreed to by the parties with respect to matters relating to post-closing control and governance.

  • The proposed regulations provide that in cases where CFIUS requests follow-up information, such information must be provided within two business days after CFIUS' request; otherwise, CFIUS may elect to reject the voluntary notice. Also, there is reaffirmation of the requirement that each notifying party certify in writing that the information it provides to CFIUS is complete and accurate as it relates to itself and the transaction, which requirement pertains to both the original information in the voluntary notice, as well as to follow-up information.

  • The proposed regulations provide for civil penalties of up to $250,000 for any material misstatement or omission in a notice to CFIUS and each violation of a mitigation agreement entered into with CFIUS or specific conditions imposed on the parties. The civil penalties available under the DPA are without prejudice to other penalties, civil or criminal, available under law. These civil monetary penalties apply to any transaction entered into after the effective date of FINSA, October 24, 2007.

If you have any questions regarding the proposed regulations, including how they may affect your company, please contact one of the members of the Securities Law Practice Group or the lawyer in the firm with whom you are regularly in contact.


1 Foreign Investment and National Security Act of 2007, Pub. L. No. 110-49, 121 Stat. 246 amending Defense Production Act of 1950, 50 U.S.C. App. § 2170 et seq.

2 Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons, U.S. Department of the Treasury, 73 Fed. Reg. 21,861 (Apr. 23, 2008).

3 Regulations Pertaining to Mergers, Acquisitions and Takeovers by Foreign Persons, 31 C.F.R. Part 800 et seq. (2007).

This article is for general information and does not include full legal analysis of the matters presented. It should not be construed or relied upon as legal advice or legal opinion on any specific facts or circumstances. The description of the results of any specific case or transaction contained herein does not mean or suggest that similar results can or could be obtained in any other matter. Each legal matter should be considered to be unique and subject to varying results. The invitation to contact the authors or attorneys in our firm is not a solicitation to provide professional services and should not be construed as a statement as to any availability to perform legal services in any jurisdiction in which such attorney is not permitted to practice.

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