Foreign Acquisitions of US Companies

Foreign Acquisitions of US Companies

April 01, 2007

By Benjamin Mojuyé

The US House of Representatives voted unanimously in late February to require more rigorous review of foreign investments in US companies that might affect US national security interests.

The US government already requires review of proposed foreign takeovers of US companies by an interagency committee called CFIUS. The acronym stands for Committee on Foreign Investment in the United States.

CFIUS has the power not only to review proposed acquisitions, but also to set aside completed transactions that were not submitted for prior approval if they are found later to raise national security concerns.

The House bill would take away some discretion from the President about how CFIUS operates. It would also require formal votes by committee members to approve transactions. The bill is a reaction to the failed takeover of the UK company Peninsular and Oriental Steam Navigation Company (P&O) by Dubai Ports World. The acquisition would have given Dubai Ports World operating control over six US ports. CFIUS approved the transaction, but the parties canceled the deal after an outcry from Congress.

More than 1,600 transactions have been reviewed by CFIUS since the committee was established in 1975. During that period, only one transaction has been formally vetoed, but about a dozen deals have been withdrawn, and the parties to others have agreed to measures to mitigate national security concerns in order to get their transactions approved. The vast majority of deals are approved without any conditions or mitigation measures.

The parties to a deal are under no obligation to notify CFIUS. However, they run the risk of having the deal set aside later if they fail to have it approved.

The bill the House passed is H.R. 556. It must also clear the Senate. The Senate is expected to take it up later this year.

Rep. Carolyn Maloney (D-New York), the chief sponsor of the bill in the House, said it contains “very tough provisions to protect national security, including the ability for CFIUS to reopen reviews when companies don’t comply with mitigation agreements designed to reduce security risks.” Todd Malan, president of the Organization for International Investment, which represents US subsidiaries of foreign companies, also expressed satisfaction with the bill: “From a business standpoint, [this bill] does not screw anything up . . . . It maintains CFIUS’ role as a screening process, not as a barrier to foreign investment.” The US Chamber of Commerce also praised the measure. Bruce Josten, the Chamber executive vice president, declared: “This bill strikes an appropriate balance between keeping Americans safe and keeping our economy open to the world . . . . We can’t expect other countries to welcome U.S. investment if we discourage theirs. We urge the Senate to follow the balanced model for reform adopted by the House.”

The Bush administration said it “supports House passage of H.R. 556,” but expressed “concerns with some of the provisions and looks forward to working with Congress to address these concerns.”

CFIUS has been moving recently to reinvent itself without waiting for Congress to act. As the recent Alcatel-Lucent and CNOOC-Unocal merger fiascoes demonstrate, reviews are taking longer, costs for companies are mounting and CFIUS-imposed conditions are either tougher or more rigorously enforced, making it difficult for companies to secure approval of their business ventures. In 2006, there were 113 filings (up 73% from 2005), seven second-stage investigations (up 250% from 2005) and five withdrawals (up 150% from 2005) during the second-stage investigation period.

In addition, starting in 2006, CFIUS has broadened the scope of its interventions. CFIUS no longer restricts itself to acquisitions of a US entity by a foreign company. A merger or acquisition between two foreign entities that results in a transfer of US subsidiaries to a new entity, or that affects in any way US critical infrastructure, is also within the CFIUS ambit. For example, the merger between Nokia of Finland and Siemens of Germany to create Nokia Siemens Networks was recently reviewed by CFIUS. CFIUS gave its approval in November 2006, after the parties signed a mitigation or national security agreement, known as a “special security arrangement,” that restricted the ability of the merged company to do business with Nortel in Canada, which counts the US Army and Navy among its customers. More such national security agreements have been negotiated in 2006 in order to gain CFIUS approval. From 2003 to 2005, the Department of Homeland Security was a party to 13 national security agreements, while in 2006 alone there were 15 such agreements.

These types of agreements now contain stricter provisions. Notably, for the first time since its creation, CFIUS conditioned its approval of the December 2006 purchase of Lucent Technologies, Inc. by Alcatel of France on an “evergreen” stipulation that gives CFIUS authority to order divestiture of Lucent in the future if the merged company fails to comply with any of the security conditions.


