Closing the CNOOC and Dubai Ports World Debate: The Foreign Investment and National Security Act of 2007

On July 26, 2007, President Bush signed H.R. 556, the Foreign Investment and National Security Act of 2007 ("FINSA"). The enactment of FINSA effectively closes two years of debate over the manner and degree to which the federal government should regulate new foreign direct investments into the United States on national security grounds. The surprise bid by the Chinese company CNOOC in June 2005 for Unocal Corporation, followed by the political storm that erupted in early 2006 over the acquisition of certain U.S. marine cargo facilities by Dubai Ports World, precipitated searching examinations in both Congress and the Administration into the nature of national security reviews associated with investments in a post-9/11 world, an era marked by unconventional threats and emerging new sources of investment capital. In a remarkably bipartisan and sensible manner, the Administration and Congress each concluded that meeting new challenges required enhanced processes rather than far-reaching changes to the traditional welcoming U.S. policy toward foreign investments into the United States.

Background - The Exon-Florio Amendment

Historically, there existed no general authority to block foreign acquisitions of U.S. businesses on national security grounds. In 1988, responding to a wave of high-profile Japanese investments (including most prominently the acquisition of Fairchild Semiconductor by Fujitsu), Congress enacted the "Exon-Florio Amendment" to the Defense Production Act of 1950 (50 U.S.C. App. 2170). The Exon-Florio Amendment broadly authorizes the President to prohibit or to suspend a foreign acquisition of a U.S. business if he determines the proposed acquisition presents a credible threat to U.S. national security and no other legal authority provides adequate and appropriate means to address that threat.

The Committee on Foreign Investment in the United States ("CFIUS"), an interagency committee created by Executive Order in 1975 and chaired by the Treasury Department, reviews acquisitions covered by the Exon-Florio Amendment. The President retains his authority to block acquisitions based on CFIUS recommendations, but this authority has rarely been invoked. CFIUS has handled approximately 2000 cases since 1988; only a small number either were withdrawn or significantly modified in the face of CFIUS concerns, and in only one case has a President (George H.W. Bush) formally acted to block a transaction.

This record of non-interference with investment flows through 2006 masked an increasingly fractious internal deliberative process. Broadly speaking, the "security agencies" -- the Departments of Defense and Justice, and more recently Homeland Security -- often assessed potential threats differently than other CFIUS members and disagreed about the nature and process for resolving those concerns with the parties to a transaction. Pronounced disagreements emerged in recent years over the proper scope of CFIUS review, the substance of agreements designed to mitigate threats, the means to enforce such mitigation agreements, and other matters. The evident lack of familiarity among high-level Administration officials with the Dubai Ports World acquisition revealed a surprising lack of involvement by senior officials in CFIUS determinations.

Congress effectively forced Dubai Ports World to divest itself of the U.S. port facilities it had acquired from a British company, notwithstanding the Administration's opposition and lack of evident security issues. Following that debacle, CFIUS implemented significant internal reforms to tighten and to elevate the decision-making process. Both the Senate and House passed bills in 2006 to reform the process, but those efforts died when agreement among the two chambers could not be reached before adjournment.

Key Changes

FINSA reflects the benefit of the additional months afforded for Congressional deliberation beyond the hothouse climate created by the Dubai Ports World controversy and 2006 mid-term election. FINSA amends the Exon-Florio Amendment to establish a firm, rigorous CFIUS process, consistent with the measures already taken by the Administration. The key features of CFIUS review following implementation of FINSA will be:

