Many U.S. government agencies exist in relative anonymity, known only to those directly affected by their workings or by Washington insiders. A few, however, have made an overnight leap from obscurity to fame or infamy.

Leading the exceptions these days is the interagency Committee on Foreign Investment in the United States (CFIUS), charged with examining the national security aspects of foreign takeovers of American corporations (see SIDEBAR).

CFIUS' alleged failings have captured headlines since Dubai Ports World (DPW) announced its intention earlier this year to purchase the U.S sea terminal operations owned by U.K.-based Peninsular and Oriental Steam Navigation Co. Coming as it did on the heels of the furor surrounding Chinese National Offshore Oil Corporation's proposed purchase of Unocal, it wasn't long before the fallout from DPW led to cries for reform.

Both houses of Congress responded. On July 26, they passed–by unanimous floor vote with no debate–competing proposals to revamp CFIUS.

“With both the House and the Senate having passed legislation, the chance of getting a new law is substantial,” says Charles Levy, a partner at Wilmer Cutler Pickering Hale & Dorr, who is counsel to the Business Roundtable, an association of CEOs that has led lobbying efforts regarding CFIUS reform.

But just what form the new law takes will have a significant impact on U.S. companies.

Reforming CFIUS

“CFIUS affects between 60 and 80 deals a year but it has a wider effect on many more because regulatory risk is an important factor in companies' decisions to acquire or sell,” says David Marchick, an international trade partner at Covington & Burling.

Before DPW, however, the existing system didn't appear to pose any meaningful regulatory risk.

“With very few exceptions, the CFIUS system has worked well, with little or no Congressional interest or oversight, and only an occasional critical GAO report,” says Stephen Canner, staff chair of CFIUS from 1988 to 1992 and now vice president of investment policy at the U.S. Council for International Business (USCIB).

DPW made that record irrelevant, leading to the passage of the House's National Security FIRST Act and the Senate's Foreign Investment and National Security Act–competing laws that need to be resolved before Congress promulgates final legislation.

Although there are important similarities in the two bills, the USCIB, the Business Roundtable, the U.S. Chamber of Commerce and the American business community in general have all thrown their weight behind the House version.

“Both bills require greater scrutiny when the acquirer is owned by a foreign government, both require a higher level of review of transactions and both impose more stringent reporting requirements to Congress, but there are very significant differences otherwise,” Marchick says.

The overriding objection to the Senate bill is that it contemplates a major overhaul of U.S. policy on foreign investment, making major changes to critical aspects of the CFIUS process and mandating far more extensive reporting than the House bill.

By contrast, the House bill focuses on improving the management of CFIUS without making fundamental changes to the open posture that the U.S. has exhibited historically to foreign investment.

“The Senate's version really overreaches, and if the final legislation does the same, it will not only deter investment in the U.S. but will encourage other nations to do the same and impede our transactions abroad,” Canner says.

In other words, to the extent that the Senate version becomes law, there will be fewer deals to do and the ones that are done will be more problematic.

“The Senate version will lengthen deal timetables, create uncertainties, bring politics into the process and raise transaction costs,” says Douglas Holtz-Eakin, director and chair in International Economics at the Maurice R. Greenberg Center for Geoeconomic Studies in Washington, D.C.

Senate's Shortcomings

To begin with, the Senate bill would apply to a much broader range of transactions because it requires a full investigation of the security risk whenever there is foreign investment in critical infrastructure. By contrast, the House bill would merely require CFIUS to consider the fact that critical infrastructure is the subject of a transaction as one of several factors in determining whether an inquiry should go beyond a review to a full-fledged investigation.

“Everyone agrees, for example, that a Chinese investment in a nuclear company requires a thorough investigation, but the Senate version goes so far as to require such an investigation when a Canadian company buys an interest in a local toll road,” Marchick says.

The Senate bill also risks politicizing the process by requiring frequent communication with Congress during the CFIUS process. On the other hand, the House version contemplates reporting only after the process has ended.

“The Senate's proposal means Congress can get involved on a real-time basis while the review is underway, which opens the door to constant meddling from politicians,” Marchick says.