CFIUS was created in 1975 by executive order of President Gerald Ford.

It was originally a committee with representatives from four federal agencies — the Departments of State, Defense, Treasury and Commerce — and the White House.

Ford charged it with “monitoring the impact of foreign investment in the United States, both direct and portfolio, and for coordinating the implementation of United States policy on such investment.” CFIUS originally had merely an advisory function: if “the need arises,” it made recommendations to the National Security Council and National Economic Policy Board in the White House. The executive order creating CFIUS did not claim power for the President to block or otherwise interfere with any merger or acquisition that might jeopardize US national security.

In 1988, Congress strengthened the President’s hand. The “Exon-Florio amendment” gave the President authority to review proposed foreign takeovers of US companies and block any that threatened national security. In the late 1980s, there was heightened concern in Congress about Japanese investment in the United States. The House committee report on the amendment characterized a proposed takeover of Fairchild in 1987 by Fujitsu Corporation as “tantamount to loss of the [US] ability to produce airplanes during World War II.” The amendment also gave the President the power to unwind completed transactions. Under the Exon-Florio amendment, action by the President to block or unwind an acquisition is final: there is no appeal to the courts.

President Reagan delegated the new power to CFIUS by executive order in December 1988.

CFIUS currently has 12 members. Six agencies are represented: State, Defense, Treasury, Commerce, Justice and Homeland Security. Another six White House offices are represented: the national security and economic policy advisers to the President, the US trade representative, CEA (the Council of Economic Advisers), OMB (the Office of Management and Budget), and the President’s science adviser. The panel is chaired by the Treasury secretary.

The Exon-Florio amendment established a four-step process for reviewing any foreign acquisition of a US company.

The review process generally begins with the two parties involved filing a notice of the planned transaction with CFIUS. CFIUS may also initiate its own review. In addition, CFIUS may reopen transactions it already approved if the parties submitted false or misleading information or the parties fail to take actions that CFIUS ordered to mitigate any national security concerns.

Transactions involving an entity owned or controlled by a foreign government can be subject to a more stringent process. The President is required by a 1993 “Byrd amendment” in such cases to submit a written report to Congress, together with a “detailed explanation” of his findings and the factors upon which they are based. In addition, the Byrd amendment requires an investigation in cases where the acquirer is controlled by or acting on behalf of a foreign government.

Under the current regime, since notification of CFIUS is completely voluntary, parties to a planned merger or acquisition may choose not to notify the committee if they believe their transaction does not raise any US national security issues. However, they do so at their own peril: there is no limitation period for CFIUS to act, so an acquisition could be unwound by CFIUS years after it closes.

There is nothing to stop parties to a deal from checking with the office of international investment at Treasury to confirm there is no need to seek approval. Even if approval will be required, such pre-filing discussions can help identify possible issues.

H.R. 556

H.R. 556 would maintain the current architecture of CFIUS as an interagency committee, but with three notable differences. First, CFIUS would no longer be a creation of presidential executive orders. H.R. 556 establishes CFIUS by statute. The direct consequence is to restrict the President’s power to amend the status of or to repeal CFIUS without Congressional action. Second, the bill would leave the Treasury secretary in charge of the panel, but elevate the Commerce and Homeland Security secretaries to vice chairmen. Third, it would add another member: the Department of Energy.

It would also make substantial changes in the way CFIUS conducts its reviews.

The staff work of the committee is done currently by the office of international investment at the US Treasury. Reviews are highly confidential. Treasury calls on different agencies for input depending on the industry involved. For example, the Departments of Defense and Homeland Security will be more actively involved in the acquisition of a US aerospace and defense company by a foreign entity. Agencies that are not members of CFIUS may also be called upon to take part in the review process, particularly where they have oversight responsibilities over the industries the proposed merger or acquisition will affect. In the Dubai Ports World-P&O transaction, for example, CFIUS invited the Departments of Transportation and Energy to participate in the review process.

The Bush administration is unhappy about having Congress set the membership of CFIUS in stone. It wants to retain flexibility to adjust the membership and operating procedures over time.

