The Foreign Investment and National Security Act of 2007: An Assessment of Its Impact on Sovereign...

Electronic copy available at: http://ssrn.com/abstract=2387562

The Foreign Investment and National Security Act of 2007:

An Assessment of Its Impact on Sovereign Wealth Funds

and State-Owned Enterprises

Paul Rose

Public Law and Legal Theory Working

Paper Series

No. 231

January 29, 2014

This working paper series is co-sponsored by the

Center for Interdisciplinary Law and Policy Studies

at the Moritz College of Law

This paper can be downloaded without charge from the

Social Science Research Network Electronic Paper Collection:

http://ssrn.com/abstract=2387562


THE FOREIGN INVESTMENT AND NATIONAL SECURITY ACT OF 2007:

AN ASSESSMENT OF ITS IMPACT ON SOVEREIGN WEALTH FUNDS

AND STATE-OWNED ENTERPRISES

Paul Rose*

* Associate Professor of Law, Ohio State University – Moritz College of Law

Preliminary Draft, January 28, 2014


FINSA_Rose.docFINSA_1.15.14 1/29/20141/28/2014 9:16 AM4:21 PM

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THE FOREIGN INVESTMENT AND NATIONAL SECURITY ACT OF 2007:

AN ASSESSMENT OF ITS IMPACT ON SOVEREIGN WEALTH FUNDS

AND STATE-OWNED ENTERPRISES

Paul Rose*

* Associate Professor of Law, Ohio State University – Moritz College of Law.

The author expresses thanks for the excellent comments and suggestions from

practitioners who have requested anonymity, and thanks also to Brittany Pace for

excellent research assistance.

In 2007, the U.S. Congress passed the Foreign Investment in the United States Act (FINSA), the most recent in a series of calibrations to a basic regulatory framework that is now nearly 40 years old. FINSA has particularly significant effects on investment by sovereign wealth funds (SWFs) and state-owned enterprises (SOEs). Indeed, FINSA is properly understood as a response to SWF and SOE activity, and is designed to provide a framework in which U.S. regulators can weigh the particular risks presented with investment by state-controlled entities. Although in general FINSA has performed ably and as intended in its first five years of implementation, balancing the risks associated with SOE and SWF investment in a competitively neutral way has historically been a challenge, and now seems to be even more challenging after the passage of FINSA.

INTRODUCTION ...................................................................................................... 3

I. THE EVOLUTION OF THE US FOREIGN INVESTMENT REGULATION ................... 4

A. The Foreign Investment Regulatory Prior to FINSA .................................. 4

B. The Political Impetus Behind the FINSA Amendments ........................... 10

II. The Foreign Investment in the United States Act of 2007: A Brief

Overview ............................................................................................................. 12

A. Foreign Investment Regulation from Exon-Florio to FINSA ................... 12

B. Key Definitions under FINSA..................................................................... 16

III. An Overview of the CFIUS Process After FINSA ...................................... 18

A. CFIUS Review: A Basic Roadmap .............................................................. 19


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B. Particular Concerns with SOE and SWF Investments under FINSA ..... 23

IV. ASSESSING THE IMPACT OF FINSA ............................................................... 24

A. CFIUS Reporting Obligations under FINSA ............................................. 26

B. Trends in CFIUS Activity, 2005-2012 ........................................................ 27

IV. CRITICISMS OF THE CFIUS PROCESS AFTER FINSA..................................... 32

CONCLUSION........................................................................................................ 37

INTRODUCTION

In 2007, the U.S. Congress passed the Foreign Investment in

the United States Act (FINSA), the most recent in a series of

calibrations to a basic regulatory framework that is now nearly 40

years old. Although FINSA is in a broad sense more a refinement

than a reconfiguration of U.S. foreign investment regulation

generally, it has particularly significant effects on investment by

sovereign wealth funds (SWFs) and state-owned enterprises (SOEs).

Indeed, FINSA is properly understood as a response to SWF and SOE

activity, and is designed to provide a framework in which U.S.

regulators can weigh the particular risks presented with investment

by state-controlled entities. Balancing these risks in a competitively

neutral way has historically been a challenge, and now seems to be

even more challenging after the passage of FINSA.

Notwithstanding the challenge, the review process required

under FINSA is, as one practitioner describes it, an “elegant

mechanism”1 that seeks to balance national security with an open

investment policy, executive agency accountability to Congress with

agency authority over matters of trade and defense, and predictability

with enforcement flexibility. Its basic framework has served as a

model for other countries, including China.2 And it has performed

ably and as intended in its first five years of implementation. That is

not to say, however, that further calibration is not desirable; as

1 See infra note 78 and accompanying text. 2 Lucas S. Chang, Stephen Paul Mahinka, and Sean P. Duffy, China's New

National Security Review Process for Foreign Investments: U.S. CFIUS Review Moves East (March 3, 2011), available at

http://www.morganlewis.com/index.cfm/publicationID/f29df3a9-48df-4909-a0b3-

23ed7bdc3199/fuseaction/publication.detail


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discussed in this chapter, FINSA has significant room for

improvement.

This chapter proceeds as follows. Part I describes the

evolution of foreign investment regulation in recent years, beginning

with the 1975 Presidential order that provided the basic regulatory

structure that carries on through FINSA today. Part II presents a

brief overview and analysis of FINSA, including the key statutory

definitions that determine the regulatory pathway of a foreign

investment transaction. Part III reviews how the regulatory process

plays out from the point of view of a SOE or SWF, noting particular

difficulties that state-controlled entities encounter under FINSA.

Finally, Part IV assesses the impact of FINSA by reviewing

government and private data on foreign transactions in the United

States, and discusses a number of criticisms with the operation of

FINSA, particularly as they relate to SOEs and SWFs.

I. THE EVOLUTION OF THE US FOREIGN INVESTMENT

REGULATION

A. The Foreign Investment Regulatory Prior to FINSA

The genealogy of FINSA can be traced back to a 1975

Executive Order issued by President Ford.3 This Executive Order

provided the core of modern US regulation of foreign investment, and

a number of its essential provisions remain today. Most importantly,

the order established the Committee on Foreign Investment in the

United States (CFIUS), which (as later amended) included the

Secretary of State; the Secretary of the Treasury; the Secretary of

Defense; the Secretary of Commerce; the United States Trade

Representative; the Chairman of the Council of Economic Advisers;

the Attorney General; and the Director of the Office of Management

and Budget.4 The order designates the Secretary of the Treasury as

3 Executive Order 11858, May 7, 1975, 40 F.R. 20263. 4 As described by the U.S. Treasury, CFIUS is now structured as follows:

The Secretary of the Treasury is the Chairperson of CFIUS, and

notices to CFIUS are received, processed, and coordinated at the

staff level by the Staff Chairperson of CFIUS, who is the Director of

the Office of Investment Security in the Department of the Treasury.

The members of CFIUS include the heads of the following

departments and offices: Department of the Treasury (chair);

Department of Justice; Department of Homeland Security;

Department of Commerce; Department of Defense; Department of


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the chairman of the Committee, and impliedly established the

Treasury Department as the primary regulator tasked with managing

the regulations associated with CFIUS and its processes, although the

committee as a whole has the responsibility to “consider proposals for

new legislation or regulations relating to foreign investment as may

appear necessary.”5

More broadly, CFIUS is also tasked with the “primary

continuing responsibility within the Executive Branch for 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.”6 As discussed below, this responsibility is

met, in part, through periodic reports produced by CFIUS for

Congress, portions of which are also made public. The Commerce

Department is specifically required to take the lead in collecting data

on foreign investment in the U.S., the “close observation of foreign

investment in the United States,” and the preparation of reports on

trends and significant developments in “appropriate categories” of

foreign investment. Finally, and perhaps most importantly, CFIUS

has the ability to review specific transactions.

Some questioned whether this basic framework was both

practically and legally sufficient to regulate foreign investment in

U.S. firms. Indeed, as one researcher notes, it was not clear that

under existing law federal agencies had “the legal authority to collect

State; Department of Energy; Office of the U.S. Trade

Representative; Office of Science & Technology Policy.

The following offices also observe and, as appropriate, participate in

CFIUS’s activities: Office of Management & Budget; Council of

Economic Advisors; National Security Council; National Economic

Council; Homeland Security Council.

