Foreign Direct Investment in the U.S. and National Security: How Open is the Door?
By Russell L. Smith
WASHINGTON, DC (KWR) May 4, 2015 - In a 2008 Executive Order implementing the Exon-Florio law, President George W. Bush stated that:
"It is the policy of the United States to support unequivocally [international] investment [in the United States], consistent with the protection of the national security."
Today foreign direct investors in the United States must deal with the intersection of those two policy goals-supporting inward investment into the United States, and protecting U.S. national security, and as a practical matter what it means for a foreign investment transaction that may affect U.S. national security.
Whether or not one believes that the balance has tipped in favor of protecting national security, the Committee of Foreign Investment in the United States ("CFIUS") process, and other U.S. government national security reviews, have become a major consideration in many transactions.
Under the "Exon-Florio" provisions of U.S. law, the President has the authority to accept, reject, or require changes to a merger, acquisition, or takeover that results in the ownership or control of a U.S. person by a foreign person (a "covered transaction") and that "threatens to impair national security" of the United States.
If the President determines that a covered transaction threatens national security, the Exon-Florio provision allows him to act only if no other provision of U.S. law can adequately address those security concerns.
The President's Exon-Florio authority is exercised through the CFIUS, an inter-agency committee, led by the Treasury Department. It serves the President by reviewing national security implications of foreign investments in the U.S. economy.
CFIUS is comprised of representatives from nine U.S. cabinet-level departments and two White House offices.
While there are a limited number of voting members of CFIUS, in reality it operates on consensus, such that if one participant strongly objects to a transaction or seeks conditions, those demands are usually respected.
Exon-Florio does not define the term "national security," but instead establishes a very broad scope for the factors that CFIUS should consider in evaluating the national security impact of a transaction.
There are some national security factors that are known to be of substantial interest to CFIUS.
In particular, the transaction's industry sector, the nationality of the acquirer, and the particular products or services involved are all determinative factors. Transactions involving the defense, energy, information and communications technology, financial markets and credit operations, and transportation sectors are more likely to raise CFIUS concerns. Countries posing political or security challenges to the United States receive enhanced scrutiny. Finally, transactions involving export-controlled products, contracts with the U.S. government, or defense-related issues are also evaluated closely.
When the Exon-Florio law was enacted in 1988, the concern was Japanese investment in the United States, and the Reagan Administration fought for a narrowly limited review process with strict timelines. The CFIUS process was quite informal and the information requirements were not particularly burdensome.
The cycle of concern over foreign investment turned around again in 2006, when Dubai Ports World sought to purchase the port management operations of Pacific & Orient lines, including U.S. port operations. CFIUS approved this transaction and Members of Congress, prompted by unsuccessful bidders, raised concerns about "Arab" control of U.S. ports. In a post September 11 world, this was enough to scotch the U.S. portion of the transaction and prompt a stampede to "tighten" Exon-Florio. That was accomplished through the 2007 Foreign Investment and National Security Act and the 2008 CIFUS regulations implementing it.
That produced a process that continues to evolve, so far not by changes in the law, but by more subtle movements in how CFIUS interprets the law.
The cycle of concern over foreign investment turned around again in 2006, when Dubai Ports World sought to purchase the port management operations of Pacific & Orient lines, including U.S. port operations. CFIUS approved this transaction and Members of Congress, prompted by unsuccessful bidders, raised concerns about "Arab" control of U.S. ports. In a post September 11 world, this was enough to scotch the U.S. portion of the transaction and prompt a stampede to "tighten" Exon-Florio. That was accomplished through the 2007 Foreign Investment and National Security Act and the 2008 CIFUS regulations implementing it.
In general, today parties must provide more detail, and many transactions receive more careful scrutiny, than they did even a year or two ago. For example, CFIUS shows increasingly keen interest in any foreign government involvement in a covered transaction. CFIUS aggressively seeks to pierce corporate structures and look through to the ultimate parent in a transaction-so acquisitions with very complex ownership structures only invite deeper review to find the foreign control.
Other than the requirement to show that other provisions of law are not adequate to respond to a national security threat, and that evidence of a threat be "credible," there are no limitations on the President's, and in turn CFIUS's discretion to decide what is a national security concern. In essence the lack of any specific definition of what constitutes national security means that CFIUS can and does review many aspects of a transaction, some of which may seem quite far removed from accepted notions of national security.
According to a recent Bloomberg Government study, the U.S. government has increased its national security scrutiny of proposed foreign takeovers of U.S. companies. In 2011, CFIUS reviewed about nine percent of the foreign takeover activity in the U.S., as compared to less than six percent in 2005.
The gradually increasing scope of the President's exercise of his Exon-Florio review powers indicates that the balance in the U.S. foreign direct investment equation may be tipping in favor of national security and away from open investment---at least when it comes to vast sectors of the U.S. economy and newly acquisitive investors from many countries outside North America and Western Europe.
Russell Smith is Special Counsel and head of the Government Relations Practice Group in the Washington, DC office of Willkie Farr & Gallagher LLP. The views expressed are solely those of Mr. Smith.
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.
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