Publications and Presentations
July 26, 2007

CFIUS Reform Legislation

On July 26, the President signed into law the "Foreign Investment and National Security Act of 2007." The legislation passed both the House and the Senate by wide margins. The new law provides statutory authority for the Committee on Foreign Investment in the United States ("CFIUS" or "the Committee") and strengthens and formalizes the process for Presidential review of foreign acquisitions that could affect the national security of the United States. (This process is often called the "Exon-Florio" process, since it was authorized by a 1988 amendment to the Defense Production Act authored by Senator Jim Exon (D-Nebraska) and Congressman Jim Florio (D-New Jersey)). The law will take effect 90 days following enactment.

The legislation received strong support from the U.S. business community, and is not expected to have an adverse effect on foreign investment. Although it provides for enhanced accountability by senior Cabinet officials in the decision-making process, and steps up Congressional scrutiny of covered transactions, the law, in and of itself, should not materially alter the CFIUS process.

Briefly stated, here are the significant changes made by the legislation:

CFIUS Membership
The law retains the current membership of CFIUS (heretofore a creature of Executive Order), with the exception of the U.S. Trade Representative and certain members of the Executive Office of the President, such as the Budget Director. It adds the Secretary of Energy as a voting member of CFIUS. In addition, the law adds—as ex-officio, non-voting members—the Secretary of Labor and the Director of National Intelligence ("DNI"). Since the new law authorizes the President to supplement the Committee membership as the President sees fit, however, either generally or on a case-by-case basis, it would not be surprising if all current members of the Committee remain.

Under the new law, the Secretary of the Treasury must designate a member of the Committee to be the "lead agency" on behalf of the Committee, both for the negotiation of mitigation agreements (if any) and for monitoring a completed transaction to ensure that the mitigation agreement is honored. Additionally, the DNI is required to assess the threat to national security posed by a covered transaction, and to report the results of this investigation to the Committee within 20 days after the transaction is accepted for review. This is a new statutory requirement, but it will not be a new practice. Threat assessments have long been conducted for covered transactions.

Investigation of Government-Controlled Acquisitions
All covered transactions are and always have been subject to a 30-day review. The amendments strengthen the provisions of the law that require mandatory investigation of any acquisition by a foreign government-controlled entity—i.e., an additional 45-day review followed by a 15-day Presidential assessment—but exempt from such investigations transactions that, in the view of the Secretary of the Treasury and the head of the lead agency, "will not impair the national security of the United States." This determination may not be delegated to any person other than the Deputy Secretary of the Treasury or the deputy head of the lead agency.

This provision effectively codifies current practice. Although the requirement that the Secretary or Deputy personally sign off on any decision not to undertake an investigation may push some cases into investigation that have escaped such scrutiny before, it is unlikely that this change in the law will require investigation in cases that present no colorable risk to the national security. For example, although CFIUS will likely hold to its position that "Golden Share" companies are foreign government controlled, the presence of a Golden Share, without more, is unlikely to prompt investigation. At the same time, the increased political accountability that will attach to the decision to decline investigation may result in the investigation of acquisitions by companies controlled by the governments of non-NATO countries, or acquisitions involving critical infrastructure, even where the perceived national security risk is small.

Critical Infrastructure
The new law expressly provides for investigation of acquisitions that "would result in control of any critical infrastructure" if CFIUS determines that the transaction "could impair national security" and that such impairment "has not been mitigated by assurances provided or renewed with the approval of the Committee . . . ." The term "critical infrastructure" is defined to mean "systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems or assets would have a debilitating impact on national security." Here again, the new law effectively codifies current practice. What is instructive is that Congress declined to expand the definition of "critical infrastructure" outside national security to include "economic security," as proposed in earlier drafts of the legislation. At the same time, in amending the law to identify acquisitions affecting critical infrastructure as a key concern, Congress has removed any doubt that it expects CFIUS to review acquisitions that affect "vital ... systems and assets," which we expect to extend beyond the traditional defense sector of the economy. The addition of the Secretary of Labor as a member of CFIUS, albeit nonvoting, indicates that job protection may get closer scrutiny, especially in cases where a transaction could result in skilled labor being outsourced to foreign countries. It is noteworthy that the law provides for regulations ensuring "an appropriate role for the Secretary of Labor with respect to mitigation agreements," a new requirement.

Additional Factors for Consideration
The new law makes the statutory factors for consideration in any review mandatory (they were previously discretionary) and adds new factors, including whether the acquisition presents a regional military threat to the interests of the United States, the effect of the transaction on major energy assets, the effect on critical technologies (defined as "essential to the national defense"), whether the acquiring firm is foreign government controlled, the adherence of the subject country to nonproliferation control regimes, the relationship of the subject country with the United States (particularly its record on cooperating in counter-terrorism efforts), the potential for transshipment or diversion of technologies with military applications (including an analysis of national export control laws), and the long-term projection of U.S. requirements for sources of energy and other critical resources and material. While consideration of these factors is not legally mandated for 90 days after enactment, the reality is that CFIUS has considered these factors for some time, and needs no statutory mandate to do so.