The Director of National Intelligence and the Secretary of Labor are

non-voting, ex-officio members of CFIUS with roles as defined by

statute and regulation.

http://www.treasury.gov/resource-center/international/foreign-investment/Pages/cfius-

members.aspx. 5 Executive Order 11858 (b)(4). 6 Executive Order 11858 (b).

http://www.treasury.gov/resource-center/international/foreign-investment/Pages/cfius-members.aspx

http://www.treasury.gov/resource-center/international/foreign-investment/Pages/cfius-members.aspx


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the types of data that were required by the order.”7 This question was

resolved the next year as Congress passed and President Ford signed

the International Investment Survey Act of 1976, which gave the

President “clear and unambiguous authority” to “collect information

on “international investment and United States foreign trade in

services,” to collect and use information on “direct investments owned

or controlled directly or indirectly by foreign governments or persons”,

and to “provide analyses of such information to the Congress, the

executive agencies, and the general public.”8 The act specifically

noted that its purpose was to impose only the minimum necessary

burden on business and other respondents, and that the act was not

intended to “restrain or deter foreign investment in the United

States.”9

Although CFIUS was now clearly and statutorily authorized to

gather and report data, it met only sporadically and still lacked a

comprehensive and clearly defined mission. Was it designed to

evaluate political risks associated with foreign investment, the

economic risks of foreign investment, or both?10 Whatever the

intention of the original executive order, from 1980-1987 CFIUS

investigations were generally framed as national security concerns,11

although this would not preclude an economic justification because

7 James K. Jackson, The Committee on Foreign Investment in the United States (CFIUS), Congressional Research Service, RL33388 (June 12, 2013). Available

at http://www.fas.org/sgp/crs/natsec/RL33388.pdf. 8 22 U.S.C. 46, International Investment and Trade in Services Survey §

3101, Pub. L. 94–472, § 2, Oct. 11, 1976. 9 Id. 10 Jackson reports that between 1975 and 1980, CFIUS had met only 10

times. He also notes one critic’s comment that “the Committee has been reduced over

the last four years to a body that only responds to the political aspects or the political

questions that foreign investment in the United States poses and not with what we

really want to know about foreign investments in the United States, that is: Is it good

for the economy?” Jackson, supra, citing U.S. Congress. House. Committee on

Government Operations. Subcommittee on Commerce, Consumer, and Monetary

Affairs. The Operations of Federal Agencies in Monitoring, Reporting on, and

Analyzing Foreign Investments in the United States. Hearings. 96th Cong., 1st sess.,

Part 3, p. 5. (July 30, 1979. Washington: GPO). 11 Jackson writes that “[f]rom 1980 to 1987, CFIUS investigated a number of foreign

investments, mostly at the request of the Department of Defense.” James K. Jackson,

The Committee on Foreign Investment in the United States (CFIUS), supra n. 4, at 3.

http://www.fas.org/sgp/crs/natsec/RL33388.pdf


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the acquiring firms were domiciled in Japan, viewed by many as the

principal economic threat to the U.S. at the time.12

It is often the case that particular deals mark a regulatory

tipping point. The DP World deal, which was the subject of great

debate and ultimately led to increased regulation of foreign

investments in 2007, have a parallel in the 1987 proposed sale of

Fairchild Semiconductor to Fujitsu. Indeed, concern over foreign

acquisitions—and particularly Japanese acquisitions—was a subject

of great national concern in the 1980s, just as the activities of Chinese

and Middle Eastern firms are a subject of concern today.13 The

proposed Fairchild deal—in a foreshadowing of later concerns with

China—“generated intense concern in Congress in part because of

general difficulties in trade relations with Japan at that time and

because some Americans felt that the United States was declining as

an international economic power as well as a world power.”14

According to Department of Defense officials, the deal also had

important national security implications because “some officials

believed that the deal would give Japan control over a major supplier

of computer chips for the military and would make U.S. defense

industries more dependent on foreign suppliers for sophisticated high-

technology products.”15 The deal reinforced the perception that a more

protective stance from the Administration was required with respect

12 As described below, the defensive use of a national security statute for general or

even localized economic purposes is a central weakness that persists in CFIUS. An

established technique used by corporate counsel to defend against unwanted takeover

offers is to petition regulators or Congressional representatives who can raise

regulatory objections to the transaction; the specific nature of the defense depends on

the domicile of the potential acquirer. If the acquiring firm is domestic, the defense is

based on antitrust concerns. If the acquiring firm is foreign, the defense focuses on

potential national security concerns. 13 Reflecting on the political economy of foreign investment regulation,

Graham and Marchick note:

[P]olitical pressures based on real or perceived threats to tighten the valves

on [foreign direct investment] have arisen from time to time. While these pressures

have generally failed to carry the day, in 1988, they resulted in the establishment of

an investment review law—the Exon-Florio Amendment—grounded in national

security concerns.

Edward M. Graham & David M. Marchick, US NATIONAL SECURITY AND

FOREIGN DIRECT INVESTMENT (May 2006) , available at

http://www.petersoninstitute.org/publications/chapters_preview/3918/02iie3918.pdf. 14 Jackson, supra note 4, at 4. 15 Id.

http://www.petersoninstitute.org/publications/chapters_preview/3918/02iie3918.pdf


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to foreign investment. More positively, however, it also encouraged

the creation of more stable, predictable foreign investment regulation.

In response to these concerns, in1988, Congress passed and

President Reagan signed the Omnibus Trade and Competitiveness

Act of 1988, which included the “Exon-Florio Amendment”.16 The

basic regulatory procedure included elements from prior practice,

built into a more robust, deliberate process with four steps: (1) a

voluntary notice by parties to a transaction with potential national

security impact; (2) a 30-day review to identify national security

issues; (3) an additional 45-day investigation if the review has

identified issues that may require mitigation; and (4) a Presidential

action, if warranted. The involvement of the President in Exon-Florio

marks an important shift in the regulation of foreign investment: not

only is the President empowered to investigate foreign investment in

U.S. firms, but is also granted authority to block potential foreign

“mergers, acquisitions, or takeovers” of “persons engaged in interstate

commerce in the United States” if “there is a credible threat that

leads the President to believe that the foreign interest exercising

control might take action that threatens to impair the national

security”, and if other laws or regulations “do not in the President’s

judgment provide adequate and appropriate authority for the

President to protect the national security in the matter before the

President.”17

The legislation also provided a broad grant of powers in other

ways. CFIUS is not time-limited nor subject to a statute of

limitations, which allows CFIUS to investigate a foreign merger

either at upon a voluntary filing of notice by the parties to a

transaction, or at any time, if the parties do not file notice of the

transaction voluntarily. 18 Even if a transaction has closed, CFIUS

may initiate a review and, potentially, unwind the transaction.

Additionally, the regulatory scope of CFIUS is broadly defined under

Exon-Florio. CFIUS had the power to investigate transactions that

could threaten national security, but the term “national security” was

16 Omnibus Trade and Competitiveness Act of 1988, § 5021, Public Law 100-

418, U.S> Code 50 1988, App. § 2170. 17 Omnibus Trade and Competitiveness Act of 1988, App. § 2170(e). 18 Edward M. Graham & David M. Marchick, US NATIONAL SECURITY AND

FOREIGN DIRECT INVESTMENT, at 39. In addition to the broad provisions discussed,

Graham and Marchick also note that the term “credible evidence” is undefined and, in

practice, CFIUS “views the credible evidence standard as a fairly low threshold.” Id.


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not defined by the statute. Indeed, the legislative history of CFIUS

shows that the committee was to regulate foreign investment with the

understanding that “national security” was “to be read in a broad and

flexible manner.”19

Finally, Exon-Florio broadly defined the term “control”, which

is the trigger for the application of the review, investigation and

blocking provisions of the act. The accompanying Treasury

regulations define control as:

The power, direct or indirect, whether or not

exercised, and whether or not exercised or exercisable

through the ownership of a majority or a dominant

minority of the total outstanding voting securities of an

issuer, or by proxy voting, contractual arrangements or

other means, to determine, direct or decide matters

affecting an entity.20

Consistent with this broad definition, Graham and Marchick

note that CFIUS has found control under Exon-Florio where “the

foreign owner’s rights include seats on the board of directors, veto

rights over certain corporate actions, or the right to appoint or reject

certain key personnel,”21 even when the actual percentage of equity

ownership is de minimus.

It did not take the President long to make use of the expanded

authority under Exon-Florio to block a transaction deemed to impact

national security. In 1990, just two years after Exon-Florio’s passage,

President Bush required China National Aero-Technology Import and

Export Corporation (CATIC) to unwind its acquisition of Mamco, a

Washington State-based specialty airplane component manufacturer,

in order to prevent CATIC from acquiring sensitive technology. Until

the 2012 acquisition by Ralls of an Oregon wind farm project,

19 Statement of Senator Exon, Congressional Record 134 (April 25, 1988):

S4833. CFIUS likewise declined to limit itself to a narrow definition in its own

regulations. The preamble to the relevant Treasury regulations states that “The

Committee rejected [various recommended definitions] because they could improperly

curtail the President’s broad authority to protect national security.” Regulations

Implementing Exon-Florio, Code of Federal Regulations, Title 31, Sec. 800, App. A

(1988). 20 Regulations Implementing Exon-Florio, Code of Federal Regulations, Title

31, Sec. 800.204, App. A (1988). 21 Edward M. Graham & David M. Marchick, US National Security and

Foreign Direct Investment, at 39.


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however, the CATIC deal has been the only transaction officially

blocked by a President (though many deals have been unwound at

earlier stages after a CFIUS review or investigation has begun).

