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New Law May Make Foreign Acquisitions of U.S. Companies Difficult

October 23, 2007

WASHINGTON, D.C. (October 23, 2007)-- Thursday, Oct. 24, is the effective date of a new law that may sharply increase the potential for political controversy over foreign investment in the United States.

The Foreign Investment and National Security Act of 2007 (FINSA) increases the power of the American President to block a foreign acquisition on national security grounds.  A recommendation to block an acquisition can be made by the Committee on Foreign Investment in the United States (CFIUS), an interagency body of the U.S. government.

FINSA reflects heightened concern over potential national and homeland security issues associated with foreign acquisitions of U.S. companies.  The new law also opens up the review and investigation process for foreign acquisitions to many new parties, including Congress, advocacy groups, labor unions and competing bidders for acquisition targets.

“While the American economy remains largely open to foreign investment, the new law increases the risk that domestic political considerations will influence the approval or rejection of a foreign bid to acquire an American company,” said George M. Foote, partner with Bracewell & Giuliani LLP.  “Recognizing the importance of foreign investment in the U.S., Congress and the Administration have emphasized that their intent is not to let the new law disrupt or block routine foreign investments and acquisitions.  The new law will, however, raise the cost and lower the chance for approval of some foreign acquisitions and could discourage or defeat some investments.”

The new law was drafted to provide protection from terrorism and specifically includes homeland security in the definition of national security.  It also widens the range of companies that might be subject to protection from foreign acquisition.  Protected assets might include pipelines, telecommunications systems, waterworks, food supply networks, and high technology companies.

Under FINSA, any merger or acquisition that could result in foreign control of an entity engaged in U.S. interstate commerce may be reviewed by CFIUS for national security concerns.  The results of CFIUS reviews and investigations must be provided to Congress.  Including Congress in the process will increase public scrutiny of deals and will enable domestic private and political parties — including labor unions, activist groups and competitors for the acquisition target — to pursue their own agendas in supporting or opposing a deal.  Politicized conflicts and controversies could delay or even derail transaction approvals.

“In practice, the new CFIUS process should not significantly discourage international transactions in America,” Mr. Foote said. “The United States will continue to welcome foreign investment.  However, domestic U.S. companies, potential foreign acquirers, investors and financiers will have to carefully follow development of the new CFIUS regulations in the coming months.  Any investment in America now must be planned to minimize the risks in the CFIUS process and with due regard for the political influences that could interfere with the transaction.”