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 Robert Schlossberg and Christine Laciak of Freshfields Bruckhaus Deringer LLP offer their views on the Treasury Department's draft proposal for legislation regarding CFIUS in The Daily Deal. The United States is a debtor nation--we need foreign money, and fortunately, we are an attractive economy in which to invest. Foreigners are not content, however, to invest solely in Treasury bills. They are also very interested in U.S. manufacturing, U.S. technology, U.S. roads and other infrastructure, as well as financial institutions, like stock exchanges, investment banks and private equity houses. Thus our general desire for foreign investment needs to be tempered or at least monitored for "national security" concerns. At what point does foreign control over U.S. assets threaten our national security?
It's been nearly 20 years since Congress first addressed the issue by passing the Exon-Florio Act as an amendment, appropriately enough, to the Defense Production Act. The Exon-Florio legislation established the Committee on Foreign Investment in the United States, or CFIUS, an interagency body chaired by the Treasury Department. As reflected in the original implementing regulations issued by Treasury, the focus in those simpler times was primarily on defense contractors and defense procurement. Congress wanted the appropriate government agencies to review transactions in which a foreign entity, whether government-controlled or not, proposed to take control over a U.S. business with access to sensitive technology and that supplied the Department of Defense.
This was all before the horrors of 9/11 and the rise of Sovereign Wealth Funds. Many mark the turning point in the national security review of transactions as the acquisition by Dubai Ports World of the U.K. company Peninsular and Oriental Steam Navigation Co. This had nothing to do with military contracts--it was all about the ever-broadening definition of national security, and of course about politics. Without detailing the issues that transaction raised, the whole affair underscored that the 1988 Exon-Florio Act had become dated; and thus in the summer of 2007 Congress passed the Foreign Investment and National Security Act or Finsa, which sought to clarify and update the national security review of transactions and, among other things, required CFIUS to issue new regulations. You can think of it as a coming of age. The 60 pages of new proposed regulations were issued for public comment April 21, and they are very much evolutionary rather than revolutionary. Indeed, much of the proposal addresses topics familiar to those of us who have been participating in these reviews as the informal procedures and practices that CFIUS has adopted in recent years. In 1988, when Congress passed Exon-Florio, it stated that it in no way intended to impose barriers to foreign investment; similarly, in issuing these proposed regulations the Treasury Department said that the regulations reinforce "the longstanding U.S. policy of welcoming foreign investment." Well, maybe. Although filing with CFIUS remains voluntary, the types of investments or industries covered by the relevant legislation are broad, the amount of information required extensive and the time required to go through the process lengthened. There are also few if any bright-line tests: Whether a foreign person is taking "control" of a U.S. business, which is the sine qua non for a filing, can be difficult to determine, as the proposed regulations do not prescribe a minimum shareholding (CFIUS is emphatic that there is no 10% minimum). Instead, they prescribe a functional test that looks at all the facts and circumstances to determine whether the foreign person has the ability to determine, direct or decide important matters affecting the company. Similarly, "national security" still remains an elusive concept: It includes "critical infrastructure," a term still undefined, as well as "critical technology," a term defined to some extent. The regulations do explicitly exempt truly passive investments. They also exempt most but not all long-term leases--leases are covered where the lessee makes substantially all business decisions regarding the operation of a leased entity. The issue of leases has taken on increasing importance of late, with "infrastructure" a hot investment category and with states and municipalities engaging in what some have called the "selling off of America" (as a way to avoid raising taxes). The regulations also make clear that more detailed information will be required of the foreign purchaser(s) and parent entities; and highly sensitive personal information will be required (as it is in practice now) of senior executives so that appropriate background checks can be run. CFIUS also seeks to institutionalize the current best practice of pre-filing consultation and sharing of draft notices as a way to ensure completeness of the filing (thus effectively lengthening the prescribed statutory period of 30-90 days, depending on the identity of the investor and the industry at issue). The lessons for foreign acquirers, whether government-controlled or not, are clear: The possibility and desirability of national security review of transactions should be addressed early in deal planning. A thorough review of the U.S. target's business needs to be undertaken with a broad definition of "national security" in mind. A realistic view of the information and time required for the process should be embraced, and a thorough strategy developed that builds on all of the above and is cognizant of the informal agency and Capitol Hill outreach is all but required. Only then can you hope to feel that your foreign investment will be truly welcomed. Robert Schlossberg is a partner and Christine Laciak, an associate, in the antitrust, competition and trade group in the Washington, D.C., office of Freshfields Bruckhaus Deringer LLP. Categories Deal Video
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