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New Political Challenges for Foreign Investment in America
September 19, 2007
WASHINGTON, D.C. (September 19, 2007): In reaction to public protests surrounding recent high-profile foreign acquisitions of American assets, Congress has added more regulation, more publicity and more political risk to foreign investment transactions in the United States.
The new law, the Foreign Investment and National Security Act of 2007, was signed by President Bush in July and goes into effect in October. It expands the powers of a special U.S. government committee to investigate and block foreign investments. The committee is called the Committee on Foreign Investment in the United States or CFIUS.
"For twenty years CFIUS quietly, privately, and often informally, reviewed a small percentage of foreign acquisitions of American defense manufacturers and specialized tech companies," said George Foote, a partner in the Washington, D.C. office of the international law firm Bracewell & Giuliani LLP. "The original CFIUS approach reflected the Cold War view of national security. The new law is based on post-September 11 concepts of security that are not tied so closely to the identity of the home country of the acquiring company. That difference can be a game changer in cross-border deals."
In 2006, CFIUS recommended approval of the acquisition of P&O, an international company that manages American ports, by Dubai Ports World, an Arab-controlled company. Because of the concerns about port security after the September 11 attacks, the acquisition quickly became a political hot potato.
The resulting outcry led Congress to add more formality and publicity to once-informal processes at CFIUS. Congress drafted a bill that requires certain reviews and makes full investigations more likely.
"The scope of what is important to national security has been dramatically expanded for purposes of a CFIUS review," said Mr. Foote, "Now, foreign investment in many more companies will require CFIUS filings and investigations will become more common. For example, any power or pipeline company or even a company with a major stake in the economy could be considered a national security asset that requires domestic control, and a foreign bid to acquire it might be blocked by the new CFIUS process."
Mr. Foote said, "CFIUS decisions will be more open and political. CFIUS could become a political forum where many economic and political interest groups will have a chance to weigh in on a wide range of deals. The CFIUS process potentially is a weapon for almost any American entity that is the target of a foreign acquirer. A demand for CFIUS review might be deployed on behalf of a company, even a foreign company, that is competing for an American target company."
Foreign investors have reacted unfavorably to the new law that could lead to restrictions on what has traditionally been -- and remains -- one of the most open economies in the world.
"The new law could raise the cost and lower the chance for approval of foreign acquisitions and could discourage or defeat some investments," said Mr. Foote. "It remains to be seen whether, in practice, the national security benefits of the new law will outweigh the new costs to corporations and the risk of reduced foreign investment in America."