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

By David Marchick, Mark Plotkin and David Fagan, Covington & Burling, Washington D.C.

As Chinese companies, with the encouragement of Chinese government policy, seek to diversify and expand their operations, many are turning to foreign direct investment (FDI) to grow their companies. A few recent examples include Lenovo's acquisition of IBM's personal computer business (the largest Chinese acquisition of an American company); TCL's combination of its television assets with France's Thomson; Shanghai Automotive's acquisition of Korean automaker SsangYong Motor (and its aborted attempt to rescue MG Rover from bankruptcy); and China National Offshore Oil's reported consideration of a bid for the US-based oil company Unocal. Indeed, in 2004, Chinese outward direct investment grew 27% to US$3.62 billion. Though just a fraction of the US$60 billion in inward FDI that China received last year, it is nevertheless an amount almost certain to increase.

The US holds, unquestionably, the greatest market potential for outward Chinese investment. As they explore investment options in the US, however, Chinese companies and their counsel must be aware of an important, but little known investment review law - the Exon-Florio Amendment. Exon-Florio enables the US government to restrict, reject or impose conditions on foreign investments into the country on national security grounds. The law has become increasingly relevant in the wake of the September 11 attacks. In particular, Chinese and other Asian companies and investment funds, together with their respective lawyers, need to be mindful of the US government's right to review FDIs on national security grounds when the contemplated transaction involves a US economic sector deemed to be "critical infrastructure".