CIFUS Update: Striking a Balance Between Foreign Investment and National Security Concerns
by Debra Cheng

As an open market economy, the U.S. has sought to provide a favorable environment for foreign investment. It has been successful in that, over the past decade, the U.S. has been the largest recipient of foreign investment among Organisation for Economic Co-operation and Development (OECD) countries, receiving over $1637 billion in foreign investment from other OECD countries.1 Recently, however, concerns have been raised that the U.S. is becoming less receptive to foreign investment, as demonstrated, for example, by the increasing number of reviews of certain potential acquisitions of U.S. assets by foreign entities.

On July 26, 2007 the Foreign Investment and National Security Act of 2007 ("The Act") was signed into law.2 The Act updates the Defense Production Act of 1950, as amended, which grants the President authority to suspend or prohibit a foreign acquisition, merger or takeover of a U.S. entity where there is credible evidence that the foreign investment is a threat to national security. The Committee on Foreign Investment in the United States ("CFIUS") is the vehicle that monitors, reports on, and determines whether such investments may threaten U.S. national security. The Act does not impose onerous new requirements to deter new investment into the U.S. In fact, provisions of the Act may serve to facilitate decision-making by companies as to whether or not their proposed transaction would be subject to CFIUS review by increasing transparency.

Post World War II
Congress enacted the Defense Production Act of 1950 to ensure that U.S. assets remain out of enemy hands. CFIUS' origins can be traced to 1975, when President Ford by Executive Order established a committee to monitor and coordinate the implementation of policy on foreign investment in the U.S., focusing on manufacturers of weapons and defense systems.3 The intent was not to discourage foreign investment generally, but to provide a review mechanism of such foreign investments and, if necessary, to restrict or suspend foreign investments that would threaten national security. The President only once unraveled an acquisition, when in 1990 President Bush ordered the China National Aero-Technology Import and Export Corporation, an export-import company for the People's Republic of China Ministry of Aerospace Industry, to divest the recently acquired MAMCO Manufacturing, Inc., a U.S. manufacturer of machines and metal parts.

Post 9/11
Under the Exon-Florio provision, the meaning of "national security" was left undefined and was arguably meant to be broadly interpreted; however, in practice it has arguably been narrowly interpreted.4 In the post-9/11 environment, "national security" firmly encompasses not just military but also economic, technological, energy, and infrastructure security concerns. Two much publicized examples are the 2005 proposed takeover of U.S. oil firm Unocal by state-owned China National Offshore Oil Corporation ("CNOOC"), which ended in the parties ceasing discussions before a CFIUS review was initiated; and in 2006, when Dubai Ports World ("DPW"), based in the United Arab Emirates, acquired the rights to manage the loading and unloading of cargo at some major U.S. ports. Although the DPW transaction cleared CFIUS in 2005, public concerns about a Middle East firm controlling the management of major U.S. ports caused DPW to request a new CFIUS review in 2006 and, in the end, DPW agreed to sell the U.S. port leases to a U.S. company.5

Foreign Investment and National Security Act of 2007
The Act statutorily establishes CFIUS, formalizing certain features of the review process, increases Congressional oversight, and provides a definition of the term "national security".6 CFIUS review remains voluntary, with the right reserved by the President or CFIUS to initiate a review. Some examples of changes under the Act, although not exhaustive, are:

Formalization

• CFIUS members include the following (or their designees): Secretaries of Treasury, Homeland Security, Commerce, Defense, State, Energy, and Labor; the U.S. Attorney General; the Director of National Intelligence; and the heads of other agencies the President determines appropriate.
• Mitigation is provided for.

  Congressional Oversight
  

• Upon completion of a review or investigation, a certified notice or written report must be transmitted to certain members of Congress, and an annual report to Congress of all reviews and investigations conducted in the previous 12-month period, instead of the previous requirement of a quadrennial review.

  "National security"

• Is defined broadly as "issues relating to homeland security", which includes "critical infrastructure", itself broadly defined as "systems and assets . . . so vital to the United States that the incapacity or destruction of such systems or assets would have a debilitating impact on national security."
• Other factors, previously optional, now are required to be considered in a CFIUS review (e.g., domestic production needs for national defense requirements; domestic capacity to meet national defense requirements; potential effects of the proposed transaction on United States technological leadership in areas affecting United States national security.)

The CFIUS process has evolved over time, along with changes in the context in which these transactions have taken place. However, much of the process remained informal and not explicitly stated within the statues. Statutory changes resulting from the Act should therefore serve not only to increase communication between the Congressional and Executive branches on issues concerning investments, whether they are proposed or pending, but to even the playing field for companies contemplating investment in the U.S. in terms of increasing their understanding of whether their proposed or pending transaction may be subject to CFIUS review and even necessitate modification; they can also reduce the risk or the perception of risk of surprises during the CFIUS process, particularly concerning the potential for any suspension or unraveling of foreign investments in U.S. companies or assets. At the same time, the Act does not seek to eliminate flexibility for policymakers to interpret, for example, the meaning of "national security" even though the Act provides a definition for the first time, or for the President or CFIUS to act when necessary.

Notes
1 For the period from 1997-2006, OECD, Trends and Recent Development in Foreign Direct Investment, June 2007
2 (Public Law 110-49; available at (http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_public_laws&docid=f:publ049.110.pdf).
3Committee on Foreign Investments in the United States (CFIUS), available at <http://www.ustreas.gov/offices/international-affairs/exon-florio>.
4 Testimony of Patrick A. Malloy before the Subcommittee on Commerce, Trade, and Consumer Protection House Energy and Commerce Committee, Hearing on H.R. 5337, The National Security Foreign Investment Reform and Strengthened Transparency Act of 2006, July 11, 2006, available at <http://www.uscc.gov/testimonies_speeches/testimonies/2006/06_07_11_mulloy.php>.
5 Ilene Knable Gotts, Leon B. Greenfield, Perry Lange, Is your cross-border deal the next national security lightning rod?, 16-AUG Bus. L. Today 31
6 110th Congress Rept. 110-24 (Feb. 23, 2007).

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Debra Cheng is an international trade and corporate attorney at the Washington, DC office of McGuire Woods LLP.

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