AND U.S. FOREIGN INVESTMENT RULES: TODAY’S “SCREEN” MAY
BE TOMORROW’S “WALL”
by Russell L. Smith, Willkie Farr & Gallagher
Washington, Aug 2005 - The
recent effort by the China National Overseas Oil Company
(CNOOC) to acquire the U.S. oil company Unocal unleashed
what can only be described as a firestorm of opposition.
The motivations for that opposition were mixed, and included
pure political efforts to “kill” the CNOOC
bid by rival Chevron, a strong negative climate of opinion
in Washington about China, and perhaps some legitimate
concerns about the potential impact of such an acquisition
on the national security of the United States. However,
whatever the motivation, the opposition ultimately manifested
itself in a series of legislative actions that focused
on the laws and structures in place for the United States
Government to screen mergers, acquisitions and takeovers
of U.S. assets by foreign entities. Although CNOOC ultimately
withdrew its bid for Unocal, the debate over the extent
and manner to which such foreign investment should be
regulated continues, and proposals that Congress will
be debating this fall could change that regulation dramatically.
If those changes happen, the United States could become
much less attractive for foreign investors, and the trade
deficit dollars that return to the United States from
foreign investment could begin migrating to other, more
Under the so-called “Exon-Florio” provision of U.S. law, the President
has the authority to accept, reject, or require changes in mergers, acquisitions
or takeovers that result in the ownership or control of U.S. entities by foreign
persons. The standard by which the President is to exercise that authority is
based on the potential impact of the proposed transaction on the national security
of the United States. If the proposed transaction involves a non-governmental
foreign acquirer, then the President is to judge whether the transaction “will…threaten
to impair the national security.” If the proposed transaction involves
an acquisition by an entity that is controlled or acting on behalf of a foreign
government, the standard for possible Presidential action is whether the transaction “could
affect the national security.”
Once the President makes one of the threshold determinations described above,
the Exon-Florio provision allows the President to act only if he determines that
there is no other provision of U.S. law that can address the national security
concerns raised by the transaction.
The President’s determinations are to be made on the basis of an investigation,
which may be conducted by officials that the President designates to implement
the law. The Presidential designee in the case of the Exon-Florio law is an inter-agency
group called the Committee on Foreign Investment in the United States (CFIUS),
which is led by the Treasury Department and has twelve government agencies as
Parties to transactions subject to the Exon-Florio law may voluntarily
notify CFIUS of a proposed transaction, or CFIUS may otherwise become aware of
such a transaction. CFIUS has thirty days to conduct an initial review of a proposed
transaction. If during that review CFIUS determines the transaction does not
raise national security concerns, the transaction is considered “cleared.”
If CFIUS determines that there are national security questions that need further
review, CFIUS may undertake a formal investigation, which may take up to an additional
45 days. Again, as a result of this investigation CFIUS may clear the transaction,
request that the parties make changes in the terms, or indicate that it has identified
serious national security concerns that warrant final review by the President.
Presidential review is limited to an additional 15 days, at which time the President
must decide whether to reject, approve, or ask for modifications in a proposed
transaction. Determinations made under Exon-Florio are not reviewable in U.S.
The CFIUS review process is strictly confidential, is designed to impose minimal
burdens on most transactions in terms of delay (with a maximum review period
of 90 days), and attempts, to the greatest extent possible, to protect transactions
from political intervention. These attributes stem from the concerns that were
expressed at the time the Exon-Florio law was enacted--that while it was legitimate
to put in place a national security “screen” for foreign acquisitions
of U.S. assets, that screen should recognize and respect the historic U.S. policy
of welcoming foreign investment, because it brings back to the United States
billions of dollars used to purchase imported goods, and because it creates new
economic opportunities for American workers.
Moreover, limiting the criteria
for possible rejection to national security concerns reflects the fact that the
overwhelming volume of foreign investment in the United States is benign, and
that transactions warranting scrutiny are extraordinary and should be treated
as such. Finally it was acknowledged that unless steps were taken to isolate
the process from political pressures, the United States would lose substantial
credibility in its efforts to create an open investment climate for American
companies in other countries.
