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When Dubai Ports World sought to purchase U.S. port facilities in 2006, key members of Congress charged that in approving the purchase, the government was neglecting considerations of national security. Now, these congressional concerns have resulted in a new law — one with significant implications for foreign companies and governments seeking to invest in the United States. Addressing a debate that spanned more than a year, President George W. Bush signed into law on July 27 the Foreign Investment and National Security Act of 2007. FINSA removes some of the uncertainties created by Dubai Ports World and puts into statutory form the process by which the president, through the Committee on Foreign Investment in the United States, monitors foreign investment in U.S. businesses that may affect national security. Under prior law, the president had the power to suspend, prohibit, or seek divestiture of a foreign merger, acquisition, or takeover of a U.S. business. Such presidential action rarely occurred, because CFIUS typically resolved any security issues. Successfully completing one of a number of possible CFIUS examinations provided parties a safe harbor against presidential action. Although FINSA maintains much of the pre-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. In the process, FINSA places new emphasis on mitigation agreements between CFIUS and parties to a transaction, and it requires monitoring of transactions even when the parties seek to withdraw a voluntary CFIUS notification. It also provides more transparency in the CFIUS process. Understanding the new players, procedures, and standards will be important for foreign governments, foreign companies, and foreign-controlled U.S. subsidiaries making new investments in the United States. DUBAI PORTS WORLD Attention to the largely secretive work of CFIUS soared after the 2006 purchase of U.S. port facilities by Dubai Ports World, a company controlled by the United Arab Emirates. CFIUS approved the transaction, but, after the fact, key members of Congress charged this decision with paying insufficient attention to potential national security risks. Although Dubai Ports World soon pledged to sell its U.S. port interests amid the 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 in the 109th Congress. The 110th Congress acted early to adopt a compromise — the recently enacted 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 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 acquisitions involving critical infrastructure, are subject to full investigations, unless the treasury secretary and the head of the lead agency responsible for review, or their high level designees, jointly determine that no national security concern exists. • Provides for civil penalties if parties to a transaction violate FINSA provisions, including mitigation agreements. FINSA adds a new criterion by which CFIUS is to conduct its reviews and investigations — securing the critical infrastructure of the United States. The law provides that CFIUS evaluations will consider both critical infrastructure and critical technologies. These definitions are broad. Critical infrastructure is 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 “critical components, or critical technology items essential to national defense.” CFIUS will largely determine what infrastructure or technologies are critical to national security. Ultimately, CFIUS can be expected to extend its reach beyond the traditional bounds of review. INTO THE OPEN Until FINSA, CFIUS operated largely in secret. Its members were prohibited from discussing transactions under scrutiny with anyone other than the parties. Decisions were not published, and there was little oversight. Congress sought to address CFIUS accountability and transparency concerns through the following: • Required guidance: 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 about the threshold level at which CFIUS gauges security risks. • Certified notices and investigation reports: FINSA requires CFIUS to provide Congress notices of completion of initial reviews and detailed reports after investigations are completed. These notices and reports must be certified in writing by the treasury secretary and the head of the lead agency, or certain high level designees. • Annual reports to Congress: Before July 31 each year, CFIUS must provide to key congressional committees a report on all CFIUS reviews and investigations. The annual report, meant to be comprehensive, 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 designed to mitigate national security concerns. An unclassified version of the study must be 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. GOVERNMENT REVIEW CFIUS review of a proposed foreign investment takes several forms: • Voluntary initial review: As was the case previously, a party to a transaction may initiate review. CFIUS then is required to determine within 30 days the effects the transaction would have on national security. CFIUS then must either issue a recommendation for approval or proceed to investigate. • Withdrawals following notice of a voluntary initial review: Unlike pre-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 occur only if approved by CFIUS. As an additional precaution resulting from congressional concern about overuse of voluntary withdrawals, FINSA requires CFIUS to subsequently track actions of the parties. 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 or the lead agency. • Unilateral 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, that the transaction involves a foreign government-controlled entity, or, in certain instances, that critical infrastructure is involved. At the end of the 45-day investigation, the matter is sent to the president for a final decision. • Safe harbor: Safe harbor protection can be forfeited if a party makes a material misrepresentation of fact. FINSA expands that to include a material violation of an obligation undertaken under a mitigation agreement with CFIUS. FINSA provides that CFIUS membership shall include the secretaries of the Treasury, Homeland Security, Commerce, Defense, State, and Energy Departments, as well as the attorney general. Nonvoting members include the director of national intelligence and the secretary of labor, both of whom are new additions. The treasury secretary serves as the CFIUS chairperson. To provide the focus that some in Congress believed was lacking for Dubai Ports World, Congress created an additional assistant treasury secretary tasked with overseeing CFIUS matters. The hope is that this will heighten the attention within the department to FINSA. For each transaction reviewed by CFIUS, the chairperson must designate a lead agency that will be responsible for the review of a particular case, for any negotiation of mitigation measures designed to reduce national security risk, and for any subsequent monitoring. The director of national intelligence is required to provide an analysis of potential national security concerns. FINSA provides that the president may include the heads of other agencies on a case-by-case basis, and CFIUS may consult other agencies as appropriate. FINSA also provides, for the first time, civil penalties for companies that violate CFIUS regulations, including actions that contravene a mitigation agreement. In addition to adding some transparency, FINSA adds new complexity, increased scrutiny, and a broader mandate that will increase the number of transactions that CFIUS considers. New oversight by Congress and the press will add to public consciousness of certain foreign acquisitions. This will be so even though the key requirements of the CFIUS process — such as time limits on reviews and investigations — remain the same. Consequently, those handling foreign acquisitions will see an increasing number of transactions in which CFIUS must be high on the list of due-diligence concerns.


Michael J. O’Neil is a partner in the Washington, D.C., office of Kirkpatrick & Lockhart Preston Gates Ellis. His practice focuses on trade, export, security, information technology, and federal policy.

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