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The Foreign Investment and National Security Act of 2007: Improved Transparency and Slower Deal Making
October 24, 2007
National Security Gains May Be Offset by Increased Delays and Public Challenges to Foreign Investment in the United States
Wednesday, October 24, 2007 is the effective date of the Foreign Investment and National Security Act of 2007 (FINSA), a law that may sharply increase the potential for political controversy over foreign investment in the United States. A direct result of heightened concern over potential national security issues in foreign acquisitions of U.S. companies and assets, FINSA is likely to have a number of unintended effects on future foreign investment in American businesses.
FINSA increases the power of the President of the United States and the Committee on Foreign Investment in the United States (CFIUS), an interagency body of the executive branch that assesses national security risks of foreign investments in the United States. The Act gives the President more latitude in defining national security and widens the range of companies that might be subject to protection from foreign acquisition.
While enlarging executive branch control over foreign acquisitions, FINSA also opens the review and investigation process for foreign acquisitions to many new parties, including Congress, advocacy groups, labor unions and competing bidders for acquisition targets.
The overall effect of the changes to the CFIUS process is the creation of an uncertain regulatory environment in which potential national security gains may be accompanied by increased delays for international transactions, higher costs for parties to a transaction, and heightened political controversy.
More Sectors Targeted: An Expanded Definition of “National Security”
Established in 1975 by President Gerald Ford and brought under presidential oversight by President Ronald Reagan in 1988, CFIUS has, for many years, reviewed foreign acquisitions from a Cold War view of national security. Since the end of the Cold War, and especially since September 11, 2001, the focus of national security planning has been defense against attacks within the U.S. by terrorist organizations.
This new perspective became evident in 2006 when Dubai Ports World proposed to acquire P&O, an international company that managed American ports. Although CFIUS and the President raised no objection to the transaction after reviewing its terms, public and congressional opposition effectively scuttled the deal.
The Dubai Ports World controversy led Congress and the President to cooperate in enacting FINSA. The Act formally defines “national security” to include “homeland security." It establishes procedures to review foreign acquisition of “critical infrastructure” and “critical technologies," defined as “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.”
These new definitions increase the number of industry sectors that are treated as critical to national security. In addition to defense and technology companies, any business operating in a sector that is important to the U.S. economy — including transportation companies, energy and power companies, ports and airports, banks, food suppliers and telecommunications providers — may be subject to national security analysis.
The range of “covered transactions” open to scrutiny has expanded. Under FINSA, any merger, acquisition or takeover that could result in foreign control of an entity engaged in U.S. interstate commerce may be reviewed for national security concerns, and CFIUS must review any transaction in which the acquirer is a foreign government or an entity controlled by a foreign government.
Increased Deal Approval Complexity: A More Open CFIUS Process
FINSA also will subject transactions to more scrutiny by more parties. Although CFIUS filings remain largely voluntary, the Act provides the President and the executive branch with increased authority to initiate investigations into covered transactions, including transactions that have been reviewed previously.
The likelihood of an investigation following a CFIUS review has increased along with the increased number of parties to CFIUS deliberations. For example, the Secretaries of Labor and Energy have been added to the committee, the Director of National Intelligence is a non-voting member, and a new assistant secretary has been added to the Treasury Department to handle CFIUS duties.
The results of investigations must be provided to Congress for consideration. This notice requirement opens the process to public scrutiny and invites the application of influence by domestic private and political parties — including labor unions, activist groups and business suitors competing for the acquisition target. Such politicized conflicts and controversies could delay or derail transaction approvals.
Foreign governments may perceive a CFIUS action that blocks a transaction to be a non-tariff trade barrier to potential investments in the U.S. or an effort to implement informal protectionist policies. Diplomatic involvement in a transaction could create more political controversy that could affect the pricing and the approval of the transaction.
Ensuring Success in an Uncertain Environment
The new foreign investment law is not intended to threaten or regulate most foreign investment in America. Nevertheless, domestic U.S. companies, potential foreign acquirers, investors and financiers should exercise a heightened level of caution as FINSA takes effect and as CFIUS publishes its new regulations in the coming year. Transactions should be approached with careful planning and an awareness of the new legal and political ramifications.
Companies can take some steps to help streamline the CFIUS approval process and minimize the likelihood or the effects of investigations. These include:
- ensuring that none of the deal’s principals are nationals of states identified as sponsors of terrorism
- determining whether deal assets involve “national security” considerations, under the expanded definitions in FINSA
- examining the deal and its financing closely to ensure that they would hold up to both public scrutiny and a delayed closing
- considering management structures that minimize direct foreign control
- retaining counsel to ensure that all filing-related documentation is complete and submitted in a timely manner
- creating public communications strategies to address potential concerns and opposition
- working closely and cooperatively with CFIUS, congressional staff, and staff from the agencies that are part of CFIUS
Under FINSA, CFIUS could become a new shield against dangerous foreign control of American infrastructure, but it also could become a new forum for public and political battles over foreign acquisitions in the U.S. The full effect of FINSA will not be known for months, but foreign investors and their American counterparts need to plan acquisition strategy earlier and more carefully than ever before.