United States: Congress Approves CFIUS Reform Legislation Clearing The Way For Less Political Foreign Investment Reviews

On February 28, 2007, the House had passed its own CFIUS reform legislation (H.R. 556) and the Senate passed its own version on June 29, 2007 by unanimous consent (S. 1610). Because the differences between the two bills were minor, the House adopted the Senate bill as an amendment in lieu of its own bill, thus avoiding a House-Senate conference. The Bush Administration has generally supported both the House and Senate CFIUS reform measures in this Congress and the President is expected to sign the legislation.

The House of Representative’s recent action should bring to a close a controversial period for foreign investors. Since the 2006 transaction in which Congress blocked the acquisition by Dubai Ports World ("DPW") of a company that operated several major U.S. ports, the foreign investment review process has become highly politicized. Congress' frequent and vocal criticism of the Administration's handling of national security reviews under the Exon-Florio Amendment frightened foreign investors, who feared they might be the victim of the next DPW-like uproar.

With Congress looking over its shoulder, CFIUS, the interagency body that vets foreign acquisitions of U.S. companies, has already tightened its procedures. For example, CFIUS has been requiring foreign companies to submit detailed security information on boards of directors and senior executives. More senior government officials have been involved in the review of transactions, and CFIUS has been reporting to Congress on completed reviews. Many of these changes anticipated the requirements of the new law.

Nevertheless, the new law will have a significant impact. For example, it greatly expands the concept of national security to include "those issues relating to ‘homeland security’, including its application to critical infrastructure." Critical infrastructure, in turn, is defined to mean "systems and assets, whether physical or virtual, so vital to the United States" that their incapacity or destruction would have a "debilitating impact on national security." In an effort to provide some clarity to these broad terms, the law instructs CFIUS to publish within 180 days regulatory guidance on the types of transactions CFIUS has reviewed and those that have presented national security considerations.

Energy security will also be a factor in CFIUS reviews. This is a consequence of another controversial transaction – the 2005 proposed acquisition of Unocal Corp. by China National Offshore Oil Corp. after Chevron had already signed an agreement to buy the company. The new law requires CFIUS to examine "the potential national security-related effects on United States critical infrastructure, including major energy assets," and to consider "the long-term protection of United States requirements for sources of energy and other critical resources and material."

In sum, many more types of transactions are now potentially subject to review and possible investigation, such as acquisitions of ports and power plants, LNG terminals, toll roads and tunnels. Previously, most investors would not have thought such transactions posed national security risks.

The new law keeps the original time frames of a 30-day review period and, if triggered, a 45-day investigation. However, the law makes investigations mandatory if: (i) the transaction threatens to impair national security and the threat has not been mitigated; (ii) the acquiring company is owned by a foreign government; or (iii) the transaction would result in foreign control of any critical infrastructure, CFIUS determines that the transaction could impair national security and the threat has not been mitigated.

There is an exception for investigations of foreign government controlled transactions or transactions involving critical infrastructure if the Secretary of the Treasury and the Secretary of the designated "lead agency" involved in the review determine that the transaction will not impair U.S. national security. The authority to make this determination may not be delegated to an official lower than the Deputy Secretary level. Clearly, there is a strong presumption that these transactions will face investigation.

Previously CFIUS had operated under various Executive Orders and the membership had gradually grown to twelve, including representatives from various elements of the Executive Office of the President. The new law provides express statutory authority for CFIUS and fixes the membership at nine. The members of CFIUS are now the Departments of Treasury, Homeland Security, Commerce, Defense, State, Justice, Energy and Labor (non-voting ex officio) and the Director of National Intelligence (non-voting ex officio). The law authorizes the Director of National Intelligence to play a more explicit role in the CFIUS review process. In addition, any other agency may be added to CFIUS on a case-by-case basis as appropriate.

Although the Treasury Department continues to serve as the chair of CFIUS with a newly appointed Assistant Secretary responsible for CFIUS reviews, a major new provision of the law is the designation of a "lead agency" for each transaction that is responsible for negotiating mitigation agreements and monitoring their compliance. The lead agency for a particular transaction will be selected based on the industry and the nature of the risk the transaction may present.

The new law specifically authorizes the lead agency to "negotiate, enter into or impose, and enforce" any agreement or condition with a party to mitigate any threat to national security that arises as a result of the transaction. The lead agency is required to provide periodic reports to CFIUS monitoring the observance of the terms of mitigation agreements.

Mitigation agreements will clearly play a more significant role in CFIUS reviews. These are agreements designed to address perceived national security risks that may be enforced contractually against a foreign investor. The terms of mitigation agreements, which apply only to foreign investors, may go beyond applicable regulatory requirements. The use of such agreements has already increased dramatically. In recent congressional testimony, Stewart Baker, Assistant Secretary for Policy at the Department of Homeland Security ("DHS"), reported that from 2003-2005, the first three years of the Department’s existence, DHS was a party to thirteen mitigation agreements. In 2006 alone, DHS was a party to fifteen such agreements.

One reason behind the DPW controversy was the feeling by many in Congress that they were not being kept informed about pending or completed transactions. The new law now requires CFIUS to send a certified report to specified members of Congress outlining the results of each completed review and investigation unless the matter has been sent to the President for decision. The certification must describe actions taken by CFIUS and identify the determinative factors considered. Reports must be provided by Presidential appointees (generally individuals at the Assistant Secretary level) or by the Deputy Secretary in the case of investigations.

These reports must be provided to the following members of Congress: the Majority and Minority Leaders of the Senate; the Chairs and Ranking Members of the Senate Banking Committee and any Senate Committee having oversight over the lead agency; the Speaker and Minority Leader of the House; the Chairs and Ranking Members of the House Financial Services Committee and the Committee having oversight of the lead agency; and for transactions involving critical infrastructure, the members of the Senate from the state and the Member of the House from the congressional district where the principal place of business of the acquired U.S. company is located.

The law also requires CFIUS to provide briefings to Congress on completed transactions and compliance with mitigation agreements, subject to confidentiality restrictions or classified treatment, if necessary.

Although foreign investors will not see dramatic changes in the way CFIUS reviews transactions, there will be an increased level of scrutiny and, with the expanded concept of national security, more transactions will be subject to CFIUS review. Even when an acquired U.S. company does not have any U.S. government contracts or does not export sensitive technology, the transaction may still raise issues from the standpoint of critical infrastructure or homeland security. Also, as a result of the new legislation, there will likely be more 45-day investigations, particularly if the acquiring company is controlled by a foreign government.

These changes will make foreign investment more difficult, but for most transactions probably only marginally so. Transactions involving companies from countries where the United States may perceive a threat or those that involve the acquisition of assets that could be characterized as "critical infrastructure" will still face political risks. For those transactions, government relations will continue to play an important role in the CFIUS review process, apart from compliance with the purely regulatory aspects of the review. In general, however, with the enactment of the new law, Congress should have greater confidence in CFIUS and the politicization of foreign investment reviews that has been so pronounced during the last year should begin to subside.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.