The Exon-Florio framework was further developed through

Treasury regulations in 1991. The most important aspect of these

regulations was the creation of a notification process under which

parties to a proposed transaction would make a voluntary notice filing

to CFIUS regarding transactions involving foreign control that might

implicate national security. The regulations also state that such

filings are to be kept confidential by CFIUS. Although the filing is

nominally voluntary, parties face substantial risks if they fail to make

a filing. Most crucially, the acquisition is subject to divestment

indefinitely. A filing thus brings certainty to the transaction.

The Exon-Florio process was subsequently updated by the

Byrd Amendment in 1992. Under this amendment, which directly

affected deals involving sovereign wealth funds and state-owned

enterprises, CFIUS must investigate proposed acquisitions if (1) the

acquirer is controlled by or acting on behalf of a foreign government

and (2) the acquisition “could result in control of a person engaged in

interstate commerce in the U.S. that could affect the national security

of the U.S.”22

B. The Political Impetus Behind the FINSA Amendments

As noted above, just as the proposed Fairchild sale to Fujitsu

catalyzed new regulation of foreign investments, a 2006 transaction,

the acquisition of certain port operations in the U.S. by DP World—a

Dubai state-controlled enterprise—spurred Congress to pass FINSA.

In March 2006, DP World finalized the purchase of Peninsular and

Oriental Steam Navigation Company (P&O). P&O managed port

operations in New York, New Jersey, Philadelphia, Baltimore, New

Orleans, and Miami, and subsequent to the acquisition these

operations would have been under the control of DP World. CFIUS

reviewed the transaction—but did not undertake a full 45-day

investigation—and determined that the transaction did not pose a

threat to U.S. national security interests. President Bush stated that

"[t]his is a company that has played by the rules, that has played by

the rules, that has been cooperative with the United States, a

22 National Defense Authorization Act for Fiscal Year 1993, P.L. 102-484,

October 23, 1992.


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country’s that’s an ally in the war on terror, and it would send a

terrible signal to friends and allies not to let this transaction go

through."23 He threatened to veto any legislation attempting to block

the deal.24 As a Congressional Research Service report notes, some

members of Congress were confused by the failure of CFIUS to

initiate a full investigation of the transaction before approving it:

The DP World acquisition . . . exposed a sharp rift

between what some Members apparently believed the

amendment directed CFIUS to do and how the

members of CFIUS were interpreting the amendment.

In particular, some Members of Congress apparently

interpreted the amendment to direct CFIUS to conduct

a mandatory 45-day investigation if the foreign firm

involved in a transaction is owned or controlled by a

foreign government. Representatives of CFIUS argued

that they interpreted the amendment to mean that a

45-day investigation was discretionary and not

mandatory. In the case of the DP World acquisition,

CFIUS representatives argued that they had concluded

as a result of an extensive review of the proposed

acquisition prior to the case being formally filed with

CFIUS and during the 30-day review that the DP World

case did not warrant a full 45-day investigation. They

conceded that the case met the first criterion under the

Byrd amendment, because DP World was controlled by

a foreign government, but that it did not meet the

second part of the requirement, because CFIUS had

concluded during the 30-day review that the transaction

“could not affect the national security.”25

The DP World transaction was not the only deal that helped

shape FINSA. Following the DP World transaction, the Bush

Administration reevaluated CFIUS regulations and policies, and

began to take a more aggressive and arguably protectionist regulatory

stance. This new stance was apparent in the review of the Alcatel-

23 Public Papers of the Presidents of the United States: George W. Bush,

Office of the Federal Register (2002), at 313. 24 David E. Sanger and Eric Lipton, Bush Would Veto Any Bill Halting Dubai

Port Deal, N.Y. TIMES, February 22, 2006, available at

http://www.nytimes.com/2006/02/22/politics/22port.html?_r=2&oref=slogin&. 25 Jackson, supra note 4, at 4.

http://www.nytimes.com/2006/02/22/politics/22port.html?_r=2&oref=slogin&


12

Lucent transaction in late 2006. Before the transaction could be

finalized, Alcatel, a French state-controlled enterprise, was required

to enter into a “Special Security Arrangement” (SSA) designed to

mitigate the risk that Alcatel would acquire sensitive technologies,

work product, or sensitive intelligence about the U.S.

telecommunications infrastructure. The SSA was an important shift

because it allows CFIUS to reopen an investigation and potentially

unwind a deal if CFIUS believes that parties have not complied with

the terms of the agreement. The SSA in the Alcatel-Lucent deal thus

introduced some uncertainty into CFIUS-approved transactions,

because “[p]rior to this transaction, CFIUS reviews and investigations

had been portrayed, and had been considered, to be final.”26

II. THE FOREIGN INVESTMENT IN THE UNITED STATES ACT OF

2007: A BRIEF OVERVIEW

As with Exon-Florio, two decades earlier, the 2007 Foreign

Investment and National Security Act largely codified administration

practices. FINSA is not so much a change in philosophy or a dramatic

shift in regulatory intensity, as it is an evolution of the existing

framework. As with Exon-Florio, however, the evolution produced

some adaptations that had a significant impact on how foreign

investment deals are executed and regulated.

A. Foreign Investment Regulation from Exon-Florio to FINSA

The evolution of foreign investment regulation is not

unwarranted. While the fears about the rise of China, for example,

seem to echo the 1980s consternation about the rise of Japan—

perhaps misplace, given the later stagnation of the Japanese

economy—there are significant differences. First, and most

importantly, the Japanese firms that were part of the 1980s buying

spree—acquiring trophy properties while also taking market share

from existing U.S. companies, as Sony did from IBM and Toyota and

Honda did from Ford and GM—were privately-held (or even publicly-

traded) foreign business, rather than state-owned enterprises, as are

many more of the current acquirers, including, of course, Chinese

firms. And while Sony and Toyota competed against existing U.S.

brands, many of the state-owned or controlled foreign enterprises

26 Id. at 5.


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today—many of which are state-owned enterprises—are not simply

competing with U.S. brands, but instead seeking to acquire existing

U.S. brands.27

The evolution of U.S. foreign investment law is perhaps best

understood as an adaptation to the increasing activity of state-

controlled entities such as SOEs and SWFs. The basic Exon-Florio

framework of a 30-day review period and a potential (and more

intense) 45-day investigation period continue under FINSA.

Additionally, the President retains the ability to block transactions

that impair national security interests. Some of the most important

evolutions in FINSA that will affect SOE and SWF deals include

clarifications on the use of “mitigation agreements”; FINSA

essentially codified the SSA strategy used in the Alcatel deal,

allowing CFIUS to require and enforce agreements designed to

mitigate potential national security threats.28 Mitigation agreements

under FINSA are monitored by a “lead agency”—typically this agency

would be the one that has regulatory responsibility over the firms or

27 Kenneth Rapoza, The Foreign Companies That Are Buying Up America,

FORBES (JUNE 27, 2013), available at

http://www.forbes.com/sites/kenrapoza/2013/06/27/the-foreign-companies-that-are-

buying-up-america/. Rapoza states, “Unlike the 1980s, when the Japanese were

buying up real estate and selling Honda’s for the first time to Main Streeters

abandoning their Detroit made cars, the strategy for firms from China to Brazil has

been to acquire existing brands.” 28 Business groups including the U.S. Chamber of Commerce, the Business

Roundtable, the Organization for International Investment and the Financial

Services Forum, criticized the Alcatel SSA, stating that the SSA “a disturbing

departure from the government's stated support for an open trade and investment

regime." Jeremy Pelofsky, Businesses object to US move on foreign investment,

REUTERS, Dec 6, 2006, available at http://uk.reuters.com/article/2006/12/06/usa-

investment-idUKN0534982920061206. However, these same groups later praised the

FINSA amendments generally, despite the inclusion of the mitigation agreement

provisions:

The issuance of the regulations clarifies the procedures for national security

reviews by the Committee of Foreign Investment in the United States (CFIUS) and

provides certainty to investors. The regulations provide necessary guidance on which

transactions involve both control and a relationship to national security and therefore

require CFIUS review. Neither FINSA or [sic] these regulations constitute a barrier

to foreign investment in the U.S. but rather the regulations provide a roadmap for

investors as to when and how they must go through the CFIUS process.

Press Release, Administration Issues Proposed FINSA Regulations,

Financial Services Forum, April 21, 2008, available at

http://www.financialservicesforum.org/index.php/press-releases/106-business-groups-

comment-on-finalizing-new-national-security-review-process-for-foreign-

investment.html.

http://www.forbes.com/sites/kenrapoza/2013/06/27/the-foreign-companies-that-are-buying-up-america/

http://www.forbes.com/sites/kenrapoza/2013/06/27/the-foreign-companies-that-are-buying-up-america/

http://uk.reuters.com/article/2006/12/06/usa-investment-idUKN0534982920061206

http://uk.reuters.com/article/2006/12/06/usa-investment-idUKN0534982920061206

http://www.financialservicesforum.org/index.php/press-releases/106-business-groups-comment-on-finalizing-new-national-security-review-process-for-foreign-investment.html




14

transactions at issue, and is the natural drafter and monitor for the

mitigation agreement. Although FINSA allows CFIUS to reopen

reviews and investigations if there has been an intentional breach of a

mitigation agreement, in practice this should create little uncertainty

for deals as counsel gains expertise in how mitigation agreements are

monitored by CFIUS.