Since enactment of the Exon-Florio law in 1988, about 1,500 transactions have
been notified to CFIUS. Of those, 25 have been subject to a 45-day investigation,
and one has been referred to the President and subsequently rejected. Until the
CNOOC bid, while some critics had argued that this record indicated that the
CFIUS process was inadequate to “catch” potentially problematic acquisitions
and needed strengthening, they offered no evidence of any transaction that had
in fact threatened the national security of the United States, however that term
might be defined. Those involved in the CFIUS process could testify to the fact
that the agencies involved utilize the initial 30-day review to examine proposed
transactions rigorously to assure that national security issues have been addressed
under a variety of other U.S. authorities, and do not hesitate to “stop
the clock” by asserting a lack of complete documentation until concerns
can be addressed.
Despite the substantially positive record, the CNOOC bid has now opened the CFIUS
process to an organized and bipartisan congressional effort that may result in
very dramatic and potentially harmful changes. Goaded by a contingent of former
U.S. government officials, union leaders, and business sectors that are threatened
by Chinese competition, key members of Congress have offered amendments to the
Exon-Florio law as part of the debate on the Defense Appropriations Act, which
Congress will be considering this fall.
Possible changes in the law are:
Extending the period of CFIUS initial review to 60 days
from the current 30.
2. Requiring CFIUS to send the results of every investigation to the President,
and to the Senate Committee on Banking, Housing and Urban Affairs and the House
Committee on Financial Services.
3. Allowing the chairmen of those committees to request that CFIUS investigate
a transaction involving an entity controlled by a foreign government.
4. Requiring, in every case in which a transaction is not suspended
or prohibited, that the transaction be reviewed by Congress before
it can be consummated.
Congress would be given up to 40 “legislative days” to pass a resolution of
disapproval of a transaction, which the President could sign or veto. The reference
to “legislative days” opens a transaction to long and
uncertain delays since legislative days are only those days on which
Congress is in session. If
a transaction was under Congressional review at the time Congress
adjourned for the year, it could be held up for up to three months.
5. Adding “energy security” and “economic security” to
the areas to be investigated and evaluated in reviewing transactions.
6. Changing the coordinating agency from the Treasury to the Commerce Department.
Members of Congress also continue to warn that China’s objectives
in investing in the United States should be uniformly suspect and
to imply that in general
U.S. investment policy should be hostile to China.
the proposals which are quite clearly and unapologetically
intended to politicize the foreign investment
review process and weaken confidentiality protections
are enacted into law, the predictable consequence will be that foreign investors,
and most certainly not just Chinese investors, will rightly see the United
States as no longer committed to an open investment climate.
They will feel much more
free to utilize their dollars to buy assets in other countries where the rules
are similar to current U.S. law. It is worth noting in this regard that China
is attracting very high levels of foreign direct and portfolio investment and
is carefully liberalizing its investment regulation.
The argument that “Unocal could not buy CNOOC” may or may not be
true, but recent news reports indicate that Yahoo is quite free to buy a major
stake in the Chinese web company Alibaba.com, and to enter into a joint operating
arrangement for its Chinese operations. If the Exon-Florio law is changed in
the ways now being proposed such an investment by Alibaba.com in Yahoo might
be considered “off limits.” Americans could be faced with the criticism
that U.S. investment rules are more exclusionary than those of China. If that
becomes the case, the criticism will not come solely from China--it will be widespread,
and foreign investors will “vote with their feet.”
While the information and opinions contained within have
been compiled from sources believed to be reliable, KWR
does not represent that it is accurate or complete and
it should be relied on as such. Accordingly, nothing
in this article shall be construed as offering a guarantee
of the accuracy or completeness of the information contained
herein, or as an offer or solicitation with respect to
the purchase or sale of any security. All opinions and
estimates are subject to change without notice. KWR staff,
consultants and contributors to the KWR International
Advisor may at any time have a long or short position
in any security or option mentioned.