CFIUS retains the authority under H.R. 556 to order a transaction that poses national security risks to be unwound. There is no time limit within which CFIUS must act. H.R. 556 makes clear that the committee “may move to initiate a review” of any “covered transaction” at any time. In theory, a deal could be unwound years after it was concluded if the damage to US national security interests became clear in hindsight.

30-Day Review

A notice by the parties to CFIUS triggers a 30-day review.

This notice should provide a detailed description of the planned transaction, its motivations and timeline. CFIUS will want a list of the assets that each party controls currently. It will want to know who is on the board of each party and the backgrounds of the board members. It will also want a sense of the long-term business plan of the combined entity.

H.R. 556 gives CFIUS the ability to compel the testimony of “such witnesses and the production of such books, records, correspondence, memoranda, papers, and documents” as the committee feels it needs to evaluate a proposed transaction.

Under current law, if there is a consensus among CFIUS members that no national security threat exists, or that the threat has been adequately mitigated by some action by the parties, then CFIUS is supposed to clear the transaction within 30 days.

Currently, member agencies reach a consensus through an informal process. H.R. 556 formalizes the review process by requiring a “roll call vote” of CFIUS member agencies. The review or investigation of a covered transaction will be considered “complete” only if two conditions are met: the results of the review or investigation “are approved by a majority of the members of the Committee in a roll call vote,” and the results are certified by the secretaries of Treasury, Homeland Security and Commerce.

The bill requires additional action by the President and analysis by the Director of National Intelligence in cases where a party to a covered transaction is a government, an entity “directly or indirectly” controlled by a government, or a citizen of a country led by a government that has been determined by the US State Department as having “repeatedly provided support for acts of terrorism.”  In such cases, no review or investigation shall be treated as final or complete until the results are signed by the President. This is a response to the failed Dubai Ports deal that CFIUS and President Bush approved, but that the parties decided to cancel after an outcry from Congress. H.R. 556 stresses the independent role of the Director of National Intelligence: he cannot be a member of CFIUS and shall serve “no policy role” with CFIUS other than providing the intelligence analysis of the covered transaction.

In the past, 30 days have proved insufficient to allow CFIUS to complete its initial review. As a result, CFIUS has sometimes encouraged parties to withdraw their notification of a pending or completed acquisition and to refile at a later date. By doing so, the parties can avoid entering the extended 45-day investigations period that is described below. While any subsequent refiling will be considered as a new, voluntary refiling that restarts the clock, information gained by CFIUS in the initial filing will allow it to conduct an informal review of the planned transaction. Some parties choose a permanent withdrawal. Parties may withdraw their notice at any stage of the review.

45-Day Investigation

Under the current system, if there is any evidence that a threat to national security exists, or if CFIUS members fail to agree as to the existence of such national security threat, CFIUS is required to conduct an investigation for an additional 45 days.

Under the House bill, this second stage of review is triggered in four situations. There must be an investigation in cases where the initial review shows that the covered transaction threatens to impair US national security and “that threat has not been mitigated” during or prior to such review. An investigation is required if the transaction is a “foreign government-controlled” transaction, unless the three main agencies — State, Homeland Security and Commerce — agree it poses no national security threat. The transaction moves to an investigation if a roll call vote “results in at least 1 vote” by a member agency against approving the transaction. Lastly, it moves to an investigation if the Director of National Intelligence identifies “particularly complex intelligence concerns that could threaten to impair” US national security and member agencies “were not able to develop and agree upon measures to mitigate satisfactorily those threats during the initial review period.”

The bill allows the 45-day period to be extended upon a two-thirds vote by the committee.

Even before notice of a transaction is filed, counsel to the parties would usually explore with the office of international investment at Treasury what mitigation measures, if any, are required to get approval for a transaction. Any such discussions might continue after a notice is filed, particularly if the matter moves to a formal investigation. The parties might make commitments regarding the composition of the board of directors (adding American citizens or guaranteeing that a board will only be composed of Americans), allow full access to their premises and operations to US law enforcement agencies, promise not to increase the level of foreign control of the post-merger entity, or even commit to conduct any research and development in the United States. Alcatel Lucent promised, for example, to restrict Alcatel’s access to sensitive work done by Lucent’s research division, Bell Labs, and the communications infrastructure in the US.