Mitigation agreements play an important role as a CFIUS

enforcement mechanism, and their expanded use can be attributed to

the operation of Section 2(b), which requires that after reviewing a

transaction, CFIUS must provide a notice to Congress, which must be

“signed by the chairperson and the head of the lead agency, and shall

state that, in the determination of the Committee, there are no

unresolved national security concerns with the transaction that is the

subject of the notice or report.”29 Because of this certification process,

CFIUS must show that it has carefully evaluated and responded to

potential national security risks; as a result, mitigation agreements

are common after FINSA and they “have the effect of law.”30 The

breach of a mitigation agreement can not only cause an investigation

to be reopened, but can also result in monetary penalties up to the full

value of the transaction and, potentially, the unwinding of the

transaction.31

Some types of agreements will be subject to a stricter 45-day

investigation after the initial 30-day review. FINSA requires that

CFIUS always investigate transactions involving (1) acquirers

controlled by foreign governments, and (2) “critical infrastructure”.32

This provision responds to the concern raised in DP World that a 30-

day review was not seen by some as adequately protective against the

special concerns presented by acquisitions by foreign government-

controlled entities. However, FINSA also states that an investigation

29 Foreign Investment and National Security Act of 2007, P.L. 110-49,

Section 2(b)(3)(C)(ii). 30 Mark Plotkin, David Fagan & Adam Smith, Steering the Deal Through,

INDIAN BUS. L. J. (September 2009), available at

http://www.cov.com/files/Publication/5e616f09-55a5-4a1a-97f4-

0a3ff6d724cb/Presentation/PublicationAttachment/4c4e9055-65e3-46be-a7ff-

13179e90a717/Steering%20the%20Deal%20Through.pdf. 31 [FINSA cite] 32 “Critical infrastructure” is defined by FINSA as “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.” Section A(6).

http://www.cov.com/files/Publication/5e616f09-55a5-4a1a-97f4-0a3ff6d724cb/Presentation/PublicationAttachment/4c4e9055-65e3-46be-a7ff-13179e90a717/Steering%20the%20Deal%20Through.pdf




15

is not required if “the Secretary of the Treasury and the head of the

lead agency jointly determine, on the basis of the review of the

transaction . . . that the transaction will not impair the national

security of the United States.”33 Thus, as was argued by the Bush

Administration in connection with the DP World transaction, if there

are no apparent national security concerns with a deal, the parties

should not be subject to a more costly and lengthy CFIUS

investigation.

Treasury regulations promulgated pursuant to FINSA also

require extensive disclosures to accompany the notice of a FINSA-

covered transaction. The notice must include, among other diverse

items, a “summary setting forth the essentials of the transaction,

including a statement of the purpose of the transaction, and its scope,

both within and outside of the United States;”34 the “immediate

parent, the ultimate parent, and each intermediate parent, if any, of

the foreign person that is a party to the transaction;”35 the name of all

financial institutions involved in the transaction, information about

any contracts that the acquirer has had in effect within the prior

three years with “any United States Government agency or

component with national defense, homeland security, or other

national security responsibilities, including law enforcement

responsibility as it relates to defense, homeland security, or national

security”36 a “description and copy of the cyber security plan, if any,

that will be used to protect against cyber attacks on the operation,

design, and development of the U.S. business’s services, networks,

systems, data storage, and facilities”;37 and, for each member of the

board of directors and officers (to the level of “president, senior vice

president, executive vice president, and other persons who perform

duties normally associated with such titles”) and for any 5% holder of

the acquiring entity, a curriculum vitae, name and address, country

33 Sec. 2(b)(2)(D). 34 31 CFR 800.402 C(1)(i). As discussed below, this summary, and particular

the justifications for the transactions outlined in the summary, form a crucial part of

the transaction review, particularly for transactions involving state-owned-

enterprises. See Part ____, infra. 35 31 CFR 800.402 C(1)(v)(A). Parent is defined as “a person who or which

directly or indirectly: (1) Holds or will hold at least 50 percent of the outstanding

voting interest in an entity; or (2) Holds or will hold the right to at least 50 percent of

the profits of an entity, or has or will have the right in the event of the dissolution to

at least 50 percent of the assets of that entity.” 31 CFR 800.219. 36 31 CFR 800.402 C(3)(iv). 37 31 CFR 800.402 C(3)(viii).


16

and city of residence, date and place of birth, social security number

or similar national identity number, passport number, and dates and

nature of foreign government and foreign military service.38

For entities “controlled by or acting on behalf of a foreign

government, including as an agent or representative,” such as state-

owned enterprises or sovereign wealth funds, additional disclosures

are required. The notice must disclose the identity of the foreign

government, whether the foreign government (or person or entity

acting on its behalf) has or controls ownership interests in the party

to the transaction, including convertible voting, has the right or power

to appoint directors, holds contingent interests, or holds golden shares

or “any other affirmative or negative rights or powers that could be

relevant to [CFIUS’s] determination of whether the notified

transaction is a foreign government-controlled transaction, and if

there are any such rights or powers, their source . . . and the

mechanics of their operation.”39

B. Key Definitions under FINSA

The Treasury regulations also provide guidance on what

constitutes a covered transaction for purposes of CFIUS review and

investigation. Under FINSA, a “covered transaction” was simply

defined as “any merger, acquisition, or takeover that is proposed or

pending after August 23, 1988, by or with any foreign person which

could result in foreign control of any person engaged in interstate

commerce in the United States.”40 The definition under the Treasury

regulations retains, as required by law, this same core definition, with

very little alteration: a covered transaction means “any transaction

that is proposed or pending after August 23, 1988, by or with any

foreign person, which could result in control of a U.S. business by a

foreign person.”41 The real clarification comes in the expansion of key

terms in the definition, including ‘‘transaction,’’ ‘‘control,’’ ‘‘U.S.

business,’’ and ‘‘foreign person.’’ The latter two terms are both

defined expansively; “U.S. business” includes “any entity, irrespective

of the nationality of the persons that control it, engaged in interstate

commerce in the United States, but only to the extent of its activities

38 31 CFR 800.402 C(6)(vi). 39 31 CFR 800.402 C(6)(iii). 40 Foreign Investment and National Security Act of 2007, P.L. 110-49,

Section 2(a)(3). 41 31 CFR 800.207.


17

in interstate commerce.”42 “Foreign person” itself contains three

nested defined terms:43 “foreign national,” “foreign government,” and

“foreign entity”, all of which supply straightforward meanings. The

important second section of the definition adds that a foreign person

also includes “any entity over which control is exercised or exercisable

by a foreign national, foreign government, or foreign entity.”44

“Transaction” is also defined broadly as proposed or completed

mergers, acquisitions, or takeovers.45 The definition also includes the

acquisition of an ownership interest in an entity, the acquisition or

conversion of convertible voting instruments of an entity, the

acquisition of proxies from holders of a voting interest in an entity,

the formation of a joint venture, or even entering into a long-term

lease that allows the lessee to make “substantially all business

decisions concerning the operation of a leased entity, as if it were the

owner.”46

Perhaps the most important definition in the Treasury

regulations is that of “control”. As enacted, FINSA left discretion to

CFIUS and Treasury to define the term, stating only that term

“’control’ has the meaning given to such term in regulations which the

Committee shall prescribe.”47 Treasury created a careful definition

that provides CFIUS with a very low threshold to overcome in

determining whether a transaction involving a foreign person is a

“covered transaction.” Control is defined as:

the power, direct or indirect, whether or not exercised,

through the ownership of a majority or a dominant

minority of the total outstanding voting interest in an

entity, board representation, proxy voting, a special

share, contractual arrangements, formal or informal

arrangements to act in concert, or other means, to

determine, direct, or decide important matters affecting

an entity . …48

42 31 CFR 800.226. 43 31 CFR 800.216. 44 Id. 45 31 CFR 800.224. 46 Id. 47 Foreign Investment and National Security Act of 2007, P.L. 110-49,

Section 2(a)(2). 48 31 CFR 800.204(a).


18

The definition then gives extensive examples of the kind of

powers that would fall under the definition,49 as well as a number of

exclusions in which a foreign person holds a minority interest in the

party to the transaction.50 This definition is important for SOEs and

SWFs because even where they acquire relatively small positions in

U.S. firms—less than 10%, for example—the presence of any special

control rights or influence could bring a transaction under the

definition.

