An act recently passed in Congress, intended to tighten controls on foreign capital inflows, could derail your best-laid deals.

THE FOREIGN INVESTMENT and National Security Act of 2007 (FINSA) will soon tighten the screws on foreign capital flowing into the United States. Foreign investors and their US partners must be prepared to face new risks and uncertainties, including deal delays and political interference, starting on Oct. 24, when FINSA goes into effect.

FINSA emerged out of a policy debate in Washington over the need for added protection of sensitive US assets, a debate sparked by several high-profile deals, including CNOOC's bid for US oil company Unocal in 2005 and the proposed Dubai Ports World deal in 2006.

Parties to transactions involving foreign investment in a US entity will still be able to determine on their own whether to file a notice with the interagency body charged with enforcing the law—the Committee on Foreign Investment in the United States (CFIUS). Nonetheless, it is noteworthy that in anticipation of FINSA, the number of voluntary filings already has begun to climb dramatically and probably will continue to increase in the near term.

Controversy over foreign investment promises to stay in the headlines for the foreseeable future, as dollar weakness makes US assets cheaper, and as countries with growing foreign reserves—such as China—look to purchase US assets through sovereign (state-owned) wealth funds or as a diversification from US government debt instruments. Following is a rundown on the law’s potential consequences and what to expect when dealing with them.

Coverage of commercial sectors. What will FINSA change for the financial and business community? In the past, national security reviews have focused largely on acquisitions of companies in the defense area or those with sensitive US government contracts. FINSA now requires that similar scrutiny be given to investment in US "critical infrastructure"—a somewhat nebulous term that encompasses a broader swath of purely commercial sectors. To support this broadened focus, FINSA adds the US Departments of Energy and Labor to CFIUS.

Increased Congressional involvement. FINSA requires CFIUS to notify Congress about each transaction it has considered, and to respond to a panoply of congressional committees and officials. The effect? Where US constituent companies wish to oppose a competing foreign bidder, or where special interests want to draw attention to policies in an investor's home country, the larger congressional role mandated by FINSA increases the potential for political mischief and interference.

Government-owned investors. FINSA mandates that CFIUS conduct a full investigation of any acquisition by an entity that is owned or controlled by a foreign government, even indirectly, unless senior US officials certify that the transaction will not impair national security. CFIUS must also take into account additional factors, including a country’s compliance with US and multilateral counterterrorism, non-proliferation and export control regimes, where government-owned entities are involved. This will translate into tougher treatment of investors from countries such as China and Russia, as well as those from the Middle East.

Disadvantaged bidders. In competitive bidding situations, foreign investors may find that their bids are discounted by financial analysts, who may apply a price premium if they sense political risk or the potential for controversy or delay. This is especially so where foreign firms bid against US firms, where foreign government-owned enterprises compete with private entities, or where investors from countries that are politically allied with the United States bid against companies from countries perceived as higher security risks.

Delay and uncertainty. Most important, investors must brace themselves for delays and possible deal changes. The new law is aimed at prodding CFIUS officials to conduct more 45-day "second-stage" investigations of proposed deals, after the initial 30-day review (through a combination of on-the-record involvement of more senior officials, a larger role for multiple agencies, transaction-specific intelligence estimates and closer congressional oversight). Also, FINSA explicitly permits CFIUS to require deal changes through "mitigation agreements" as a precondition to granting approval.

Be prepared for special scrutiny and uncertainty if government-owned entities are involved, especially in bidding situations, and when deals involve entities from countries that are not US allies.

In the spring of 2008, CFIUS will publish explanatory regulations and guidance, which should provide more clarity for the financial community. Until then, foreign investors and their respective US partners should proceed carefully with these heightened risks and uncertainties.