In cases where mitigation measures are promised, one federal agency is usually appointed to monitor the agreement. The agency must file a report every six months with CFIUS confirming that the mitigation measures are being implemented as promised. Any “significant modification” to such mitigation agreements must be reported to the Director of National Intelligence and to any other “Federal department or agency that may have a material interest in such modification.”

The Exon-Florio amendment gave the President 15 days to make a decision after CFIUS has finished its work. He may permit, permit with conditions, suspend, prohibit, or prohibit and order a divestiture of the merged entity if the merger was already consummated by the date he issues his decision. No action by the President during the 15-day period generally means the parties are free to proceed.

Out of 1,604 foreign acquisitions of US companies reviewed by CFIUS since Exon-Florio became law in 1988, only 25 cases have gone through the second stage of review. Of the 25 cases, 13 cases were submitted to the President by CFIUS for decision. In 11 of the 13 cases, the President took no action, and the parties to the proposed acquisitions were free to proceed. In one case, the President ordered the foreign acquirer to divest itself of all its interest in the US company. That was in 1990. President George H.W. Bush ordered the state-owned China International Trust & Investment Corporation (CATIC) to divest itself of its interest in Mamco Manufacturing in Seattle, following a unanimous recommendation in that regard by CFIUS members. CFIUS reviewed the transaction and the merger took place. CATIC had strong ties to the Chinese military. The President was concerned that the Chinese firm could have used Mamco to acquire jet fighter engine technology and to gain “unique access” to US aerospace companies, thereby circumventing technology export control restrictions. CATIC’s acquisition of Mamco is the only transaction to have been formally blocked. In 12 of the 25 transactions that were subjected to the 45-day investigation, the parties withdrew their notices before the conclusion of the investigations.

The Dubai Ports World’s acquisition of P&O was approved by CFIUS in January 2006 after a 45-day investigation. It was a $6.8 billion acquisition that would have given Dubai Ports operating control over at least six major US ports. CFIUS negotiated several mitigation measures with Dubai Ports, including a commitment by Dubai Ports to cooperate with any future investigations by the US government of the company’s US port operations.

“National Security”

The Exon-Florio amendment gave the President authority to block any proposed investment allowing a foreign party control over a US company if the investment threatened national security and there was inadequate protection under US law.

The term “national security” was not defined, perhaps deliberately to give the President and CFIUS broad discretion in determining whether to block a transaction. However, Exon-Florio has a list of suggested possible national security concerns. These include domestic production of oil, the capacity of domestic industries to meet national defense requirements, the potential effects of the transaction on sales of US military goods or technology to a country that supports terrorism or proliferates missile technology or chemical and biological weapons, and the potential effects of the transaction on US technological leadership in areas affecting US national security.

H.R. 556 takes a different approach. While the President keeps his power to block foreign acquisitions, the examples of possible national security concerns listed in Exon-Florio are no longer discretionary: the President “shall” consider them in evaluating the threat to national security of a foreign takeover. In addition, the term “national security” is defined as including “those issues relating to ‘homeland security,’ including its application to critical infrastructure.” The term “critical infrastructure” echoes the term “critical industries” used in the USA Patriot Act. The Patriot Act defines “critical industries” as those “so vital to the United States that the incapacity or destruction of such systems and assets would have a debilitating impact on security, national economic security, national public health or safety, or any combination of those matters.” Thus, under H.R. 556, in a post-September 11 world, the term national security is no longer limited to national defense, but clearly extends to national economic security.

Covered Transactions

Under H.R. 556, CFIUS has the power to set aside any “covered transaction.” H.R. 556 defines the term “covered transaction” as “any merger, acquisition, or takeover by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States.” While H.R. 556 directs CFIUS to adopt regulations defining the term “control,” it defines the term “foreign government-controlled transaction” as “any covered transaction that could result in the control of any person engaged in the United States by a foreign government or an entity controlled by or acting on behalf of a foreign government.”

H.R. 556, like current law, is extraterritorial in reach: it would prohibit conduct by some non-US parties. Thus, a merger of one foreign company with another is subject to review and US action if either foreign party has access to technology or information that is considered central to US national security.