• Stability -- For the first time, CFIUS itself will operate under a statutory mandate.
• CFIUS Membership -- FINSA designates nine CFIUS members, newly adding the Departments of Energy and Labor (non-voting), and the Director of National Intelligence (non-voting). Several White House offices that traditionally held seats at the table -- notably, the U.S. Trade Representative -- are not included (though the President may still designate them as members).
• "Lead Agency" -- FINSA provides that for each CFIUS review, one agency will assume the role of "lead agency," responsible for negotiating and monitoring compliance with mitigation agreements. Treasury will retain its role as CFIUS Chair. The lead agency will be selected in each case based on the nature of the industry and potential security threat. In practice, the lead agency is very likely to be one of the Departments of Homeland Security, Defense, or Justice.
• Scope of Review -- FINSA clarifies that "national security" includes "homeland security," and requires special attention to acquisitions of "critical infrastructure." While CFIUS has not been previously constrained in its approach to identifying "national security" threats, the new statutory direction will cause deeper probing of acquisitions involving "critical infrastructure," leading to more mitigation agreements. ("Critical infrastructure" means "systems and assets … so vital to the United States that the incapacity or destruction of such systems or assets would have a debilitating impact on national security.") FINSA further specifies a number of new factors that CFIUS must examine for national security implications, with special emphasis on the record of the acquirer's home country with respect to weapons non-proliferation and counter-terrorism.
• Mandatory investigations -- The Exon-Florio Amendment provides for a three-stage process: (1) an initial 30-day review; (2) a 45-day "investigation" of acquisitions that present security issues that are not resolved during the initial review; and (3) a 15-day period for Presidential consideration of CFIUS recommendations and final action, if issues still remain unresolved after the investigation. FINSA requires that CFIUS initiate the second-stage investigation with respect to any transaction that involves either a foreign, government-owned acquirer or the acquisition of critical infrastructure, but also provides an exception to this mandate. To avoid a full investigation in either of these two circumstances, the Secretary or Deputy Secretary of both the Treasury and the lead agency must determine during the initial review that the transaction will not impair national security. Such a determination may occur, for example, because of consensus that no such security issues are present, or because measures have been taken to address them fully (e.g., through a mitigation agreement). Although this formulation will require a more disciplined and formal review process, it essentially ratifies current CFIUS practice. Experience shows that not all transactions involving state-owned enterprises or critical infrastructure require a full investigation, either because of the benign nature of the state enterprise (e.g., a pension fund) or easily-resolved security issues.
• Mitigation agreements -- The past three years have brought a marked increase in the number and complexity of agreements designed to mitigate identified threats. The scope and content of such agreements remain a source of disagreement among CFIUS agencies in particular cases. FINSA, however, settles any question about the government's authority to enforce agreements, and this new authority hopefully will circumscribe the use of questionable liquidated damages and "evergreen" provisions that have emerged recently as enforcement tools.
• Congressional notifications -- FINSA mandates reporting by senior Administration officials to a number of Congressional leaders and Committee Chairs, but the confidentiality of the process is preserved.

For your reference, attached is a chart comparing existing law and practice to FINSA's key provisions.

In sum, FINSA brings a welcome and positive end to the uncertainty that pervaded the Exon-Florio Amendment process over the past two years. The enhanced, relatively transparent procedural process should be a source of confidence to investors and diminish fears of Congressional meddling in particular cases. Indeed, the ultimate significance of FINSA may be found in what it does not do: impose new substantive barriers to foreign direct investments in the United States. Together with the Administration's recent strong reaffirmation that foreign investment is welcomed, FINSA signals that the CNOOC and Dubai Ports World controversies need not be a source of lingering concern.

Yet, those ill-fated transactions and the post-9/11 environment in which they emerged will continue to inform CFIUS reviews. Homeland security issues, viewed through an expansive lens, will grow in importance compared to the traditional CFIUS concerns with external military threats. The Departments of Homeland Security and Justice are already ascendant in the CFIUS process, and their support for the use of detailed mitigation agreements will impact the depth and length of the process, as well as challenge foreign acquirers to accept limitations that may negatively impact the perceived value of their investments. The monitoring authority will ensure that post-acquisition, parties to mitigation agreements will experience ongoing, potentially intrusive regulatory oversight.

FINSA strikes a laudable balance between the competing policy imperatives of attracting foreign investment while maintaining national security vigilance. How CFIUS manages the same considerations - both in the forthcoming rulemaking process mandated by FINSA and in the context of individual transactions - will determine whether that balance endures.

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O'Melveny & Myers LLP has extensive experience representing parties concerning Exon-Florio Amendment matters, including experience from prior service in senior government positions. We welcome your comments and questions on this important development. Please contact Ted Kassinger at (202) 383-5170 or , or Tom Donilon at (202) 383-5132 or for additional information.


This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Ted Kassinger, an O'Melveny partner licensed to practice law in the District of Columbia and Georgia, and Lilian Tsai, an O'Melveny associate licensed to practice law in the District of Columbia, have contributed to the content of this newsletter. The views expressed in this memo are those of the authors.