III. AN OVERVIEW OF THE CFIUS PROCESS AFTER FINSA

Following the enactment of FINSA, the CFIUS process is a

deliberate, sometimes slow-moving process that may prove frustrating

to foreign investors. Successful navigation of the process is facilitated

49 These include “(1) The sale, lease, mortgage, pledge, or other transfer of

any of the tangible or intangible principal assets of the entity, whether or not in the

ordinary

course of business; (2) The reorganization, merger, or dissolution of the

entity;

(3) The closing, relocation, or substantial alteration of the production,

operational, or research and development facilities of the entity; (4) Major

expenditures or investments, issuances of equity or debt, or dividend payments by the

entity, or approval of the operating budget of the entity; (5) The selection of new

business lines or ventures that the entity will pursue; (6) The entry into, termination,

or non-fulfillment by the entity of significant contracts; (7) The policies or procedures

of the entity governing the treatment of non- public technical, financial, or other

proprietary information of the entity; (8) The appointment or dismissal of officers or

senior managers; (9) The appointment or dismissal of employees with access to

sensitive technology or classified U.S. Government information; or (10) The

amendment of the Articles of Incorporation, constituent agreement, or other

organizational documents of the entity with respect to the matters described in

paragraphs (a)(1) through (9) of this section.” 31 CFR 800.204(a)(1)-(a)(9). 50 These exception include: “(1) The power to prevent the sale or pledge of all

or substantially all of the assets of an entity or a voluntary filing for bankruptcy or

liquidation; (2) The power to prevent an entity from entering into contracts with

majority investors or their affiliates; (3) The power to prevent an entity from

guaranteeing the obligations of majority investors or their affiliates; (4) The power to

purchase an additional interest in an entity to prevent the dilution of an investor’s

pro rata interest in that entity in the event that the entity issues additional

instruments conveying interests in the entity; (5) The power to prevent the change of

existing legal rights or preferences of the particular class of stock held by minority

investors, as provided in the relevant corporate documents governing such shares;

and (6) The power to prevent the amendment of the Articles of Incorporation,

constituent agreement, or other organizational documents of an entity with respect to

the matters described in paragraphs (c)(1) through (5) of this section.” 31 CFR

800.204(c)(1)-(c)(5).


19

through the use of experienced counsel who understand the CFIUS

process and the players in the various agencies.

A. CFIUS Review: A Basic Roadmap

Ideally, the process begins with counsel alerting the parties to

a transaction of the potential for a CFIUS review and investigation;

this is especially true for SOEs and SWFs. Having familiarity with

the process is crucial because—despite extensive examples and

commentary in the Treasury regulations—lawyers without CFIUS

experience may not recognize when a transaction is covered under the

statutes. Failing to recognize this as an important threshold question

can dramatically increase costs, and may even be fatal to the

transaction. Even though the CFIUS filing is voluntary, CFIUS has

the ability to detect transactions that may be covered transactions,

but for which a filing was not made. U.S. firms dealing in sensitive

technologies typically have regular required filings with federal

agencies, including the Department of Defense, and transactions

involving foreign persons will thereby be reported to government

agencies and appear on CFIUS’s radar. CFIUS may then, under

Section 2(b)(D) of FINSA, initiate its own review of a transaction it

believes is a covered transaction. If the transaction is found to impair

national security, it may be unwound, as in the Ralls51 case—a case in

51 In Ralls, an entity controlled by two persons alleged to have ties to the

Chinese military acquired four wind farm project companies that operated near

sensitive military and national security installations. Ralls acquired controlling

interests in the wind farms in March 2012, but did not file a notice with CFIUS.

Three months after the transaction closed, Ralls finally notified CFIUS of the

transaction. After reviewing then investigating the transaction, CFIUS determined

that mitigation was not possible, and order divestment. In October 2012, President

Obama issued an executive order formally requiring Ralls to divest ownership of the

wind farms, as well as to remove all installations, down to the concrete pads, within

14 days. Order of September 28, 2012 Regarding the Acquisition of Four U.S. Wind Farm Project Companies by Ralls Corporation, 77 Fed. Reg. 60,281 (Oct. 3, 2012),

available at http://www.whitehouse.gov/the-press-office/2012/09/28/order-signed-

president-regarding-acquisition-four-us-wind-farm-project-c. Ralls sued CFIUS,

alleging that

CFIUS violated numerous federal statutes, as well as Ralls’ due process

rights under the U.S. Constitution. A U.S. district court dismissed all claims in

February 2013, with the exception of the due process claim. Ralls later lost on this

claim as well, as the court noted that

Ralls undertook the transaction and voluntarily acquired those state

property rights subject to the known risk of a Presidential veto. And Ralls’s claim

cannot be squared with the fact that Ralls waived the opportunity – provided by the


20

which the parties failed to provide notice of the transaction to CFIUS

prior to its consummation.

Even before filing, experienced counsel will informally engage

with CFIUS personnel. The value of early engagement should be

clear, as it allows the parties to structure a deal in a way that will

facilitate passage through the CFIUS process. After these

preparatory efforts, the formal CFIUS process begins with the

voluntary notice discussed earlier, which is submitted to Treasury

officials. Treasury will perform an initial review to determine

whether the filing is complete and otherwise complies with its

regulations and applicable statutory requirements. After Treasury

determines that everything is in order, it then circulates the filing to

the other committee members. For foreign persons other than

foreign-controlled entities such as SOEs and SWFs, the filing starts

the clock on the 30-day review period. Although CFIUS makes every

effort to review the transaction expeditiously, and indeed, many

transactions will not require the full 30 days, some transactions

require additional effort and diligence. Parties will occasionally

withdraw the filing in order to give CFIUS more time to work through

the transaction, rather than hold CFIUS to the strict 30-day timeline

and risk an adverse CFIUS finding because CFIUS did not have the

ability to certify within the timeframe that he transaction did not

pose any unmitigated national security risks.52 During this period

Treasury will assign a lead agency to the transaction, and may

request additional information from the parties during the review

process.

very statute that it claims lacks the necessary process – to obtain a determination

from CFIUS and the President before it entered into the transaction.

Amended Memorandum Opinion in Ralls Corp. v. Barack H.

Obama, et. al, Case No. 1:12-cv-01513-ABJ (D.D.C. Oct. 10, 2013). 52 As experienced counsel have noted,

More flexibility is possible than this schedule might suggest. For example, if

the committee believes it will be unable to approve an acquisition during the first 30

days, the prospective investors may elect to withdraw the request for review and file

again after modifying the transaction or providing additional information. The

process then begins anew and the committee has another 30 days to complete the

initial review. Additionally, CFIUS encourages transacting parties to begin informal

consultations before officially requesting a review, thus giving parties a clear sense of

the information CFIUS needs and any concerns it may have, and extending the

effective time span of the initial review beyond 30 days.

Plotkin, Fagab & Smith, Steering the Deal Through, supra note __, at 32.


21

After the 30-day period, each agency in CFIUS must either

approve the transaction or request a 45-day investigation. As noted

above, transactions involving foreign-controlled entities will

automatically pass into an additional 45-day investigation unless “the

Secretary of the Treasury and the head of the lead agency jointly

determine, on the basis of the review of the transaction . . . that the

transaction will not impair the national security of the United

States.”53 Additionally, for other deals, if any of the agencies believes

that an investigation is required, a formal 45-day investigation must

occur. Furthermore, if any agency is not satisfied that the transaction

present no unmitigated national security risks after the 45-day

investigation, the transaction will not be approved, and CFIUS will

file a report that notifies the President of CFIUS’s determination. The

President has 15 days to either approve or formally block the

transaction. As noted above, a formal Presidential order blocking a

transaction is a rare occurrence. Typically, the parties to transactions

in which there are unresolved national security threats that cannot be

effectively mitigated will simply withdraw their filing and abandon

the transaction.

53 Sec. 2(b)(2)(D).


22

__________________________________________________________________

Overview of the CFIUS Process

Adapted from Government Accountability Office, Enhancements to the Implementation of Exon-Florio Could Strengthen the Law's Effectiveness (September 2005)


23

The requirement of consensus of all the members of CFIUS,

rather than a simple majority vote, is an important and often

overlooked strength of the CFIUS process. As noted by experienced

counsel,

CFIUS is chaired by the Department of Treasury and

has eleven other members, including the Departments

of State, Defense, Justice, Commerce and Homeland

Security and the United States Trade Representative,

among other agencies. Thus, certain of the CFIUS

agencies have as their mandate law enforcement,

defense and homeland security, while other agencies

are oriented to promoting an open trade and investment

policy. This tension among the member agencies is

designed to elicit thoughtful judgments that take into

account diverse economic and security considerations

through a consensus-building deliberative process. In

practice, the diversity among the CFIUS agencies and

the consensus-based framework in which they express

their views enable the Executive Branch to weigh

carefully the national security impact of particular

foreign direct investments in a manner that is

consistent with the U.S. government's overall policy of

promoting FDI.54

B. Particular Concerns with SOE and SWF Investments under FINSA

From the perspective of a foreign-controlled entity such as a

SOE or a SWF, the crucial difference in the CFIUS process, aside

from the longer investigation process, is the enhanced importance of

early engagement. This is perhaps even more the case with SOEs

than with SWFs.

