Download Full PDF - Sullivan & Cromwell

CFIUS Review of Foreign Investment
Procedures To Be Followed By CFIUS in Reviewing Foreign
Investment Are Revised and Enhanced
January 31, 2008
SUMMARY
On January 23, 2008, President Bush issued Executive Order 13456 (“E.O. 13456”), which implements
the Foreign Investment and National Security Act of 2007 by amending and enhancing certain procedures
to be followed by the Committee on Foreign Investment in the United States, or CFIUS, in conducting
reviews and investigations of non-U.S. persons’ acquisitions of control over U.S. businesses to determine
whether the transaction would threaten to impair the national security. Among other things, E.O. 13456
reiterates U.S. policy to support international investment in the U.S., clarifies certain procedural elements
of CFIUS review, addresses procedures for mitigation agreements and limits the authority of CFIUS to
require broad compliance with law undertakings in mitigation agreements.
BACKGROUND
On July 26, 2007, President Bush signed into law the Foreign Investment and National Security Act of
2007 (“FINSA”). That legislation substantially revised the Exon-Florio Amendment to the Defense
Production Act of 1950 (“Exon-Florio”), which first established a process for the U.S. government to
review certain mergers, acquisitions and takeovers by non-U.S. persons of U.S.-located businesses to
ensure that they do not adversely affect national security. The President of the United States, acting
through CFIUS, may investigate any transaction by which a “foreign person” gains “control” of “any
person engaged in interstate commerce” in the United States and the President may prevent or unwind
any such transaction that “threatens to impair” the national security of the United States.
As discussed in greater detail in our memorandum dated July 26, 2007, FINSA codified the existence and
role of CFIUS (an inter-agency body originally established under an earlier Executive Order), expanded
its membership, added factors that CFIUS may consider in reviewing the national security implications of
New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt
Tokyo Hong Kong Beijing Melbourne Sydney
www.sullcrom.com

a transaction, and required heightened scrutiny of certain kinds of acquisitions, including those by “foreign
government-controlled” entities and those involving U.S. “critical infrastructure.” FINSA also codified
CFIUS’s practice of using “mitigation agreements” to resolve national security concerns raised by a
transaction. CFIUS now has express authority to condition a transaction on the satisfaction of CFIUS’s
national security concerns through a mitigation agreement or other condition. The statute requires that
any such agreement or condition be based on a “risk-based analysis of the threat to national security”
raised by the covered transaction. 1
THE EXECUTIVE ORDER
E.O. 13456 enhances and clarifies several matters of CFIUS-related policy and procedures. The
principal provisions of E.O. 13456 are summarized below.
U.S. POLICY FAVORS FOREIGN INVESTMENT
Consistent with recent public statements by executive branch officials, in particular those in the Treasury
Department, E.O. 13456 provides that “[i]t is the policy of the United States to support unequivocally
[international] investment [in the United States], consistent with the protection of the national security”
because such investment “promotes economic growth, productivity, competitiveness, and job creation.”
The statement of policy in E.O. 13456 reaffirms that the value of such investment to the U.S. economy
will be considered by CFIUS, along with national security considerations, in the course of any review that
it performs.
CFIUS COMPOSITION, LEADERSHIP AND ROLES
Role and Authority of the Treasury Department
FINSA established the Secretary of the Treasury as the chair of CFIUS, and E.O. 13456 further defines
the Secretary’s role as chairperson. 2 Consistent with past practice, E.O. 13456 authorizes Treasury to
act and communicate with parties to the transaction on behalf of CFIUS. It also delegates to Treasury the
authority to issue the new Exon-Florio regulations required by FINSA, although Treasury must “consult”
the other members of the Committee. 3 Treasury also is charged with coordinating the preparation of
annual reports to Congress required by FINSA.
1
2
3
See our memorandum dated July 26, 2007, entitled “CFIUS Review of Foreign Investment: New Law
Formalizes and Makes More Rigorous the National Security Review of Foreign Investment in the
United States.”
The Secretary of the Treasury may delegate his authority to other members of the Treasury
Department; accordingly, we refer to “Treasury” rather than “the Secretary” in the text.
These regulations must take effect no later than April 22, 2008.
CFIUS Review of Foreign Investment
January 31, 2008
-2-

