CFIUS Review of Foreign Investment

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1 Procedures To Be Followed By CFIUS in Reviewing Foreign Investment Are Revised and Enhanced SUMMARY On January 23, 2008, President Bush issued Executive Order ( E.O ), which implements the Foreign Investment and National Security Act of 2007 by amending and enhancing certain procedures to be followed by the Committee on Foreign Investment in the United States, or CFIUS, in conducting reviews and investigations of non-u.s. persons acquisitions of control over U.S. businesses to determine whether the transaction would threaten to impair the national security. Among other things, E.O reiterates U.S. policy to support international investment in the U.S., clarifies certain procedural elements of CFIUS review, addresses procedures for mitigation agreements and limits the authority of CFIUS to require broad compliance with law undertakings in mitigation agreements. BACKGROUND On July 26, 2007, President Bush signed into law the Foreign Investment and National Security Act of 2007 ( FINSA ). That legislation substantially revised the Exon-Florio Amendment to the Defense Production Act of 1950 ( Exon-Florio ), which first established a process for the U.S. government to review certain mergers, acquisitions and takeovers by non-u.s. persons of U.S.-located businesses to ensure that they do not adversely affect national security. The President of the United States, acting through CFIUS, may investigate any transaction by which a foreign person gains control of any person engaged in interstate commerce in the United States and the President may prevent or unwind any such transaction that threatens to impair the national security of the United States. As discussed in greater detail in our memorandum dated July 26, 2007, FINSA codified the existence and role of CFIUS (an inter-agency body originally established under an earlier Executive Order), expanded its membership, added factors that CFIUS may consider in reviewing the national security implications of New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney

2 a transaction, and required heightened scrutiny of certain kinds of acquisitions, including those by foreign government-controlled entities and those involving U.S. critical infrastructure. FINSA also codified CFIUS s practice of using mitigation agreements to resolve national security concerns raised by a transaction. CFIUS now has express authority to condition a transaction on the satisfaction of CFIUS s national security concerns through a mitigation agreement or other condition. The statute requires that any such agreement or condition be based on a risk-based analysis of the threat to national security raised by the covered transaction. 1 THE EXECUTIVE ORDER E.O enhances and clarifies several matters of CFIUS-related policy and procedures. The principal provisions of E.O are summarized below. U.S. POLICY FAVORS FOREIGN INVESTMENT Consistent with recent public statements by executive branch officials, in particular those in the Treasury Department, E.O provides that [i]t is the policy of the United States to support unequivocally [international] investment [in the United States], consistent with the protection of the national security because such investment promotes economic growth, productivity, competitiveness, and job creation. The statement of policy in E.O reaffirms that the value of such investment to the U.S. economy will be considered by CFIUS, along with national security considerations, in the course of any review that it performs. CFIUS COMPOSITION, LEADERSHIP AND ROLES Role and Authority of the Treasury Department FINSA established the Secretary of the Treasury as the chair of CFIUS, and E.O further defines the Secretary s role as chairperson. 2 Consistent with past practice, E.O authorizes Treasury to act and communicate with parties to the transaction on behalf of CFIUS. It also delegates to Treasury the authority to issue the new Exon-Florio regulations required by FINSA, although Treasury must consult the other members of the Committee. 3 Treasury also is charged with coordinating the preparation of annual reports to Congress required by FINSA See our memorandum dated July 26, 2007, entitled : New Law Formalizes and Makes More Rigorous the National Security Review of Foreign Investment in the United States. The Secretary of the Treasury may delegate his authority to other members of the Treasury Department; accordingly, we refer to Treasury rather than the Secretary in the text. These regulations must take effect no later than April 22,

3 Role and Authority of the Lead Agency FINSA directs Treasury to designate, as appropriate, a lead agency or agencies in connection with review by CFIUS of each covered transaction. The lead agency, if so designated, is authorized to act on behalf of CFIUS with respect to the negotiation of mitigation agreements or other conditions that the Committee may determine to be necessary to protect national security, and to monitor and ensure compliance with any such agreements or conditions after the transaction closes. The Executive Order also clarifies that, if a lead agency is not designated in connection with any particular transaction, these powers remain with Treasury. As discussed below, under Mitigation Agreements and Enforcement, the lead agency s discretion to act unilaterally is limited by E.O ; among other things, the lead agency must inform the full Committee and secure its approval prior to negotiating a mitigation agreement, must keep the full Committee fully informed of its activities and must notify Treasury of any material action it proposes to take on the Committee s behalf sufficiently in advance to allow adequate time for Treasury to consult the rest of the Committee and provide the Committee s direction not to take, or to revise, such action. New CFIUS Members In addition to the heads of agencies designated as CFIUS members by FINSA, E.O adds two new permanent members: the United States Trade Representative and the Director of the Office of Science and Technology Policy. Also added as observers, and as participants when appropriate, are the Director of the Office of Management and Budget, the Chairman of the Council of Economic Advisers, and the Assistants to the President for Homeland Security and Counterterrorism, National Security Affairs and Economic Policy. Additional Duties of the Commerce Department E.O directs the Secretary of Commerce to obtain information about foreign investment in the United States, including trends and significant developments, and to analyze and report on that information, to the public as well as the President and other Executive Branch officials. The Commerce Department already collects information on foreign investment through its Bureau of Economic Analysis under the International Investment and Trade in Services Survey Act, 22 U.S.C et seq. The extent to which the Commerce Department may need to or may wish to undertake additional efforts to comply with the directive in E.O is not clear. Press reports on drafts of the Executive Order indicated that this role originally was intended to be fulfilled by the full Committee. NATIONAL SECURITY REVIEWS AND INVESTIGATIONS; REPORTING Briefly summarized, there are two stages to the CFIUS process. The first step is a national security review, which may be initiated either by the parties voluntary filing with CFIUS or, in the absence of such a filing, by the decision of the full Committee or of one of its member agencies. Once initiated, a review -3-