54 David M, Marchick and Mark E. Plotkin and David N. Fagan, Foreign

Investment

Laws and National Security: Lessons from Exon-Florio, LCI News, July 20,

2005, available at http://www.cov.com/files/Publication/8fdb961b-d279-4e73-802e-

e6de0555af86/Presentation/PublicationAttachment/2696e4d4-1d5f-4c9d-8589-

f1b433c93009/oid14563.pdf .

http://www.cov.com/files/Publication/8fdb961b-d279-4e73-802e-e6de0555af86/Presentation/PublicationAttachment/2696e4d4-1d5f-4c9d-8589-f1b433c93009/oid14563.pdf




24

SWFs have made concerted efforts—such as producing the

Santiago Principles—to signal to host countries that they are

commercially-minded investors. Although suspicions remain, SWFs

have generally shown themselves (at least in the United States) to be

passive, financial investors. As CFIUS gains more experience with

various SWFs, and particularly those that potentially present the

greatest concern with respect to national security risks simply

because of their country of domicile (the China Investment

Corporation, for example), these suspicions should continue to

diminish.

However, SOEs present a different problem, because they,

unlike SWFs, are typically not created to act as purely financial

investors. Indeed, their very existence suggests that the opposite is

the case: the foreign government sees a market failure or perceives

some benefit beyond the bottom line in owning an operating company.

These benefits could include job creation, control of production,

control of technology, or dozens of other justifications. The issue thus

arises: what benefit is the SOE deriving from ownership of a

particular U.S. asset? Is it purely financial, or does it, as is the case

with the SOE, serve multiple purposes for the foreign government

owner? For example, a SOE may be interested in acquiring a mining

company. Depending on the SOE and the particular company, the

transaction may create national security risks. The question often

posed by CFIUS is, what is the financial justification for the

transaction? If the answer is that the SOE seeks to secure a supply of

materials, then the question becomes, why is a contractual solution,

such as an agreement to meet the materials requirements of the SOE,

not sufficient? CFIUS asks such questions because SOEs may serve

multiple functions for a foreign government. While the SOE may

wish to secure a supply of materials, it may also be (and has in the

past been) the case that the mining operation is near a U.S. military

installation. SOEs thus carry the burden of showing CFIUS why a

transaction makes sense from a business, rather than a political (or

mixed-motive) standpoint. With SWFs, a financial orientation may

more often be assumed.

IV. ASSESSING THE IMPACT OF FINSA

One of the most important aspects of FINSA is an increase in

Congressional oversight. Even before the DP World transaction, some


25

members of Congress were concerned that the Exon-Florio process did

not have sufficient congressional supervision.55 Indeed, after “a series

of specific transactions brought to the forefront the difficulty in

conducting thorough oversight by Congress of the security review

process,”56 the Senate Banking Committee commissioned a study by

the Government Accountability Office on the implementation of Exon-

Florio.57 Among other things, the resulting GAO report recommended

that

to provide more transparency and facilitate

congressional oversight, the Congress should revisit the

criterion for reporting circumstances surrounding cases

to the Congress. For example, the Congress could

require an annual report on all transactions that

occurred during the preceding year. Such a report could

provide the Congress with information on the nature of

each acquisition; the national security concerns raised

by Committee member agencies, if any; how the

concerns were mitigated; and whether each acquisition

was concluded or abandoned, in addition to any

presidential decisions required under the statute.58

The GAO also recognized congressional concerns that in the

Exon-Florio process some parties were withdrawing filings in order to

“stop the clock” on investigations, and that CFIUS was not tracking

such transactions after they were withdrawn.59

55 This is clearly expressed in the legislative history of FINSA: “Since Exon-

Florio went into effect, transactions have been reviewed in a highly confidential

manner in part to prevent the public release of sensitive proprietary information. The

practical effect of conducting transactional reviews in this manner, however, has

made congressional oversight and public understanding of Exon-Florio extremely

difficult.”

Sen. Christopher Dodd, Report to Accompany S. 1610 (June 13, 2007),

available at http://www.gpo.gov/fdsys/pkg/CRPT-110srpt80/pdf/CRPT-110srpt80.pdf

56 Id. at 3. 57 Government Accountability Office, Enhancements to the Implementation

of Exon-Florio Could Strengthen the Law's Effectiveness (September 2005), available

at http://www.gao.gov/assets/250/247948.pdf. 58 Id. at 20. 59 “When companies withdraw after completing an acquisition, the

Committee may

lose visibility over the transaction, and the companies may choose not to

http://www.gpo.gov/fdsys/pkg/CRPT-110srpt80/pdf/CRPT-110srpt80.pdf

http://www.gao.gov/assets/250/247948.pdf


26

A. CFIUS Reporting Obligations under FINSA

FINSA creates “a broad new system for reporting information

on CFIUS activities to Congress so that it may conduct appropriate

oversight of the CFIUS.”60 This system includes a formal process by

which Congress may request a “detailed, classified briefing” on a

transaction61; a requirement that CFIUS file annual reports with

Congress that list transactions handled by CFIUS, cumulative and

trend analysis of transactions by business sector and country of

origin, and information on mitigation agreements entered into by

CFIUS and parties to a transaction.62 A quadrennial reporting

system existed under Exon-Florio, and the information required

under those reports—on “foreign industrial espionage in the U.S. and

on foreign attempts to control a particular U.S. business or industrial

sector”, as well as “investments in the U.S. by countries that do not

ban foreign terrorist organizations and by countries that support the

boycott of Israel”—is incorporated into the FINSA-mandated annual

report.63

A redacted annual report covering the prior year is made

public in near the end of the following year; the full report, containing

classified information, is provided to Congress. The public report has

three primary sections.64 Section I describes covered transactions,

including the prior year’s covered transactions; specific, cumulative,

and trend data on covered transactions; withdrawals and

investigations; and data on covered transactions by business sector

and country. The report also describes mitigation agreements as well

as perceived adverse effects of covered transactions.65 Section II

describes transactions involving “critical technologies,”66 and in

refile.” Id. at 20. See also Report to Accompany S. 1610 at 3. 60 Report to Accompany S. 1610 at 11. 61 Id. 62 Id. 63 Id. 64 See, e.g., Committee on Foreign Investment in the United States, Annual

Report to Congress 2012, available at http://www.treasury.gov/resource-

center/international/foreign-

investment/Documents/2013%20CFIUS%20Annual%20Report%20PUBLIC.pdf . 65 See, e.g., [cite to most recent annual report] 66 “Critical Technologies” are defined in the applicable Treasury regulations

by reference to U.S. export control regulations, and include: (a) Defense articles or

defense services covered by the United States Munitions List (USML), which is set

forth in the International Traffic in Arms Regulations (ITAR) (22 C.F.R. parts 120-

http://www.treasury.gov/resource-center/international/foreign-investment/Documents/2013%20CFIUS%20Annual%20Report%20PUBLIC.pdf




27

particular notes “whether there is credible evidence of a coordinated

strategy to acquire critical technology companies,”67 a summary of

foreign M&A of U.S. critical technology companies, the frequency of

activity by countries or economies companies, and “whether foreign

governments used espionage activities to obtain commercial secrets

related to critical technologies.”68 Finally, Section III reports on FDI

in the U.S. by countries that boycott Israel or do not ban terrorist

organizations. This section identifies relevant countries and provides

detailed findings of relevant M&A transactions and the national

security effects of the transactions.69

B. Trends in CFIUS Activity, 2005-2012

The most recent annual reports to provide an assessment of

trends in U.S. FDI—focused on CFIUS “covered transactions”—

following the passage of FINSA. These data are not presented as a

statistical study of the impact of FINSA; such work, though valuable

and perhaps overdue, is beyond the scope of this chapter. Instead,

combined with insights from leading legal practitioners, this data will

be used to describe how Exon-Florio and then FINSA has shaped the

practice of foreign direct investment by state-owned funds and

sovereign wealth funds.

First, there are a relatively stable number of transactions that

fall under CFIUS jurisdiction each year (although the number

appears to fluctuate with general economic conditions).

130); (b) Those items specified on the Commerce Control List (CCL) set forth in

Supplement No. 1 to part 774 of the Export Administration Regulations (EAR) (15

C.F.R. parts 730-774) that are controlled pursuant to multilateral regimes (i.e., for

reasons of national security, chemical and biological weapons proliferation, nuclear

nonproliferation, or missile technology), as well as those that are controlled for

reasons of regional stability or surreptitious listening; (c) Specially designed and

prepared nuclear equipment, parts and components, materials, software, and

technology specified in the Assistance to Foreign Atomic Energy Activities regulations

(10 C.F.R. part 810), and nuclear facilities, equipment, and material specified in the

Export and Import of Nuclear Equipment and Materials regulations (10 C.F.R. part

110); and (d) Select agents and toxins specified in the Select Agents and Toxins

regulations (7 C.F.R. part 331, 9 C.F.R. part 121, and 42 C.F.R. part 73).” . 67 Id. Interestingly, the 2011 Annual Report found evidence of such a

strategy, while the 2012 Annual Report did not. 68 See, e.g., [cite to most recent annual report] 69 See, e.g., [cite to most recent annual report]


28

Covered Transactions, Withdrawals, and Presidential Decisions, 2005 - 2012

Year

Number of

Notices

Notices

Withdrawn

During Review

Number of

Investigations

Notices

Withdrawn After

Commencement

of Investigation

Presidential

Decisions

2005 64 1 1 1 0

2006 111 14 7 5 2

2007 138 10 6 5 0

2008 155 18 23 5 0

2009 65 5 25 2 0

2010 93 6 35 6 0

2011 111 1 40 5 0

2012 114 2 45 20 1

Total 851 57 182 49 3

2008 was the first full year in which FINSA—and its new

requirements for CFIUS—were in operation. Without controlling for

economic conditions, it is not possible to see an impact on the number

of notices filed with CFIUS. Again, of course, these would seem to be

correlated with economic conditions to the extent that private foreign

acquirers depend on capital market financing. However, for long-

term investors like SWFs, down markets present opportunities to

acquire assets at lower prices, and one would expect foreign

government-controlled entities to operate counter-cyclically. And, of

course, there is some evidence that this has occurred, as SWFs made

numerous investments in financial services firms in late 2007 and

early 2008. Unfortunately, however, the data provided by CFIUS

does not break down transactions by privately-held, publicly-held, and

government-controlled entities.