Role and Authority of the Lead Agency
FINSA directs Treasury to designate, as appropriate, a “lead agency or agencies” in connection with
review by CFIUS of each covered transaction. The lead agency, if so designated, is authorized to act on
behalf of CFIUS with respect to the negotiation of mitigation agreements or other conditions that the
Committee may determine to be necessary to protect national security, and to monitor and ensure
compliance with any such agreements or conditions after the transaction closes. The Executive Order
also clarifies that, if a lead agency is not designated in connection with any particular transaction, these
powers remain with Treasury.
As discussed below, under “Mitigation Agreements and Enforcement”, the lead agency’s discretion to act
unilaterally is limited by E.O. 13456; among other things, the lead agency must inform the full Committee
and secure its approval prior to negotiating a mitigation agreement, must keep the full Committee “fully
informed of its activities” and must notify Treasury of “any material action” it proposes to take on the
Committee’s behalf sufficiently in advance to allow adequate time for Treasury to consult the rest of the
Committee and provide the Committee’s direction not to take, or to revise, such action.
New CFIUS Members
In addition to the heads of agencies designated as CFIUS members by FINSA, E.O. 13456 adds two new
permanent members: the United States Trade Representative and the Director of the Office of Science
and Technology Policy. Also added as observers, and as participants “when appropriate”, are the
Director of the Office of Management and Budget, the Chairman of the Council of Economic Advisers,
and the Assistants to the President for Homeland Security and Counterterrorism, National Security Affairs
and Economic Policy.
Additional Duties of the Commerce Department
E.O. 13456 directs the Secretary of Commerce to obtain information about foreign investment in the
United States, including trends and significant developments, and to analyze and report on that
information, to the public as well as the President and other Executive Branch officials. The Commerce
Department already collects information on foreign investment through its Bureau of Economic Analysis
under the International Investment and Trade in Services Survey Act, 22 U.S.C. 3101 et seq. The extent
to which the Commerce Department may need to or may wish to undertake additional efforts to comply
with the directive in E.O. 13456 is not clear. Press reports on drafts of the Executive Order indicated that
this role originally was intended to be fulfilled by the full Committee.
NATIONAL SECURITY REVIEWS AND INVESTIGATIONS; REPORTING
Briefly summarized, there are two stages to the CFIUS process. The first step is a national security
review, which may be initiated either by the parties’ voluntary filing with CFIUS or, in the absence of such
a filing, by the decision of the full Committee or of one of its member agencies. Once initiated, a review
CFIUS Review of Foreign Investment
January 31, 2008
-3-

must be completed by CFIUS within 30 days. If, at the end of its review, CFIUS concludes that a
transaction “threatens to impair” national security, it has 45 days to conduct a national security
investigation. Transactions not opposed by CFIUS – historically, the overwhelming majority of foreign
acquisitions – may proceed, and CFIUS will not later seek to re-open the transaction except in certain
extraordinary circumstances provided by FINSA.
National Security Inquiries By CFIUS Members
E.O. 13456 appears to expand the authority of the individual member agencies of CFIUS by providing
that any member may conduct its own inquiry with respect to the potential national security risk posed by
a transaction. However, communications with the parties to the transaction must occur through, or in the
presence of, the lead agency (or Treasury, if no lead agency has been designated).
National Security Investigations
FINSA requires CFIUS to conduct a national security investigation of certain covered transactions,
particularly those that would result in foreign control of any “critical infrastructure” or that are by “foreign
government-controlled” entities (subject, in each case, to certain conditions and exceptions). E.O. 13456
adds to the list of transactions requiring a 45-day national security investigation any transaction that a
single member of CFIUS believes “threatens to impair” national security.
Reports to the President
Under previously applicable procedures, reports were required to be sent to the President at the end of
every national security investigation. E.O. 13456 provides that CFIUS shall report to the President, and
request the President’s decision on a review or investigation of a transaction, in only three circumstances:
(i) if the Committee recommends suspension or prohibition of a transaction; (ii) if the Committee is unable
to make a recommendation; or (iii) if the Committee requests that the President make a determination
with regard to the transaction. This appears to mean that reports to the President are no longer required
at the conclusion of a national security review if CFIUS concludes that the transaction either does not
present a national security risk or that such risk is mitigated by agreement or condition. (However, reports
to Congress may be required by FINSA on such matters, as part of the effort to enhance Congressional
oversight of the CFIUS process.)
MITIGATION AGREEMENTS AND ENFORCEMENT
Consistent with FINSA, E.O. 13456 authorizes CFIUS, or any lead agency, to seek a mitigation
agreement or otherwise impose conditions on the parties to a transaction to address a national security
risk found to be posed by a transaction if such risk is “not adequately addressed by other provisions of
law.”
CFIUS Review of Foreign Investment
January 31, 2008
-4-