The timelines in the Senate bill also are problematic. The current CFIUS process has a 30-day initial review period, which corresponds with antitrust timelines. The Senate bill, however, envisages an additional 30-day period for review.

“The symmetry in timing with the Hart-Scott-Rodino provisions allows a foreign company and a U.S. company that are competitors in the bidding to be on the same footing in that each will know within 30 days whether the transaction it proposes will go through,” Marchick explains.

What's not known is what form the final bill will take, or whether new legislation will pass at all. But Levy says that doesn't mean the process won't change.

“Even if there isn't a new law, in-house counsel can expect a much more rigorous CFIUS process,” he says.

Cleaning House

According to Levy, the DPW fiasco emerged because CFIUS wasn't doing its job.

“CFIUS was simply checking off on its responsibilities and not performing the due diligence required,” he says.

So even if the law doesn't change, Levy expects CFIUS to be far more aggressive in the future.

“I believe that CFIUS will take a greater proportion of transactions from review to investigation; I believe that the individual agencies involved will be more outspoken as opposed to deferring to Treasury as they seem to have done over the years; and I believe that CFIUS will be asking a lot more questions and demanding a lot more supporting material,” he argues.

What it all spells is “new dimensions” –in large font and bold type–for GCs dealing with international M&As.

———–

[SIDEBAR]

The Power of CFIUS

CFIUS' roots are in the 1988 Exon-Florio Amendment to the Defense Production Act. Under this legislation, the president has delegated his review and investigative authority to CFIUS, an interagency committee comprised of 12 executive members. Among the agencies involved are the Departments of Treasury, Commerce, Defense, Homeland Security, Justice and State.

In weighing the impact of a transaction on national security, CFIUS will consider:

-Foreign government ownership.

-Sensitivity of the assets being acquired.

-The reputation and home country of the acquirer.

-The impact on U.S. markets and the government's supply of material or technology that is significant to national defense.

-The possibility of mitigating the threat by a negotiated security agreement.

Many U.S. government agencies exist in relative anonymity, known only to those directly affected by their workings or by Washington insiders. A few, however, have made an overnight leap from obscurity to fame or infamy.

Leading the exceptions these days is the interagency Committee on Foreign Investment in the United States (CFIUS), charged with examining the national security aspects of foreign takeovers of American corporations (see SIDEBAR).

CFIUS' alleged failings have captured headlines since Dubai Ports World (DPW) announced its intention earlier this year to purchase the U.S sea terminal operations owned by U.K.-based Peninsular and Oriental Steam Navigation Co. Coming as it did on the heels of the furor surrounding Chinese National Offshore Oil Corporation's proposed purchase of Unocal, it wasn't long before the fallout from DPW led to cries for reform.

Both houses of Congress responded. On July 26, they passed–by unanimous floor vote with no debate–competing proposals to revamp CFIUS.

“With both the House and the Senate having passed legislation, the chance of getting a new law is substantial,” says Charles Levy, a partner at Wilmer Cutler Pickering Hale & Dorr, who is counsel to the Business Roundtable, an association of CEOs that has led lobbying efforts regarding CFIUS reform.

But just what form the new law takes will have a significant impact on U.S. companies.

Reforming CFIUS

“CFIUS affects between 60 and 80 deals a year but it has a wider effect on many more because regulatory risk is an important factor in companies' decisions to acquire or sell,” says David Marchick, an international trade partner at Covington & Burling.

Before DPW, however, the existing system didn't appear to pose any meaningful regulatory risk.

“With very few exceptions, the CFIUS system has worked well, with little or no Congressional interest or oversight, and only an occasional critical GAO report,” says Stephen Canner, staff chair of CFIUS from 1988 to 1992 and now vice president of investment policy at the U.S. Council for International Business (USCIB).

DPW made that record irrelevant, leading to the passage of the House's National Security FIRST Act and the Senate's Foreign Investment and National Security Act–competing laws that need to be resolved before Congress promulgates final legislation.

