Increased Scrutiny and Broader Review Under New Foreign Investment Standard
- United States
- 07/13/2007
- Kirkpatrick & Lockhart Preston Gates Ellis LLP - United States
Addressing a debate that has spanned more than a year, Congress on July 11, 2007 cleared for the President’s expected signature the Foreign Investment and National Security Act of 2007 (“FINSA”). Removing uncertainties created in the wake of a controversial 2006 case, FINSA puts into statutory form the process by which the President, through the Committee on Foreign Investment in the United States (“CFIUS”), monitors foreign investment in U.S. businesses where such investment may affect national security. Under current law, the President has the power to suspend, prohibit, or seek divestiture of a merger, acquisition, or takeover of a U.S. business by a foreign entity or person. Such presidential action rarely occurs, because CFIUS typically resolves any security issues before they reach the President. Successfully completing one of a number of possible CFIUS examinations provides parties to a transaction a safe harbor against subsequent scrutiny or presidential action.
While FINSA maintains much of the existing CFIUS framework, it also broadens the authority of CFIUS to cover critical infrastructure and critical technologies, strengthens its review processes, and increases Congressional oversight over its decisions. In the process, FINSA places new emphasis on negotiating, implementing, and monitoring mitigation agreements between CFIUS and parties to a transaction, and requires monitoring of transactions even when the parties seek to withdraw a voluntary CFIUS notification. It also provides for additional transparency in the CFIUS process. Understanding the new players, procedures, and the standards applied by CFIUS will be important for foreign governments, foreign companies and foreign-controlled U.S. subsidiaries conducting due diligence with respect to new investments in the U.S.
Dubai Ports World
Public attention to the largely secretive work of CFIUS soared following the 2006 purchase of U.S. port facilities by Dubai Ports World (“DPW”), a company controlled by the government of the United Arab Emirates . CFIUS approved the transaction, but, after the fact, key Members of Congress publicly charged inattention to potential national security risks. Although DPW soon pledged to sell its U.S. port interests amidst the ensuing controversy, the spotlight remained on the CFIUS approval process. Last year, CFIUS legislation passed both Houses of Congress, but Administration objections and disagreements between the two Houses on key provisions prevented a compromise. The bill died at the end of the 109th Congress.
The 110th Congress acted early to adopt a compromise (FINSA) that addresses executive branch concerns while increasing transparency. Specifically, FINSA:
- Retains the current 30 day window for completion of the initial CFIUS review of a transaction;
- Retains the current 45 day window for completion of a subsequent, second level investigation where national security issues persist or have yet to be mitigated;
- Places increased emphasis on the protection of critical infrastructure and critical technologies;
- Increases transparency by requiring reports to Congress and the public on completed reviews and investigations;
- Increases scrutiny of withdrawals of CFIUS notifications made by the parties;
- Provides that foreign government acquisitions or those involving critical infrastructure are subject to full investigations, unless the Secretary of the Treasury and the head of the lead agency responsible for review, or their high level designees, jointly determine that no national security concern exists; and
- Provides for civil penalties if parties to a transaction violate FINSA provisions, including applicable mitigation agreements.
Focus Extends to Critical Infrastructure
FINSA adds a new criterion by which CFIUS is to conduct its reviews and investigations—securing the critical infrastructure of the United States . The bill provides that CFIUS evaluations will consider both critical infrastructure and critical technologies.
The definitions are broad. Critical infrastructure is defined as those “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.” Likewise, critical technologies are defined as “critical components, or critical technology items essential to national defense….”
Although FINSA notes that energy assets are considered critical infrastructure, it will be up to CFIUS to determine what other infrastructure or technologies are critical to national security. Ultimately, CFIUS can be expected to extend its reach beyond the traditional bounds of review.
Increased Accountability and Transparency
Until now CFIUS has operated pursuant to broadly construed regulations and largely in secret. Its members were prohibited from discussing transactions under scrutiny with anyone other than the parties themselves. Decisions were not published, there was little oversight, and no comprehensive statutory support. Congress sought to address concerns regarding CFIUS accountability and transparency through the following provisions:
- Required Guidance. Within 180 days of enactment, FINSA requires that CFIUS issue guidance on the types of transactions previously reviewed that presented national security and critical infrastructure concerns. This will provide some guidance to parties regarding the threshold level at which CFIUS gauges national security risks.
- Certified Notices and Investigation Reports. FINSA requires CFIUS to provide to Members of Congress notices of completion of initial reviews and detailed reports once investigations are completed. To promote agency accountability, these notices and reports must be certified in writing by the Secretary of the Treasury and the head of the lead agency or certain high level designees.