The most striking shift, as intended by the legislation, has

occurred with the number of investigations that have occurred post-

FINSA. In the years prior to FINSA, only a handful of transactions

were reviewed. Strikingly, in 2005, only a single transaction was

investigated. Since the enactment of FINSA, this number has been

steadily increasing. Although some of the steady increase following

the initial jump in investigations may be due to improvements in

economic conditions, part of the increase is likely attributable to

increased purchases from government-controlled entities.


29

There are two reasons to believe that this is the case. First,

unlike transactions with non-government entities, which are not

presumed to require an investigations (and indeed, often do not take a

full 30 days to review), transactions involving government-controlled

entities are required to go to the investigation stage unless the

Secretary of the Treasury and the head of the lead agency jointly

determine and certify, after the 30-day investigation, that the

transaction will not impair the national security of the United States.

The certification process leads officials to take a cautious approach in

approving such transactions, and therefore transactions involving

SOEs and SWFs will default to the investigation stage.

The second reason why one may assume that the increase in

investigations is in part driven by increased SOE and SWF activity is

because of the increase in SWF transactions over the time period.

Drawing from a database maintained by SovereigNET and Monitor, it

is clear that the number of deals involving sovereign wealth funds has

increased significantly from 2005-2012.

Another basic (but somewhat less reliable) approximation of

SOE and SWF activity in covered transactions is to look at the

number of covered transactions, as reported by CFIUS, by country of

origin of the acquirer. If we assume that SOEs and SWF acquisition

activity in more likely to originate from China—and to a lesser extent,

France—than OECD economies,70 an increase in covered transactions

from China helps to explain the overall rise in the number of

investigations. The following table shows the top ten countries of

origin from 2005-2012:

70 With the exception of Norway, which has one of the world’s largest

sovereign wealth funds in the Government Pension Fund – Global.


30

Covered Transactions by Country of Origin, 2005 – 2012

Country 2005 2006 2007 2008 2009 2010 2011 2012 Total

United Kingdom 24 23 33 48 16 26 25 17 212

Canada 6 8 21 6 9 9 9 13 81

France 9 9 7 12 7 6 14 8 72

China 1 0 3 6 4 6 10 23 53

Israel 1 9 6 12 5 7 6 4 50

Japan 3 6 1 8 4 7 7 9 45

Australia 2 7 9 11 1 3 4 3 40

Netherlands 0 4 7 2 4 2 7 6 32

Germany 2 4 6 3 1 2 3 4 25

Italy 1 3 3 5 2 3 2 1 20

Comparing the UK and China, the trend of increasing

investigations of Chinese deals is apparent.

The other striking aspect of the CFIUS data is the jump in

withdrawn transactions, from 5 in 2011 to 20 in 2012. As required by

FINSA, CFIUS must provide an explanation of withdrawn

transactions;71 a portion of the explanation is publicly disclosed.

71 See supra notes ___ and accompanying text. In its annual report, CFIUS

describes the withdrawal process as follows:

Parties can withdraw an accepted notice of a transaction if the

Committee approves a written request for withdrawal from the

parties. Parties have requested withdrawals for a number of reasons

over the years. For example, in cases in which where the parties are

unable to address all of the Committee’s outstanding national

security concerns within the initial 30-day review period and

subsequent 45-day investigation period, the parties might request to

withdraw and re-file their notice to provide themselves with


31

CFIUS notes in that disclosure that most of the withdrawals occurred

at the investigation stage:

In 2012, CFIUS approved the withdrawal of 22 notices.

The parties withdrew two notices during the 30-day

review period and 20 notices after the commencement of

the 45-day investigation period. In 10 cases, parties re-

filed in 2012, and CFIUS concluded action in those

cases. In two cases, the parties re-filed in 2013. In the

remaining cases, the parties abandoned the transaction

for commercial reasons or in light of CFIUS’s national

security concerns, as described above. As noted

previously, the number of withdrawals in 2012 is a

function of the specific facts and circumstances of the

particular transactions reviewed by the committee.

Another important trend that has been noted by

practitioners—and has some support in CFIUS reports—is the

increase in mitigation measures. Much of this increase is due to the

requirement under FINSA that agencies certify to Congress that

there exists no unresolved national security issues. However, the

CFIUS practice of requiring mitigation agreements in more cases

began even before the certification requirement was imposed. From

1997 to 2007, CFIUS reported a total of 52 mitigation agreements,72

with 29 of these in 2006 and 2007 alone. By comparison, there were

only 6 mitigation agreements in 2005.73 When comparing the number

of mitigation agreements to the number of notices, the percentage

appears relatively stable before and after the enactment of FINSA in

additional time to answer remaining questions or to resolve the

remaining national security concerns. In other cases, for example,

the parties might request to withdraw and re-file their notice

because a material change in the terms of the transaction warrants

the filing of a new notice. In still other cases, the parties might

request to withdraw their notice because they are abandoning the

transaction for commercial reasons, or in light of a CFIUS

determination to recommend that the President suspend or prohibit

the transaction. When appropriate, the Committee has established

processes to track the status of a withdrawn transaction or interim

protections to address specific national security concerns identified

during the review or investigation of the withdrawn transaction.

CFIUS Annual Report 2013, at 19. 72 CFIUS Annual Report 2008, at 15. 73 Id.


32

2007 (except, ironically, for the first full year under FINSA), as seen

in the table below:

Comparison of Notices to Mitigation Agreement, 2005-2012

Notices Mitigation Percentage

2005 64 6 9%

2006 111 15 14%

2007 138 14 10%

2008 155 2 1%

2009 65 5 8%

2010 93 9 10%

2011 111 8 7%

2012 114 8 7%

The increase in deals including mitigation agreements is likely

to increase, however, for the same reasons that drive the increase in

the number of investigations: the increase in deals involving SOEs

and SWFs, on the one hand, as well as a general increase in deals

from non-OECD countries, and particularly China, which pose

national security risks not posed by many of the OECD countries with

which the U.S. is a close political and military ally.

IV. CRITICISMS OF THE CFIUS PROCESS AFTER FINSA

In this final section, I review some of the criticisms of FINSA

and CFIUS generally, and particularly as they apply to SOEs and

SWFs. The most common criticisms are that the CFIUS process may

become overly politicized, that it lacks transparency, and that it takes

too long. I have listed them here in order of the magnitude of their

risk to the legitimacy of CFIUS, although it is undoubtedly true that

they are interrelated and affect one another.74

Just as regulators and some observers call for more

transparency from SWFs, SWFs and other observers have raised the

need for enhanced transparency from regulators, and particularly

from CFIUS. The risk of SWF politicization has been amply

discussed, but equally important is the risk that politicians and

74 This section borrows in part from Paul Rose, Sovereign Investing and Corporate Governance: Evidence and Policy, FORDHAM. J. CORP. & FIN. L (2013).


33

regulators from countries in which an SWF seeks to invest will use

the cover of “national security” review to prohibit SWF investment. In

each case, SWF investment has become politicized.

The CIC, particularly, has raised concerns that its investments

have become politicized in the U.S.. The Wall Street Journal recently

reported on a panel discussion in which Gao Xiqing, head of the China

Investment Corporation (CIC), commented on that during the

financial crisis, “we were sort of welcome” in America, but since then

“somehow we’ve become stigmatized”, adding that “there have been

quite a few cases where the U.S. says ‘go away.’” He later stated that

CIC is still heavily invested in the U.S.: “I’m not diminishing it, but

I’m not hanging everything in one tree . . . The U.S. is not one of the

most welcoming countries in the world for us.”75 According to a report

on another speech,

When CIC seeks to invest in the United States, despite

the fact that US infrastructure is in pretty dire straits,

[Gao] is politely asked to look elsewhere, even when the

investment represents only a small stake. The

regulatory roadblocks may appear to be technical in

nature, he said, but they are in fact political. "It's not

serendipity, it's by design," he said.76

To the extent that FINSA involves more Congressional

oversight of CFIUS than under Exon-Florio, the process is perhaps at

more risk of becoming politicized. This is not to ignore the reality

that SOEs and SWFs are, indeed, unlike other investors in important

ways, and that regulatory structures must be adapted to take these

differences into account. However, reciprocal transparency helps to

facilitate both the investment decision by the SOE or SWF and the

analysis of national security risk (if any) by the regulator.