4 must be completed by CFIUS within 30 days. If, at the end of its review, CFIUS concludes that a transaction threatens to impair national security, it has 45 days to conduct a national security investigation. Transactions not opposed by CFIUS historically, the overwhelming majority of foreign acquisitions may proceed, and CFIUS will not later seek to re-open the transaction except in certain extraordinary circumstances provided by FINSA. National Security Inquiries By CFIUS Members E.O appears to expand the authority of the individual member agencies of CFIUS by providing that any member may conduct its own inquiry with respect to the potential national security risk posed by a transaction. However, communications with the parties to the transaction must occur through, or in the presence of, the lead agency (or Treasury, if no lead agency has been designated). National Security Investigations FINSA requires CFIUS to conduct a national security investigation of certain covered transactions, particularly those that would result in foreign control of any critical infrastructure or that are by foreign government-controlled entities (subject, in each case, to certain conditions and exceptions). E.O adds to the list of transactions requiring a 45-day national security investigation any transaction that a single member of CFIUS believes threatens to impair national security. Reports to the President Under previously applicable procedures, reports were required to be sent to the President at the end of every national security investigation. E.O provides that CFIUS shall report to the President, and request the President s decision on a review or investigation of a transaction, in only three circumstances: (i) if the Committee recommends suspension or prohibition of a transaction; (ii) if the Committee is unable to make a recommendation; or (iii) if the Committee requests that the President make a determination with regard to the transaction. This appears to mean that reports to the President are no longer required at the conclusion of a national security review if CFIUS concludes that the transaction either does not present a national security risk or that such risk is mitigated by agreement or condition. (However, reports to Congress may be required by FINSA on such matters, as part of the effort to enhance Congressional oversight of the CFIUS process.) MITIGATION AGREEMENTS AND ENFORCEMENT Consistent with FINSA, E.O authorizes CFIUS, or any lead agency, to seek a mitigation agreement or otherwise impose conditions on the parties to a transaction to address a national security risk found to be posed by a transaction if such risk is not adequately addressed by other provisions of law. -4-

5 E.O , however, sets out additional requirements limiting a lead agency s discretion in this regard, presumably with the intent of helping to ensure that the full Committee gives careful consideration to any proposed mitigation agreement or condition. Prior to proposing a mitigation agreement to any of the parties to a transaction, the lead agency must first provide written notice to the full Committee identifying the specific national security risk that the transaction poses and setting forth the proposed mitigation measures believed to be reasonably necessary to address that risk. Only if the full Committee agrees that mitigation is appropriate and approves the proposed mitigation measures may the lead agency commence negotiating the agreement with the parties to the transaction. E.O also addresses issues that may arise from overlapping jurisdiction and authority. E.O specifically preserves the authority of each CFIUS member to conduct inquiries, communicate with the parties, and negotiate, enter into, impose, or enforce contractual provisions with the parties to a transaction so long as these activities are conducted in the exercise of authorities other than those provided under Exon-Florio. At the same time, a CFIUS member may not condition its exercise of other authority it may have upon its exercise (or forbearance in the exercise) of its CFIUS-related authority. E.O also provides that a mitigation agreement shall not, except in extraordinary circumstances, require a party to a transaction to recognize, state its intent to comply with, or consent to the exercise of any authority under existing provisions of law. 4 This provision appears to be intended to limit the potentially coercive power of CFIUS in certain respects. For example, one effect of this provision appears to be that, in the normal course, CFIUS will not be able to require a party to consent to the exercise of authority when it otherwise would not be bound, simply in order to have its transaction approved. Another effect appears to be that CFIUS is restrained, in the normal course, from including catch-all agreements to comply with applicable law, the breach of which could later be used to reopen consideration of a transaction, as Exon-Florio allows CFIUS to reopen consideration in the event of a material breach of a mitigation agreement. In a similar vein, E.O expressly provides that CFIUS may not reopen a transaction that has previously been reviewed, except in the extraordinary circumstances identified by Exon-Florio, that is, where a party materially breaches its mitigation agreement or provides false or misleading, or omits, material information during the initial review. * * * Copyright Sullivan & Cromwell LLP E.O expressly provides that it does not impair or otherwise affect existing mitigation agreements ; presumably, this means mitigation agreements entered into prior to January 23,

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