The Foreign Investment and National Security Act of 2007 (FINSA), signed by President Bush earlier this year, will clarify and enhance government scrutiny of acquisitions of critical infrastructure assets by non-US investors. FINSA is the result of more than a year of legislative efforts to reform the review process after the controversy caused by the failed Dubai Ports World acquisition of several US port operations. It both expands and adds certainty to national security reviews by the multi-agency Committee on Foreign Investment in the United States (CFIUS), formally extending the scope of the reviews beyond traditional defense-industry-related assets to include transactions in such non-defense sectors as telecommunications, energy, transportation and other sectors that are critical to national security.

Background of CFIUS Reviews

CFIUS currently reviews foreign direct investments in the United States pursuant to the Exon-Florio provision, a law enacted in 1988 to authorize the President to suspend or prohibit foreign acquisitions that are determined to threaten the national security of the United States. A series of executive orders created CFIUS and delegated to it the responsibilities to receive notices of foreign acquisitions of US companies; to review such acquisitions and, if necessary, to investigate them for national security concerns; and to report the conclusions of its investigations to the President. Although only one transaction has been formally blocked by the President,1 the threat of such action has been used regularly, either to require mitigation efforts by foreign investors or to cause them to abandon proposed acquisitions.

Regulations implementing Exon-Florio set up a voluntary system of notification of transactions, 2 in which the Department of the Treasury acts as the secretariat for CFIUS and coordinates the review by CFIUS member agencies, which include the departments of Defense, Homeland Security, State, Justice, and Commerce, among others. The statute establishes an initial 30-day review period (as with antitrust reviews under the Hart-Scott-Rodino Act), with the possibility of an extended 45-day second-stage review (or “investigation”) for transactions that raise national security concerns. Following an extended investigation, an additional 15-day period is provided in which the President may issue a final decision, resulting in a maximum review period of 90 days.

Uncertainty for Foreign Investors

Neither the Exon-Florio provision nor the regulations defined “national security” or precisely described the types of transactions that are within the provision’s scope. While this scope originally was interpreted narrowly as relating only involving “critical infrastructure,” although this term also has not been clearly defined. This has created uncertainty for businesses involved in foreign acquisitions with only indirect connections to national security.

This uncertainty increased further after the failed Dubai Ports World transaction in 2005-2006, when political controversy and pressure from lawmakers caused CFIUS to adopt a more cautious approach, leading to more frequent investigations, required mitigation measures and withdrawn transactions. CFIUS also experienced a dramatic increase in notified transactions, as foreign investors responded to the uncertainty by reporting transactions that would not previously have been considered to be within the scope of Exon-Florio. As a result, pressure grew to reform the process, both from legislators concerned with safeguarding national security and from foreign investors seeking greater certainty in the process.

Important Changes

FINSA represents a compromise between competing bills with different emphases on enhancing national security versus improving certainty for foreign investors. A coalition of business interests opposed versions of the bill that would have mandated extended investigations in certain cases and more directly involved Congress in the process. The coalition has expressed satisfaction with the balance that has been struck in the new law between protecting national security and promoting foreign investment.

Several of the law’s notable provisions are as follows:

  • CFIUS authorization and structure. CFIUS now is established and authorized by statute as opposed to executive order. The director of national intelligence has been added as an ex officio member and is required to analyze national security threats posed by covered transactions. A “lead agency” will be appointed by the Treasury Department for each transaction and will be responsible for negotiating and enforcing any required mitigation agreements. The lead agency is likely to be Homeland Security for many critical infrastructure deals. Senior-level member-agency officials now must be involved in certain decisions involving critical infrastructure, foreign government-controlled investors and reopening completed investigations to assess compliance with mitigation measures.
  • Critical infrastructure. The law formalizes the existing CFIUS practice of considering “critical infrastructure” transactions to be within the scope of its review. While the bill itself includes only a brief definition of “critical infrastructure,”3 it calls for a more detailed definition in forthcoming regulations, as well as published guidance from CFIUS on the types of transactions that have raised national security considerations. The law also requires a second-stage investigation for critical-infrastructure transactions that “could impair national security” – as opposed to the traditional, higher standard of "threatens to impair the national security," which continues to apply to defense industry transactions – unless such concerns are mitigated during the review period.
  • Foreign government-controlled transactions. CFIUS must proceed to an extended investigation of acquisitions by state-owned entities unless the requirement is waived by the secretary or deputy secretary of the treasury and an equivalent official at the lead agency for the transaction, upon a determination that it will not impair national security. This is a relatively high hurdle that likely will result in extended investigations for many foreign government-controlled transactions.
  • Congressional oversight. CFIUS must provide written notice to Congress upon the conclusion of any review or investigation. The notice must provide details about the transaction and assurances that it does not threaten to impair national security. Congressional leaders may request a briefing on any reviewed or investigated transaction or on compliance with any required mitigation measures. CFIUS also must provide detailed annual reports to Congress on its activities during the previous 12 months.

More to Come

FINSA will take effect in late October 2007, 90 days following its enactment. Implementation regulations and published guidance on the types of transactions considered to have national security implications are called for within 180 days of the effective date, in April 2008. The regulations and published guidance should provide a more detailed definition of “critical infrastructure” and greater certainty regarding the types of transactions that could be viewed as presenting a threat to national security.

Although the law is intended to preserve an open investment policy while safeguarding homeland security, other countries can be expected to consider similar review mechanisms, which could present obstacles to US investment overseas. German Chancellor Angela Merkel, for example, has called for a common EU-wide approach to vetting foreign acquisitions based upon the CFIUS model. Such an approach would represent a substantial expansion of the review process in many EU countries, including Germany, which focuses reviews only on defense-related transactions.