The Foreign Investment and National Security Act of 2007 (“FINSA”) will become effective on October 24, 2007. FINSA amends the1988 Exon-Florio Act that created a formal national security review process for proposed investments or acquisitions by foreign persons in the United States through an interagency government body called the Committee on Foreign Investment in the United States (“CFIUS”).
Exon-Florio enables the President to block or unwind investments or acquisitions of U.S. companies or assets by foreign-owned or foreign-controlled businesses whenever the President believes such transactions would jeopardize U.S. national security, unless the parties notify CFIUS of the proposed transaction and receive prior clearance. Prior notification and clearance is the only legal means by which the parties can immunize a transaction from being blocked or unwound. The law itself permits no judicial review of any such adverse action taken by the President.
Key amendments to Exon-Florio under FINSA include:
- making mandatory a formal 45-day CFIUS investigation period for investments by entities that are owned or controlled by a foreign government;
- expanding the definition of “national security” to include “homeland security”;
- identifying “critical infrastructure” assets (such as energy, communications and transport facilities) for increased CFIUS scrutiny and investigation;
- adding “evergreen” provisions to permit ongoing review of certain transactions beyond the initial review period; and
- requiring CFIUS to report in more detail on its activities and actions to Congress.
Review of Foreign Investments under Exon-Florio
Exon-Florio permits, but does not require, parties to a proposed investment, merger or acquisition that might involve U.S. national security issues to file a notice with CFIUS of the transaction. CFIUS has 30 days under existing law to review a proposed transaction for any potential national security concerns. If such concerns are raised, CFIUS may undertake an investigation and freeze the transaction for a 60-day period during which the transaction is assessed. At the end of the review period, CFIUS may clear the proposed transaction, thereby insulating the transaction from further review or action by the President (unless the parties have made material misrepresentations in their notice).
Exon-Florio received congressional attention after the Bush Administration’s widely criticized handling of a bid by a Chinese firm (partly owned by the Chinese government) to buy Unocal and the bid by Dubai Ports World (owned by the government of Dubai) to acquire the right to operate five American container terminals. Members of Congress proposed significant legislation to toughen Exon-Florio, but these proposals met intense opposition from the international business community and the White House.
FINSA’s more moderate amendments to Exon-Florio reflect the compromise reached between the Bush Administration and Congress and were endorsed by the investment community, including the U.S. Chamber of Commerce, the Business Roundtable, the Financial Services Forum and the Organization for International Investment.
The Foreign Investment and National Security Act of 2007
FINSA alters the existing Exon-Florio review system in several key respects:
- Foreign-Government Involvement; Critical Infrastructure. FINSA now requires CFIUS to make a 45-day investigation of any “foreign government controlled transaction” where an entity owned or controlled by or acting on behalf of a foreign government is the acquiring or investing party. Under FINSA, CFIUS review will also be more stringent whenever a transaction would result in foreign control or ownership of any U.S. “critical infrastructure.” However, this mandatory 45-day investigation can be waived by the Secretary of the Treasury (or deputy) or by another agency leading the review if they determine that the deal would not impair national security.
- “Homeland Security” Added to Definition of “National Security.” FINSA expressly expands the definition of “national security” beyond its traditional geo-political and military dimensions to embrace “homeland security” issues as well.
- “Critical Infrastructure” Defined. Consistent with the new “homeland security” dimension added to the definition of “national security,” FINSA now defines “critical infrastructure” expressly to cover “systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems or assets would have a debilitating impact on national security.” The legislative history of FINSA includes transport facilities, energy generation and communications within this defined term.
- Lead Agency; Mitigation Agreements. In the past, the Treasury Department chaired CFIUS and automatically led the review of each deal subject to a voluntary notice. Now, under FINSA, CFIUS must name a “lead agency” that is a CFIUS member to lead the review and negotiate, supervise, amend and enforce any mitigation agreements with the parties. This lead agency will be selected based on the nature of the transaction and the agency’s subject matter expertise or knowledge of that area. Mitigation agreements are formal, binding agreements between the parties and a government agency to minimize the perceived adverse effects of any foreign ownership or control and may require various steps such as independent directors, independent boards or other similar mechanisms to distance the foreign investor or buyer from the target company.
- Ongoing Review; Ability to Reopen Case. FINSA adds a new “evergreen” time dimension to the CFIUS process for reviews that result in a mitigation agreement. Either the President or CFIUS may reopen an investigation, notwithstanding initial clearance, if a party intentionally and materially breaches its mitigation agreement and “there are no other remedies or enforcement tools available to address such breach.” Such a reopened CFIUS review could lead to new, tougher mitigation terms or even unwinding the transaction. Under prior law, CFIUS could reopen a review only if a material omission or misstatement by the parties was made during the initial review period.
- Increased Congressional Reporting. CFIUS must provide an annual summary report on its activities to Congress. CFIUS must also provide a certified notice to Congress upon completion of each CFIUS review, specifying its decision, the basis for the decision and any specific actions taken by CFIUS.
- New CFIUS Member. The Director of National Intelligence will now serve as an ex officio, non-voting member of CFIUS and must provide an official “national security threat analysis” on each proposed transaction subject to CFIUS review. The Director is charged by FINSA to provide CFIUS with input from the entire U.S. intelligence community that may bear upon its investigation of a notified transaction.
- Judicial Enforcement. FINSA confirms that the President may ask the Attorney General to seek judicial enforcement of any Presidential determination under Exon-Florio, including a court-ordered divestment of any acquisition or investment. FINSA also confirms that private parties have no right to judicial review.
FINSA’s Anticipated Impact on Foreign Investments and Acquisitions
Buyers and sellers must continue to assess carefully the national security implications of their cross-border transactions. Congress has manifested a clear intention to keep the pressure on the White House to conduct thorough and thoughtful CFIUS reviews in the interest of national security. Parties to cross-border transactions will need to weigh more carefully the risks and benefits of filing a voluntary notice with CFIUS. Parties submitting to review should probably expect more demands from relevant agencies for formal mitigation agreements as a condition to clearance. These agreements also will provide a path for ongoing government supervision and review.