- Annual Reports to Congress. Before July 31st of each year, CFIUS must provide to key Congressional committees an annual report on all CFIUS reviews and investigations. The annual report is designed to be comprehensive and must include trend information on the number of withdrawals approved by CFIUS, information on the types of security arrangements and conditions it has approved, and information on monitoring efforts by CFIUS designed to mitigate national security concerns. An unclassified version of the study must be made available to the public.
- Briefings upon Request. CFIUS, subject to the need to protect classified information, must provide briefings to Members of Congress on key committees and from the jurisdictions affected by CFIUS actions.
The Review Process
- Voluntary Initial Review. As is the case under existing CFIUS regulations, a party to a transaction may voluntarily initiate review by submitting a written notice. CFIUS then is required to determine within 30 days the effects the transaction would have on national security. At the end of 30 days, CFIUS must either issue a recommendation for approval of the transaction or proceed with an investigation.
- Withdrawals Following Notice of a Voluntary Initial Review. Unlike existing CFIUS practice, however, FINSA prohibits a party to the transaction from unilaterally withdrawing from a review once written notice has been submitted. Withdrawal may only occur if a party submits a written request that is approved by CFIUS. As an additional precaution highlighting Congressional concern about overuse of voluntary withdrawals—and what they may conceal—FINSA requires CFIUS to subsequently track actions of the parties involved in the transaction. This new requirement underscores the importance of due diligence by a party before submission of a CFIUS notice, including, as appropriate, informal discussions with CFIUS staff and staff of the lead agency.
- Unilateral Initial Review. In addition to voluntary initial review, FINSA allows CFIUS to initiate reviews unilaterally, including reviews of cases previously reviewed in which false or misleading information was provided or where a party intentionally and materially breached a mitigation agreement. Unilateral reviews also must be completed within 30 days.
- Subsequent Investigation. FINSA provides that, unless limited exceptions apply, an additional stage, a full 45 day investigation, is required if the initial review results in a finding that an unmitigated national security threat exists, the transaction involves a foreign government-controlled entity, or, in certain instances, where critical infrastructure is involved. At the end of an investigation that does not result in a mitigation agreement or CFIUS’ determination of no adverse effect on national security, the matter is sent to the President for a final decision.
- Safe Harbor . Under current CFIUS regulations, the safe harbor sought by parties filing notifications with CFIUS can be forfeited if a party makes a material misrepresentation of fact to CFIUS. FINSA expands that exception to include a material violation of an obligation undertaken under a mitigation agreement with CFIUS.
CFIUS Membership
FINSA provides that CFIUS membership shall include the Secretaries of the Treasury, Homeland Security, Commerce, Defense, State, and Energy (new) and the Attorney General. Nonvoting members include the Director of National Intelligence and the Department of Labor (both new).
The Secretary of the Treasury serves as the CFIUS Chairperson. To provide the focus some in Congress believed was lacking in the DPW case, Congress created an additional Assistant Secretary within the Department of Treasury tasked with overseeing CFIUS matters. It is hoped that this will heighten the attention within the Department of Treasury to its implementation of FINSA. The empowerment of the CFIUS machinery and the expansion of CFIUS jurisdiction should lead to increased numbers of reviews and investigations.
For each transaction reviewed by CFIUS, the Chairperson is required to designate a lead agency that will be responsible to CFIUS for the review of a particular case, any negotiation of mitigation measures with the affected parties designed to reduce national security risk, and any subsequent monitoring of the transaction. The Director of National Intelligence is required to provide an analysis of potential national security concerns concerning each transaction.
Although the main CFIUS members are listed above, FINSA provides that the President may include the heads of other agencies on a case-by-case basis. In addition, CFIUS may consult other agencies as appropriate in the review process.
Civil Penalties Against Parties to a Transaction
FINSA also provides, for the first time, civil penalties for companies that violate CFIUS regulations, including actions that contravene a mitigation agreement reached between CFIUS and parties to a transaction. Mitigation agreements are used to reduce the national security risk posed by a transaction while still allowing the transaction to proceed. These agreements may include divestiture of certain assets by parties to the transactions.
Looking Forward
Parties to a foreign acquisition that may involve national security concerns should understand the changes FINSA makes in the CFIUS environment. In addition to adding some transparency, FINSA adds several new levels of complexity, including increased scrutiny of transactions and accountability for those involved in CFIUS work, plus a broader CFIUS mandate that will increase the number of transactions it considers. All argue for careful attention.
