National Security Regulation of Foreign Investments and Acquisitions in the United States

The US has formally invited foreign investment for decades. In 1983, president Ronald Reagan issued a "Statement on International Investment" that publicly announced, for the first time by a US president, that "the United States welcomes foreign investment". This longstanding policy, reinforced by the attractiveness of the US as the world's largest economy, has led to sustained increases in FDI into the country over the last 30 years. US affiliates of foreign multinational enterprises employed 5.2 million American workers in 2003, accounting for 5% of employment in the private sector. Capital expenditure by these same affiliates, furthermore, totaled US$109 billion in 2004. A substantial component of this foreign investment emanates from companies based in Asia, particularly Japan. Indeed, foreign companies, including Japanese auto and electronics companies, now form the bedrock of economic activity in many regions of the US.

Notwithstanding its success, the open investment policy of the US has been subject to domestic criticism. In particular, in the mid-1980s, many leading officials, companies and labour unions became alarmed at the rate of growth of Japanese investment in the US. In response, the US Congress enacted, in 1988, the Exon-Florio Amendment to the Defense Production Act of 1950, enabling the president to block corporate mergers, acquisitions and takeovers that threaten US national security. The original law included a three-year expiration provision; Congress made the law permanent in 1991.

Exon-Florio and its implementing regulations pose a number of challenges for companies and counsel attempting to evaluate whether a particular transaction implicates the terms of the law. First, Exon-Florio specifically authorizes the president or his designee to review any merger, acquisition or takeover by or with foreign persons that could result in "foreign control" of enterprises engaged in interstate commerce in the US. The term "foreign control" in this context is potentially very broad - under the plain language of the law and related regulations, it means the ability to control or influence a US company through ownership of voting securities, by proxy voting, contractual arrangements, or other means.¹ The US regulatory body implementing Exon-Florio, the Committee on Foreign Investment in the United States, or CFIUS (discussed further below), has sometimes found a foreign person to be in "control" of a US entity where that foreign person's rights include, for example, the right to appoint directors to the board, veto rights over certain corporate actions and/or the right to reject certain key personnel. A small ownership percentage, therefore, will not necessarily avoid Exon-Florio scrutiny if other factors of control are present.

Second, Exon-Florio's actual trigger for the use of presidential authority contains a significant ambiguity. The statute specifically directs the president to exercise his authority to investigate and, if necessary, prohibit a transaction if there is "credible evidence" that the foreign party exercising control "might take action that threatens ... national security". However, the law does not define the term "national security," and the legislative history states only that the term should be "interpreted broadly and without limitation to particular industries". Exon-Florio does list five "factors" for CFIUS to consider in evaluating national security, but those factors are primarily focused on the US defence industrial base and preserving US technical superiority in national security-related technologies. Importantly, as discussed below, the term "national security" is now interpreted in practice by CFIUS to extend well beyond these factors.

THE EXON-FLORIO PROCESS

Notwithstanding the ambiguities of the law, once companies and their counsel determine that a particular transaction meets the Exon-Florio criteria, the structure of the regulatory process is fairly clear. As noted, the president delegated the lead responsibilities for implementing Exon-Florio to CFIUS, which originally had been established by a presidential order in 1975 as a body to monitor and evaluate the impact of foreign investment in the US. CFIUS is chaired by the Secretary of the Treasury and has 11 other member agencies including, but not limited to, the Departments of State, Defense, Commerce, Justice and Homeland Security.

Exon-Florio also establishes a timetable for review. First, CFIUS conducts an initial 30-day review of a particular transaction. If a consensus exists that there is no credible threat to national security, or the threat has been mitigated, CFIUS will decide