75 Andrew Browne and Lingling Wei, China Fund Chief Raps U.S., Wall St.

J. (Apr. 7, 2013), available at

http://online.wsj.com/news/articles/SB1000142412788732382030457840851215942589

2. 76 Len Costa, China Investment's Gao Xiqing: Economy 'Still On Right

Track', Seeking Alpha (Oct. 9, 2012), available at

http://seekingalpha.com/article/912211-china-investments-gao-xiqing-economy-still-

on-right-track



http://seekingalpha.com/article/912211-china-investments-gao-xiqing-economy-still-on-right-track

http://seekingalpha.com/article/912211-china-investments-gao-xiqing-economy-still-on-right-track


34

Lawyers who regularly advise foreign investors and

particularly SOEs and SWFs are familiar with the transactional

frictions that mark the current CFIUS process. An opinion piece

written by two attorneys, Stephen Paul Mahinka and Sean P. Duffy,

outlines these challenges.77 They note that CFIUS could reduce the

uncertainty surrounding its reviews and investigations by “providing

brief general summaries of the bases for its determinations with

respect to proposed transactions.” CFIUS provides little clarity to its

proceedings except through the annual report provided to Congress.

Although a brief discussion is included that describes the type of

mitigation agreements entered into,78 the public report does not

provide any information regarding specific transactions or the

mitigation agreements that may have been entered into as a

consequence of an investigation, which deprives attorneys of the

77 Stephen Paul Mahinka and Sean P. Duffy, Cfius Review Needs Greater Transparency, INT’L FIN. L. REV. (Oct. 11, 2012), available at

http://www.morganlewis.com/pubs/CfiusReviewNeedsGreaterTransparency_IFLR_11

oct12.pdf. 78 For example, the CFIUS Annual Report 2013 includes the following description:

Mitigation measures negotiated and adopted in 2012 required the businesses

involved to take specific and verifiable actions, including, for example:

Ensuring that only authorized persons have access to certain

technology and information.

Establishing a Corporate Security Committee and other

mechanisms to ensure compliance with all required actions,

including the appointment of a USG-approved security officer or

member of the board of directors and requirements for security

policies, annual reports, and independent audits.

Establishing guidelines and terms for handling existing or future

USG contracts, USG customer information and other sensitive

information.

Ensuring only U.S. citizens handle certain products and services,

and ensuring that certain activities and products are located only

in the United States.

Notifying security officers or relevant USG parties in advance of

foreign national visits to the U.S. business for approval.

Notifying relevant USG parties of any awareness of any

vulnerability or security incidents.

Termination of specific activities of the U.S. business.

CFIUS Annual Report 2013 at 20.


35

context essential to adequately advise their clients. Mahinka and

Duffy compare this opacity with other agencies:

In contrast, numerous US regulatory and enforcement

agencies, including the Department of Justice Antitrust

Division and the Food and Drug Administration,

commonly provide public statements describing their

decisions, while accommodating confidentiality

concerns. Any similar brief summaries of Cfius’

parameters of decision would necessarily be

circumspect, in view of security concerns and the need

to protect the Agency’s deliberative process.

Nonetheless, it is difficult to conclude that US

government, foreign government, foreign investors and

acquirers, and indeed Cfius itself, would not be better

served by a short statement of the parties to the

transaction, the industry involved, and the Agency’s

general rationale for its determination. Such

transparency, which would require an amendment of

the Agency’s statute, would enhance the predictability

and likely the legitimacy of Cfius’ decisions, enabling

both US sellers and foreign investors and acquirers to

better gauge Cfius’ probable concerns and more

efficiently undertake investments in US businesses.

As noted above, however, as practitioners gain more experience

under CFIUS, they develop a store of knowledge that will enable them

to more effectively guide their clients. This fact highlights the

benefits of hiring experienced counsel; on the other hand, of course,

and the failure by CFIUS to make its determinations and agreements

more transparent effectively and incrementally raises the barriers to

entry for other practitioners, which may have the effect of raising

costs for parties to a transaction, which run from several hundred

thousand to several million dollars. These costs make it less likely

that smaller deals would be consummated at all, or, if they are, the

U.S. seller would be forced to give up a portion of the value, in

transaction costs, that it otherwise might have received for the

business. From the perspective of a foreign buyer, high transaction

costs mean that they are at a disadvantage to domestic acquirers.

This is particularly so for SOEs and SWFs because they are almost

certain to move to the investigation stage of CFIUS review and are

also more likely to require a mitigation agreement, both of which


36

dramatically increase the transaction costs for the parties. Mark

Plotkin, a leading practitioner that regularly advises SWFs on

covered transactions, describes how these distortions can play out in

practice:

Serving as counsel in this field means that I often see

distortions in the deal economics that can deeply affect

the bottom line. Several years ago, for example, a U.S.

client received a multi-billion-dollar offer from a foreign

investor for certain of its assets. The buyer had state-

ownership from a “sensitive” country. We believed (but

were not certain) that CFIUS would approve the

transaction; we also were concerned that the

transaction could encounter opposition in Congress. To

complicate things, the U.S. company also had received a

much lower offer—by hundreds of millions of dollars—

from an American buyer for the same assets. Unlike the

foreign buyer, the American buyer would not be subject

to a CFIUS review or political opposition. Our client

had to weigh taking the higher bid against the risk that

CFIUS would reject the transaction, or that a political

backlash might kill the deal. I was asked whether the

company should accept the foreign bid, together with

the CFIUS and political risks, or take the much lower

and relatively riskless American bid. . . . With my heart

in my throat, I assured the general counsel and his

CEO that CFIUS likely would approve the transaction

and that with an appropriate strategy we could

minimize the political risk as well. They accepted the

foreign bid. CFIUS did not object, we managed the

political dynamic, and the seller maximized the sale

price of its assets. While I am called upon regularly to

deliver these assessments, they are never easy or

certain given the unpredictability of the national

security and political environments, which continue to

distort the marketplace every day.79

79 Mark E. Plotkin, Foreign Direct Investment by Sovereign Wealth Funds,

Yale L. J. Online (Nov. 17 2008), available at http://yalelawjournal.org/the-yale-law-

journal-pocket-part/scholarship/foreign-direct-investment-by-sovereign-wealth-funds-

/. Plotkin also provide this general assessment of CFIUS and the danger of

politicization:

http://yalelawjournal.org/the-yale-law-journal-pocket-part/scholarship/foreign-direct-investment-by-sovereign-wealth-funds-/




37

Another criticism of CFIUS is the length of time it takes to

complete a review and investigation. The careful process which is

now conducted by CFIUS post-FINSA has indeed tended to lengthen

the amount of time for reviews; the certification process alone makes

the process more deliberate and lengthy. However, there is nothing

inherently unreasonable in the length of time needed for a CFIUS

review. Indeed, if foreign investors involve experienced counsel early

on, there is no reason why a CFIUS review should add any additional

time to the normal amount of time it takes to conduct a transaction

involving foreign acquirers. The danger to a deal comes when parties

assume that the CFIUS process is an afterthought to a deal, and not

an essential, early-stage aspect of the transaction process.

CONCLUSION

The United States holds a singular position as both the largest

foreign direct investor in the world and also the largest recipient of

foreign direct investment.80 FINSA has played a central role in

helping regulators evolve to meet the concerns arising from the sale of

U.S. enterprises to foreign investors, and particularly to state-

controlled foreign investors. While FINSA generally appears to have

worked well in responding to these concerns, it can be particularly

difficult and costly for SWFs and SOEs to navigate.

This chapter has outlined a few of the difficulties for state-

controlled firms, and regulators could make the passage more friendly

and predictable for these firms by creating reliable signposts that will

Congress wrought an elegant mechanism in CFIUS. I have seen the

Committee repeatedly scrutinize transactions, and at times uncover

legitimate national security concerns. I also have seen it negotiate

tough national security agreements to mitigate those concerns, and

even reject transactions where it felt the national security concerns

could not be adequately mitigated. While I have not always agreed

with the Committee’s judgment, I have never felt that the

Committee weighed inappropriate considerations in reaching that

judgment. At the same time, I have felt that the legitimacy of this

careful and impartial review has at times been jeopardized by calls

from Congress for CFIUS to act in a particular manner. In the case

of investments by SWFs, Congress should have the courage of its

convictions and allow the CFIUS process to work.

Id. 80 James K. Jackson, Foreign Investment and National Security: Economic Considerations, Congressional Research Service (Apr. 4, 2013).


38

help guide firms through the regulatory straits imposed by FINSA.

At the same time, the need for an experienced pilot is more important

than ever. But such assistance often comes as a steep cost in terms of

time and money. In some cases, SOEs and SWFs are likely to

determine that the benefits are not worth the risks and costs of

passage, and will seek to invest elsewhere. Hopefully, as CFIUS

gains more experienced with various SOEs and SWFs, and as state-

controlled entities act with the same predictability and integrity that

they would like wish to see from U.S. regulators, the passage will

become commensurately less costly and risky.

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