E.O. 13456, however, sets out additional requirements limiting a lead agency’s discretion in this regard,
presumably with the intent of helping to ensure that the full Committee gives careful consideration to any
proposed mitigation agreement or condition. Prior to proposing a mitigation agreement to any of the
parties to a transaction, the lead agency must first provide written notice to the full Committee identifying
the specific national security risk that the transaction poses and setting forth the proposed mitigation
measures believed to be reasonably necessary to address that risk. Only if the full Committee agrees
that mitigation is appropriate and approves the proposed mitigation measures may the lead agency
commence negotiating the agreement with the parties to the transaction.
E.O. 13456 also addresses issues that may arise from overlapping jurisdiction and authority. E.O. 13456
specifically preserves the authority of each CFIUS member to conduct inquiries, communicate with the
parties, and negotiate, enter into, impose, or enforce contractual provisions with the parties to a
transaction so long as these activities are conducted in the exercise of authorities other than those
provided under Exon-Florio. At the same time, a CFIUS member may not condition its exercise of other
authority it may have upon its exercise (or forbearance in the exercise) of its CFIUS-related authority.
E.O. 13456 also provides that a mitigation agreement shall not, except in “extraordinary circumstances”,
require a party to a transaction to recognize, state its intent to comply with, or consent to the exercise of
any authority under existing provisions of law. 4 This provision appears to be intended to limit the
potentially coercive power of CFIUS in certain respects. For example, one effect of this provision appears
to be that, in the normal course, CFIUS will not be able to require a party to consent to the exercise of
authority when it otherwise would not be bound, simply in order to have its transaction approved. Another
effect appears to be that CFIUS is restrained, in the normal course, from including catch-all agreements
to comply with applicable law, the breach of which could later be used to reopen consideration of a
transaction, as Exon-Florio allows CFIUS to reopen consideration in the event of a material breach of a
mitigation agreement. In a similar vein, E.O. 13456 expressly provides that CFIUS may not reopen a
transaction that has previously been reviewed, except in the extraordinary circumstances identified by
Exon-Florio, that is, where a party materially breaches its mitigation agreement or provides false or
misleading, or omits, material information during the initial review.
* * *
Copyright © Sullivan & Cromwell LLP 2008
4
E.O. 13456 expressly provides that it does not impair or otherwise affect “existing mitigation
agreements”; presumably, this means mitigation agreements entered into prior to January 23, 2008.
CFIUS Review of Foreign Investment
January 31, 2008
-5-

ABOUT SULLIVAN & CROMWELL LLP
Sullivan & Cromwell LLP is a global law firm that advises on major domestic and cross-border M&A,
finance and corporate transactions, significant litigation and corporate investigations, and complex
regulatory, tax and estate planning matters. Founded in 1879, Sullivan & Cromwell LLP has more than
700 lawyers on four continents, with four offices in the U.S., including its headquarters in New York, three
offices in Europe, two in Australia and three in Asia.
CONTACTING SULLIVAN & CROMWELL LLP
This publication is provided by Sullivan & Cromwell LLP as a service to clients and colleagues. The
information contained in this publication should not be construed as legal advice. Questions regarding
the matters discussed in this publication may be directed to any of our lawyers listed below, or to any
other Sullivan & Cromwell LLP lawyer with whom you have consulted in the past on similar matters. If
you have not received this publication directly from us, you may obtain a copy of any past or future
related publications from Jennifer Rish (+1-212-558-3715; rishj@sullcrom.com) or Alison Alifano (+1-212-
558-4896; alifanoa@sullcrom.com) in our New York office.
CONTACTS
New York
H. Rodgin Cohen +1-212-558-3534 cohenhr@sullcrom.com
Elizabeth T. Davy +1-212-558-7257 davye@sullcrom.com
Joseph B. Frumkin +1-212-558-4101 frumkinj@sullcrom.com
Washington, D.C.
Eric J. Kadel, Jr. +1-202-956-7640 kadelej@sullcrom.com
Margaret K. Pfeiffer +1-202-956-7540 pfeifferm@sullcrom.com
Samuel R. Woodall III +1-202-956-7584 woodalls@sullcrom.com
London
Brian E. Hamilton +44-20-7959-8440 hamiltonb@sullcrom.com
Richard C. Morrissey +44-20-7959-8520 morrisseyr@sullcrom.com
Paris
William D. Torchiana +33-1-7304-5890 torchianaw@sullcrom.com
Hong Kong
William Y. Chua +85-2-2826-8632 chuaw@sullcrom.com
Michael G. DeSombre +85-2-2826-8696 desombrem@sullcrom.com
Tokyo
Stanley F. Farrar +81-3-3213-6172 farrars@sullcrom.com
CFIUS Review of Foreign Investment
January 31, 2008
DC_LAN01:229388.4
-6-