U.S. policy encourages open foreign investment in the United States except when such investment threatens to impair U.S. national security. The Exon-Florio Amendment to Section 721 of the Defense Production Act, as amended,[22] provides guidance to the president and the Committee on Foreign Investment in the United States (CFIUS) to evaluate whether a particular investment threatens national security and whether to block or take action against the transaction to minimize the perceived threat. Under Exon-Florio, a CFIUS review commences when the parties (or party) to a subject transaction submit a voluntary notice to the CFIUS staff chairman. A CFIUS review may also be started by a member’s submission of an agency notice to the CFIUS staff chairman of a proposed or completed transaction that the member has reason to believe is subject to Section 721 and may have adverse effects on the national security.

Since September 11, 2001, Exon-Florio’s effectiveness has been increasingly questioned. The Government Accountability Office (GAO) identified a number of weaknesses in the implementation of Exon-Florio.[23] The Exon-Florio process came under public and congressional criticism in 2005, when a Chinese government-owned corporation attempted to acquire a major U.S. oil company, and again in 2006, when a Dubai, United Arab Emirates-owned corporation acquired a U.K.-based international logistics and transportation company, thereby gaining control of six major U.S. ports.

The Foreign Investment and National Security Act of 2007 (FINSA), passed by Congress and signed into law by the president in late July, enacts a number of reforms to the CFIUS process in order to address many of the concerns raised by the GAO, Congress and the public, and directs the inspector general to investigate “each failure” of CFIUS to submit a periodic report to Congress, as required by Exon-Florio. The list below identifies FINSA’s significant changes to Exon-Florio:

  • The director of national intelligence, with the various intelligence agencies, has the responsibility to determine whether a proposed transaction would constitute a threat to national security, and advise CFIUS accordingly within 20 days of CFIUS’s receipt of notice.
  • CFIUS must consider a transaction’s potential effects on critical infrastructure, including major energy assets; sales of military goods or technology to countries posing a regional military threat to the United States; critical technologies deemed essential to national defense; and the long-term projections of U.S. energy requirements.
  • CFIUS must investigate any transaction that would result in a foreign government or a foreign government-controlled entity gaining control of a business in the United States, except where the CFIUS chair and lead agency jointly determine that the transaction will not impair national security. However, such a determination may be made only after evaluating whether the country adheres to nonproliferation regimes; the relationship of that country with the United States, specifically with respect to its record of cooperating in counterterrorism efforts; and the potential for trans-shipment or diversion of technologies with military applications.
  • FINSA eliminates the permissive withdrawal of a voluntarily submitted notice, and CFIUS now must approve any withdrawal request. In addition, FINSA directs CFIUS to establish interim protections to address any specific concerns arising from the withdrawal or specific time frames for resubmission, and a process for tracking actions taken by a party to a covered transaction.
  • FINSA grants Congress greater oversight of the CFIUS process. CFIUS now must brief Congress upon request and provide annual reports on all reviews and investigations completed by CFIUS during the 12-month report period. Further, CFIUS must notify Congress in writing at the completion of a review where no investigation is required or by a written report upon the completion of an investigation. Each notice or report must certify that there are no unresolved national security concerns with respect to the transaction that is the subject of the report. In addition, FINSA orders the secretary of the treasury to study foreign investments in the United States and report findings and conclusions within 150 days of the enactment of FINSA and with every annual CFIUS report submitted thereafter.
  • FINSA obligates CFIUS to publish guidance on the types of transactions likely to raise national security issues—in particular, transactions that would result in foreign government control of critical infrastructure—no later than April 21, 2008.
  • FINSA takes effect October 24, 2007. Regulations promulgated under FINSA must be become effective no later than April 21, 2008, and must impose civil penalties for violations of those regulations.

The increased transparency of the CFIUS process is a double-edged sword for foreign businesses that wish to invest in the United States. On one hand, such businesses ultimately will gain a better understanding of the types of transactions that will be approved, require mitigation or be blocked. On the other hand, the increased transparency also could have a chilling effect on foreign investment in the United States, due to the increased level of scrutiny.

FINSA’s requirement that CFIUS consider whether a transaction could have effect on “critical infrastructure and energy” clearly expands the scope of transactions that CFIUS now must review. Under Homeland Security Directive 7 (HSPD-7), issued by the president on December 7, 2003, U.S. critical infrastructures are identified as information technology, telecommunications, chemicals, transportation systems, postal and shipping services, agriculture, food, public health, drinking water and waste water treatment facilities, energy and electric power, banking and finance, and national monuments and icons.

FINSA does not change the voluntary submission of notice, a CFIUS member’s ability to submit agency notice nor the timing for a CFIUS review process (30-day review with a potential subsequent 45-day investigation). However, FINSA’s increased congressional oversight, which resulted in part from recent high-profile transactions, mandates that foreign investors in potentially high profile transactions develop both a CFIUS filing strategy and a political/congressional strategy in preparation for issues raised by a proposed transaction.