Mitigation, Tracking, and "Postconsummation Monitoring"
The law assumes (with some justification) that approval of a transaction may be coupled with an agreement to mitigate any threat to the national security posed by the acquisition. For example, reviews involving government contractors with security clearances typically include representations by the acquiring firm that it intends to enter into an agreement to mitigate foreign ownership, control, and influence ("FOCI") in accordance with the requirements of the National Industrial Security Program Operating Manual ("NISPOM"). The law provides for oversight of the parties' compliance with these representations. As FOCI agreements under the NISPOM have always been closely monitored by the government agency with oversight for the company's clearance, we anticipate no increased burden for companies holding clearances. The burden outside the cleared defense sector remains to be seen. The new law also provides for establishment of a tracking mechanism for deals withdrawn from review—for any reason—prior to conclusion of the CFIUS process. This last measure responds to criticism by the Government Accountability Office that no such process was in place for withdrawn transactions.

The Executive Branch has up to 180 days from enactment to promulgate regulations implementing the new law, including notice and comment. In particular, the law provides for fleshing out the definitions of "critical technologies" and "control" in regulations. (Since "control" has had an established definition, the legislation seems to invite CFIUS to revisit the definition, which determines which cases qualify for CFIUS review, and which transactions are properly deemed "foreign government controlled.") The law also provides for regulations spelling out procedures for submitting notice of covered transactions to the Committee, submitting a request to withdraw a covered transaction from review, resubmitting notice of a covered transaction that was previously withdrawn from review, and providing notice of the results of a review or investigation to the parties to the covered transaction, once action has been completed. Regulations will also determine the process for determining civil penalties for violations of the law or of any mitigation agreement. Firms with especial interest in the CFIUS process will want to monitor the regulatory process.

Congressional Oversight
At various times over the last few years, Congress considered opening CFIUS reviews to Congressional scrutiny while the reviews were ongoing. As passed, the new law does not do that, but instead provides for reports—at the conclusion of the CFIUS review—to the Senate and House leadership, key committee chairs, and (with respect to transactions involving critical infrastructure) to the Congressional delegation (House and Senate) representing the district in which the principal place of business of the targeted entity is located. The legislation also provides for several reports to Congress, including evaluation as to whether the Committee has identified "credible evidence of a coordinated strategy by 1 or more countries or companies to acquire United States companies involved in research, development, or production of critical technologies for which the United States is a leading producer . . . "

Although the new law, as written, provides some measure of protection against political interference in the CFIUS process, it is important to remember that the Dubai Ports World acquisition of British-owned P&O Ports (and its contracts to manage U.S. ports) was derailed by political opposition after it had cleared CFIUS review, highlighting the importance of addressing the political implications of sensitive transactions. Although the law may not require Congressional briefings during CFIUS review, prudence may argue for the parties to brief Members of Congress in advance of filing to ensure that the transaction is fully understood and that Congressional concerns are appropriately addressed.

The new law will not effect radical change. As the nonpartisan Congressional Research Service observed at a time when the more aggressive House legislation was under active consideration,

changes . . . proposed in the House and Senate bills would alter the current CFIUS process, but it remains to be seen how the changes would effect the outcome of the CFIUS process. In the final analysis, the President retains sole authority to apply the Exon-Florio provisions and he has complete discretion to accept or reject a CFIUS recommendation to block a proposed foreign investment transaction. As a result, CFIUS reflects the President's priorities and policies relative to foreign investment. [Emphasis supplied.]

We agree. The CFIUS process has always been and remains subject to the broad discretion of the President. Procedural reforms in the law, such as the current amendments, will effect marginal change, but the outcome in any given case will be driven by the facts, the political climate, and how the Administration strikes the balance between foreign investment and national security.

For more information, please contact Farhad Jalinous at +1 202 682 3581 or, Karalyn Meany at +1 202 682 3547 or, Keith Schomig at +1 202 682 3522 or, or Norman Pashoian at +1 202 682 3562 or

Copyright ©2007 by Kaye Scholer LLP. All Rights Reserved. This publication is intended as a general guide only. It does not contain a general legal analysis or constitute an opinion of Kaye Scholer LLP or any member of the firm on the legal issues described. It is recommended that readers not rely on this general guide in structuring individual transactions but that professional advice be sought in connection with individual transactions. References herein to "Kaye Scholer LLP & Affiliates," "Kaye Scholer," "Kaye Scholer LLP," "the firm" and terms of similar import refer to Kaye Scholer LLP and its affiliates operating in various jurisdictions.

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