Final foreign investment rules ease, complicate deals
The U.S. Treasury Department last week published final guidelines for how the executive branch plans to implement last year’s law to reform the process of reviewing foreign investments for their potential impact on national security.
The Foreign Investment and National Security Act (FINSA) codifies the roles and responsibilities of the inter-agency Committee on Foreign Investment in the United States (CFIUS), imposes more mandatory investigations under certain circumstances, requires a lead agency for each review, and more full and frequent reporting to Congress.
The regulations in more detail define what types of transactions are subject to CFIUS review, clarify what constitutes foreign control of a U.S. company, provide clear timelines for reviews, and lay out penalties for false submissions and other guidelines.
Lawmakers moved to revise 20-year-old national security laws after the Dubai Ports World controversy in 2006 led to charges that the Bush administration did not conduct a thorough review of the government-owned company’s acquisition of a U.K. port operator responsible for several U.S. marine facilities. The acquisition came to public attention after being cleared by regulators. Members of Congress blamed the administration for favoring business over security and maintaining secrecy about the decision. DP World was forced to divest its U.S. assets and the administration began to extend the definition of national security reviews beyond the defense and intelligence sectors to critical infrastructure such as telecommunications, energy and ports.
As a result, the number of CFIUS reviews has doubled and the number of extended investigations has tripled since 2005. Many sales or U.S. companies to foreign entities are now restructured or include safeguards (special security agreements, separate board of directors with U.S. citizens, security committees, and other conditions) to mitigate any national security issues. In some cases investors are scared away from concluding any deals by the extra scrutiny, according to lawyers who advise clients about the acquisition rules.
Providing notification of cross-border investments to the government is voluntary, but the ambiguity about what constitutes national security in a politicized environment has many companies today submitting notices for all types of transactions to avoid any unforeseen complications. The final rules now also provide CFIUS authority to review a transaction that has not been voluntarily submitted for review. And it formalizes CFIUS’s current practice of encouraging parties to engage in pre-filing consultations to identify and address any potential pitfalls as early as possible.
In the past it took a 50 percent foreign stake to attract the interest of CFIUS, but now the government is scrutinizing deals that have as little as 5 percent foreign ownership, Simeon Kriesberg, a partner in the international law firm Mayer Brown LLP, said at a port infrastructure conference in Houston last month.
The new rules provide some clarity in the area of infrastructure privatization by exempting notifications for long-term concessions if the U.S. entity retains security functions, the authority to monitor the foreign firm’s compliance with operating requirements and the right to terminate the concession if the foreign firm breaches its obligations.
Kriesberg said that even if the exemption is met it might be prudent for parties to seek a CFIUS review to avoid any political controversy. Meeting the exemptions simply will allow an investor to be approved more quickly.
Most projects in the port and intermodal sector should probably be submitted to CFIUS, he advised.
The new regulations, according to Kriesberg, mean:
' Greater political oversight of national security reviews.
' Less dominance of the process by the Treasury Department.
' More frequent 45-day investigations instead of 30-day reviews.
' Greater scrutiny of the nationality and national security background of the foreign acquirer.
' Greater scrutiny of minority interests, unless clearly passive.
' More common reviews of infrastructure investments.
' Greater CFIUS sensitivity to congressional concerns.
' Heightened CFIUS attention to national security at the expense of investment promotion.
Before going into a deal foreign investors need to make a strategic calculus about the political environment. Having a Russian investor today after Russia’s recent invasion of Georgia and other hostile behavior may not bode well for deal approval, he said.
The CFIUS process “is more political than ever, but perhaps a bit more predictable,” Kriesberg said.
The final regulations can be found on the Treasury Web site at www.treas.gov/offices/international-affairs/cfius/ ' Eric Kulisch
