A CFIUS Report

A CFIUS Report

February 01, 2013 | By Keith Martin in Washington, DC

A CFIUS report to Congress in December suggests that all proposed foreign investments in US energy projects or companies should be submitted to the government for review before the transactions close.

The report by the Committee on Foreign Investment in the United States — CFIUS for short — lists areas of potential national security concern with foreign investments in US companies and projects. It is an annual report on activities during 2011. For the first time, the report lists as areas of potential concern investments in US companies or projects that “involve various aspects of energy production, including extraction, generation, transmission, and distribution” and projects that are near US military bases or other sensitive US government facilities.

CFIUS was formed by President Gerald Ford in 1975. It is an inter-agency committee, headed by the Treasury Department, on which 16 agencies sit that reviews potential foreign investments in US companies for national security concerns. Submission of proposed deals is voluntary. However, the committee has authority to set aside transactions after the fact that were not submitted for review.

Review takes 30 days. Transactions that raise potential issues then move into an investigation phase that takes another 45 days.

The committee makes recommendations. The President has ultimate authority to block a transaction. Only two transactions have been formally rejected by the President. Transactions that run into trouble are usually withdrawn before they reach the need for a presidential decision.

Before 2006, at most one or two transactions a year were withdrawn. During the period 2006 through 2009, 64 transactions were withdrawn, or roughly 14% of the 469 transactions submitted to CFIUS for review during that period. From 2009 through 2011, the period covered by the latest report, 9% of transactions were withdrawn.

Some of the transactions withdrawn are later resubmitted. For example, there were 111 CFIUS filings in 2011. Of that number, 40, or 36%, took another 45 days beyond the initial 30 for an investigation. In eight, or 20% of the cases that went to investigation, the parties agreed to mitigation measures to address government concerns with the transactions. Because working out a mitigation agreement takes time, it can lead to withdrawal and later resubmission once the mitigation measures have been agreed.

The latest report is interesting for the large number of transactions that were submitted involving investments by long-standing US allies. The largest numbers of filings in 2011 by far were for in-bound US investments from the United Kingdom. The top 10 countries for which filings were made in 2011 and the numbers are United Kingdom (68), Canada (27), France (27), China (20), Israel (18), Japan (18), Holland (14), Sweden (14), Australia (8) and Spain (7).

Another interesting development is the report says for the first time that the US intelligence community believes with “moderate confidence” that one or more foreign governments have directed companies to acquire critical American technologies in a “coordinated strategy.” There were no details in the public report, but the details were shared with Congress. This adds a layer of complexity to evaluating proposed investments by Chinese companies.

In September, President Obama ordered Chinese-backed Ralls Corp. to divest a wind farm that the company bought in Oregon at which it hoped to deploy turbines by its affiliate, the Sany Electric Co. The wind farm is close to a US Navy base that provides training for drone aircraft. The company filed suit in federal district court in Washington in an effort to have the order set aside on grounds that it is an unconstitutional taking of private property without due process.

In the only other presidential action, the first President Bush rejected a proposed acquisition of MEMCO Manufacturing Inc., a supplier to Boeing, by the China National Aero-Technology Import and Export Corporation in 1990.

A proposed $257 million purchase of nearly all the assets of bankrupt US battery maker A123 by Chinese-backed Wanxiang American Corp. is also before CFIUS. The purchase was approved by the bankruptcy court of December 11. It is undergoing a 45-day investigation by CFIUS. The company said in a blog posting in late January that it expects to close on the purchase on February 1.

The defense part of the A123 business was sold to Navitas Systems LLC in Illinois. Wanxiang received approval from CFIUS last year for a $420 million investment for a minority stake in GreatPoint Energy near Boston. GreatPoint and China Wanxiang Holdings have entered into a joint venture to build a $1.25 billion plant in western China for converting coal into cleaner-burning synthetic natural gas. Wanxiang has more than 3,000 employees in the United States.

Several members of Congress have criticized the sale. Johnson Controls Inc., which lost the bid for the commercial assets, has hired a prominent Washington law firm to lobby against the sale. A123 received a $250 million loan guarantee from the US Department of Energy.

An assistant US Treasury secretary, Marisa Lago, made a trip to Beijing in November to assure the Chinese that there is no general US policy against Chinese acquisitions of US companies.

by Keith Martin