Although there are important similarities in the two bills, the USCIB, the Business Roundtable, the U.S. Chamber of Commerce and the American business community in general have all thrown their weight behind the House version.

“Both bills require greater scrutiny when the acquirer is owned by a foreign government, both require a higher level of review of transactions and both impose more stringent reporting requirements to Congress, but there are very significant differences otherwise,” Marchick says.

The overriding objection to the Senate bill is that it contemplates a major overhaul of U.S. policy on foreign investment, making major changes to critical aspects of the CFIUS process and mandating far more extensive reporting than the House bill.

By contrast, the House bill focuses on improving the management of CFIUS without making fundamental changes to the open posture that the U.S. has exhibited historically to foreign investment.

“The Senate's version really overreaches, and if the final legislation does the same, it will not only deter investment in the U.S. but will encourage other nations to do the same and impede our transactions abroad,” Canner says.

In other words, to the extent that the Senate version becomes law, there will be fewer deals to do and the ones that are done will be more problematic.

“The Senate version will lengthen deal timetables, create uncertainties, bring politics into the process and raise transaction costs,” says Douglas Holtz-Eakin, director and chair in International Economics at the Maurice R. Greenberg Center for Geoeconomic Studies in Washington, D.C.

Senate's Shortcomings

To begin with, the Senate bill would apply to a much broader range of transactions because it requires a full investigation of the security risk whenever there is foreign investment in critical infrastructure. By contrast, the House bill would merely require CFIUS to consider the fact that critical infrastructure is the subject of a transaction as one of several factors in determining whether an inquiry should go beyond a review to a full-fledged investigation.

“Everyone agrees, for example, that a Chinese investment in a nuclear company requires a thorough investigation, but the Senate version goes so far as to require such an investigation when a Canadian company buys an interest in a local toll road,” Marchick says.

The Senate bill also risks politicizing the process by requiring frequent communication with Congress during the CFIUS process. On the other hand, the House version contemplates reporting only after the process has ended.

“The Senate's proposal means Congress can get involved on a real-time basis while the review is underway, which opens the door to constant meddling from politicians,” Marchick says.

The timelines in the Senate bill also are problematic. The current CFIUS process has a 30-day initial review period, which corresponds with antitrust timelines. The Senate bill, however, envisages an additional 30-day period for review.

“The symmetry in timing with the Hart-Scott-Rodino provisions allows a foreign company and a U.S. company that are competitors in the bidding to be on the same footing in that each will know within 30 days whether the transaction it proposes will go through,” Marchick explains.

What's not known is what form the final bill will take, or whether new legislation will pass at all. But Levy says that doesn't mean the process won't change.

“Even if there isn't a new law, in-house counsel can expect a much more rigorous CFIUS process,” he says.

Cleaning House

According to Levy, the DPW fiasco emerged because CFIUS wasn't doing its job.

“CFIUS was simply checking off on its responsibilities and not performing the due diligence required,” he says.

So even if the law doesn't change, Levy expects CFIUS to be far more aggressive in the future.

“I believe that CFIUS will take a greater proportion of transactions from review to investigation; I believe that the individual agencies involved will be more outspoken as opposed to deferring to Treasury as they seem to have done over the years; and I believe that CFIUS will be asking a lot more questions and demanding a lot more supporting material,” he argues.

What it all spells is “new dimensions” –in large font and bold type–for GCs dealing with international M&As.

———–

[SIDEBAR]

The Power of CFIUS

CFIUS' roots are in the 1988 Exon-Florio Amendment to the Defense Production Act. Under this legislation, the president has delegated his review and investigative authority to CFIUS, an interagency committee comprised of 12 executive members. Among the agencies involved are the Departments of Treasury, Commerce, Defense, Homeland Security, Justice and State.

In weighing the impact of a transaction on national security, CFIUS will consider:

-Foreign government ownership.

-Sensitivity of the assets being acquired.

-The reputation and home country of the acquirer.

-The impact on U.S. markets and the government's supply of material or technology that is significant to national defense.

-The possibility of mitigating the threat by a negotiated security agreement.