Investment regulations: A question of national security
Last month, the US completed a lengthy process to revise its regulatory mechanism for screening foreign investment on national security grounds - a review process administered by the interagency Committee on Foreign Investment in the US (CFIUS).In 2006, investors around the globe watched in dismay as members of the US Congress condemned the acquisition by Dubai Ports World of Peninsular and Oriental Steam Navigation Company's US ports management business. The transaction, which had been approved by CFIUS, collapsed under the withering criticism of politicians and pundits. The most ominous aspect of this episode was the many calls to fix the CFIUS review process. Given that the CFIUS process enables the President to block controlling foreign investments in US businesses if those investments may impair national security, foreign investors feared that reforming CFIUS could widen its scope and thereby narrow their ability to invest in the US.
January 28, 2009 at 08:08 PM
5 minute read
The acquisition of a US ports management business by a foreign investor led to the revision of the regulatory mechanism for screening foreign investment on national security grounds
Last month, the US completed a lengthy process to revise its regulatory mechanism for screening foreign investment on national security grounds – a review process administered by the interagency Committee on Foreign Investment in the US (CFIUS).
In 2006, investors around the globe watched in dismay as members of the US Congress condemned the acquisition by Dubai Ports World of Peninsular and Oriental Steam Navigation Company's US ports management business. The transaction, which had been approved by CFIUS, collapsed under the withering criticism of politicians and pundits. The most ominous aspect of this episode was the many calls to fix the CFIUS review process. Given that the CFIUS process enables the President to block controlling foreign investments in US businesses if those investments may impair national security, foreign investors feared that reforming CFIUS could widen its scope and thereby narrow their ability to invest in the US.
Congress indeed enacted CFIUS reform legislation in the form of the Foreign Investment and National Security Act of 2007 (FINSA). Subsequently, former President George W Bush issued an executive order implementing FINSA, and, most recently, the US Treasury Department issued final regulations codifying the process and procedural changes mandated by Congress. Thankfully, the result was not the disastrous protectionist closing of the US's doors that some predicted. Instead, the reforms may perhaps best be described as refreshing and refining CFIUS in a manner that ultimately benefits foreign investors.
For example, FINSA and the final regulations did not lengthen the existing CFIUS review timeframes, keeping intact the 30-day initial review period, optional 45-day investigation, and rarely used 15-day window for a presidential decision. The regulations also recommend, in certain circumstances, but importantly do not require, pre-filing consultations with CFIUS. Mandatory pre-filings would have prolonged the CFIUS process to the disadvantage of foreign companies. The regulations, however, do pressure parties to respond swiftly to CFIUS inquiries – within three business days – during CFIUS reviews. (This is actually an improvement over the two-day response period the Treasury initially proposed.)
In addition, the reforms fortunately left economic security out of the transaction review process. While national security is not defined for CFIUS purposes, the regulations and agency guidance retain CFIUS's narrow focus on national security considerations.
The safe harbour for transactions reviewed by CFIUS provides that an approved transaction cannot be reopened except in limited circumstances involving the submission of false or misleading material information to CFIUS; the omission of material information; or a material breach of a mitigation agreement reached with the CFIUS agencies.
Also significant is that CFIUS reviews remain voluntary. Of course, the true amount of choice is limited by the fact that there is no 'safe harbour' for transactions not reviewed by CFIUS. Indeed, the former president has exercised his authority, albeit once, to order the complete unwinding of a transaction after it had closed. Given this extraordinary power – which is not subject to judicial review – sophisticated foreign investors generally consult experienced CFIUS counsel before undertaking significant US investments.
Not all the news is ideal. The new regulations impose additional information burdens on transaction parties that can add time and expense to the preparation CFIUS filings. Parties can cope with the requirements by involving CFIUS counsel early. Moreover, while the regulations clarify to some extent the flexible definition of what comprises 'control' by a foreign person, the clarifications fail to provide the specific guidance – such as specific percentage thresholds of stock that may be acquired without triggering a finding of control – that has long been sought by foreign investors. And while the codification of many existing informal practices has rendered the CFIUS process somewhat more transparent, the reality is that the CFIUS mechanism remains largely opaque to all but insiders. Most issues in a transaction are therefore identified by experienced CFIUS counsel rather than the parties themselves, creating a potential trap for the unwary.
That said, the CFIUS reforms undertaken by Congress and subsequently implemented by the Bush administration on balance help to clarify an often-mysterious process and remove at least some of the political tensions that had been inflamed in recent years. FINSA and its regulations accomplish this by formalising previously ad hoc practices; making the CFIUS process more accountable, both internally and to the Congress; and reaffirming the relatively narrow focus of CFIUS purely on national security matters. While not perfect, the overall result is positive: a strengthened yet navigable political and regulatory environment for foreign investment in the US.
Mark Plotkin is a partner and David Fagan and Damara Chambers are associates in the Washington DC office of Covington & Burling.
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