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 G. Christopher Griner, Farhad Jalinous, and Christopher R. Brewster of Kaye Scholer LLP explore the implications of national investment on foreign investment.
In late January, following enactment of the Foreign Investment and National Security Act of 2007, President Bush issued amendments to the executive order that governs national security reviews of mergers and acquisitions. The order states that U.S. policy supports foreign investment "unequivocally, consistent with the protection of the national security." It is just such national security concerns that allow for "equivocation" in American open investment policies, and the principal purpose of Finsa is to bring new vigor to the review process.
Investment reviews are conducted by the multiagency Committee on Foreign Investment in the United States, created in 1975 by President Ford under executive order. Finsa provided statutory authorization for CFIUS, defining membership to include seven agencies: Treasury (chair), Homeland Security, Commerce, Defense, State, Justice and Energy, with nonvoting seats to the secretary of labor (a new addition) and the director of national intelligence. To this group, the executive order adds the U.S. trade representative and key White House staff, including the national security adviser and the assistants to the president for economic policy and homeland security. The presence of several White House advisers makes clear that CFIUS cannot act as a "free agent," unfettered by White House oversight.
While almost all cases are concluded within the 30-day statutory time frame for initial reviews, we find that CFIUS agencies "post-Finsa" ask more questions -- and that the questions are more probing. Where national security risks are identified, 30-day reviews may be followed by a 45-day investigation. The executive order expands on the authority provided in Finsa to CFIUS member agencies for triggering investigations by providing that formal investigations must be undertaken if any member of CFIUS "believes that the transaction threatens to impair the national security of the United States and that the threat has not been mitigated." This greatly strengthens the power of any one agency to force an investigation -- and highlights the importance of mitigation agreements. Finsa gave statutory recognition to mitigation agreements -- formal pledges by the buyers to establish safeguards against perceived national security risks. Mitigation has always been required to maintain security clearances, but CFIUS has used mitigation in other cases as well. Finsa now requires the lead agency to monitor and enforce mitigation agreements. Under the order, CFIUS is authorized to "impose conditions" to mitigate national security, giving the green light to "take it or leave it" conditions when agreements cannot be reached. The order provides that mitigation agreements -- with rare exception -- may not require compliance with existing laws. This seemingly odd self-restraint may reflect the view that commitments to abide by existing law are of little value, since the parties are merely agreeing to do what they are required to do anyway. Nevertheless, tying mitigation agreements to commitments to follow "existing provisions of law" also means deals can be undone by infractions unrelated to national security concerns. The CFIUS process was never intended to be used in this way. The order thus makes clear that mitigation agreements may be used only where existing authorities, on their own, provide inadequate protection to the national security. The order also provides that CFIUS reviews may not be used to obtain or reward concessions under other laws. While agencies may conduct inquiries with the parties to a transaction in the independent exercise of their authority (e.g., antitrust reviews), the order states that an agency may not condition its decisions in such matters on its willingness to use -- or not use -- its CFIUS authority to block or clear a transaction. Therefore, government investigations may not be held hostage to CFIUS approval, nor may CFIUS approval be used to force concessions on unrelated matters. The line gets blurry, however, when agency inquiries implicate national security. Indeed, where classified programs are involved, CFIUS clearance will likely require mitigation. Regulations implementing Finsa are expected in April. Meanwhile, the executive order provides a window into the CFIUS process. Companies contemplating foreign investment in the U.S. national security sector should anticipate and prepare for tough CFIUS reviews. G. Christopher Griner is managing partner, Farhad Jalinous is partner and Christopher R. Brewster is counsel in Kaye Scholer LLP's Washington office. Categories Deal Video
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