In July 2007, President Bush signed into law the Foreign Investment and National Security Act of 2007 (the Act), reforming the process by which the U.S. government reviews the national security impact of foreign direct investments in the United States and increasing the level and duration of government scrutiny given to direct investments in certain energy assets. Through the Exon-Florio Amendment to the Defense Production Act of 1950, the President is authorized to bar or impose significant restrictions on acquisitions by non-U.S. entities of U.S. companies if such acquisitions threaten U.S. national security interests. Reviews of foreign direct investments under Exon-Florio are conducted by the Committee on Foreign Investment in the United States (CFIUS or the Committee). The Act strengthens the CFIUS review process by mandating expanded reviews in the case of certain transactions, expanding the factors considered by CFIUS in assessing security risks, authorizing the re-consideration of approved transactions under certain circumstances, and increasing congressional oversight. The Act comes on the heels of the negative attention the CFIUS review process drew when the China National Offshore Oil Corporation attempted to purchase Unocal in 2005, and again when Dubai Ports World, a company owned by the government of Dubai, announced in 2006 its acquisition of a British company operating port facilities in some major U.S. cities.

Initiation of Review and Investigation

National security reviews are not mandatory; they are generally initiated through voluntary notice of the parties, although CFIUS has the power to self-initiate a review. At the conclusion of an initial 30-day review of a transaction, CFIUS must determine whether to terminate its review or proceed to a more extensive 45-day investigation (to date, most reviews have concluded at the end of the 30-day period). Pursuant to the Act, the 45-day investigation is now mandatory whenever a transaction could result in the control of a U.S. entity by a foreign government or an entity controlled by or acting on behalf of a foreign government. The Act also focuses the CFIUS’ attention on acquisitions of critical infrastructure, which includes major energy assets, by requiring a full investigation of such acquisitions if CFIUS determines that the acquisition could impair national security and such potential impairment has not been appropriately mitigated. The Act also provides for an investigation whenever the Lead Agency (which now could be the Department of Energy (DOE) as explained below) with the concurrence of the Committee so recommends. However, the latter change is more form than substance as it has been the informal practice of CFIUS for some time to proceed to an investigation if even a single CFIUS member so requests.

The Act provides some flexibility from these mandatory investigation provisions by giving the Lead Agency and the Secretary of the Treasury, acting jointly, the power to exempt a transaction from a full investigation if they determine the transaction will not impair the national security

Expansion of the Committee, Committee Powers and Scope of Review

The Act expands the scope of the Committee membership and the CFIUS process. The Act makes the Secretary of Energy a member of the Committee, which previously had no representation from the DOE. The Act provides for the designation on a case-by-case basis by the Secretary of the Treasury of any member or members of the Committee to serve as the Lead Agency or Agencies to act on behalf of the Committee in reviewing, investigating, and monitoring an investment transaction. With the Committee’s membership expanded to include the Secretary of Energy, the DOE could serve as the Lead Agency. In reviewing transactions, the Committee now must consider not only the effects on U.S. national security, but also: (1) the potential effects on “critical infrastructure,” 1 which includes major energy assets; (2) the long-term projection of U.S. requirements of energy and other critical resources and materials; and (3) in cases involving acquisitions by foreign governments, the adherence of the acquirer’s country to arms control, nonproliferation, and disarmament regimes and its cooperation in counter-terrorism efforts, as well as the potential for transshipment or diversion of technologies with military applications.

Expansion of CFIUS Monitoring

The Act strengthens monitoring by CFIUS. Where notices filed with CFIUS subsequently are withdrawn to ensure that appropriate interim protections are in place, CFIUS is required to establish procedures to track transactions. CFIUS, through the designated Lead Agency, also will be required to establish procedures to monitor the implementation and fulfillment of any mitigation agreement (an agreement between CFIUS (or certain CFIUS agencies) and the foreign acquiror designed to mitigate national security risks).

Significantly, the Act imposes a so-called “evergreen” provision, authorizing CFIUS to reopen a prior review under certain conditions, including: (1) the submission of false or misleading material information, or the omission of material information, during the review or investigation; and (2) the intentional material breach of a mitigation agreement, but only if the Lead Agency certifies such and the Committee determines that no other remedies are available. Nevertheless, the inclusion of the evergreen provision is a reflection of the importance the U.S. government attaches to compliance with the terms of any mitigation agreement negotiated in the context of the CFIUS review.

Increased Congressional Oversight

The Act provides a more significant oversight role for Congress. Now CFIUS is required to notify specified members of Congress at designated stages of review of a transaction. At the request of certain members of Congress, the Committee must report on a covered transaction, on a classified basis if necessary. The Act also requires the Committee to submit an annual report to the relevant congressional committees covering the basic information concerning the parties, transactions, and CFIUS actions, as well as cumulative and trend information; the report will include an assessment of the vulnerability of critical technologies. The Act provides that confidentiality protections currently applied to documents and information submitted to CFIUS will continue to apply to materials subsequently provided by the Committee to Congress.

Conclusion

U.S. policymakers continue to publicly support foreign direct investment in the United States. Nevertheless, non-U.S. persons interested in acquiring U.S. businesses with “critical infrastructure,” such as an investment in an oil or gas interest, would be well-advised to consider the potential impact of the CFIUS process in their acquisition strategy. In particular, attention should be given to the potential demand for a mitigation agreement to alleviate any national security concerns. In light of the enhanced congressional oversight of CFIUS, acquirors should also consider the potential interest of Congress in any contemplated transaction