What is CFIUS? At least until recently, a business advisor might have been as likely to guess "a new strain of virus" or "a satellite-based weapons system" as to identify CFIUS as a government committee that could derail his or her next transnational deal. CFIUS is an acronym for the Committee on Foreign Investment in the United States, a federal interagency committee charged with reviewing the national security implications of foreign investments in the United States. This once obscure body leapt to prominence in February 2006 with a political firestorm over Dubai Port World's acquisition of U.S. port leases.

In 2005, DP World, a United Arab Emirates-based company, notified CFIUS of its intended purchase of Peninsular and Oriental Steam Navigation Company, a British firm holding the rights to manage the off-loading and on-loading of cargo at major U.S. ports. CFIUS cleared the transaction in 2005. But bipartisan political concern over port security caused DP World voluntarily to request that CFIUS conduct a new review of the transaction in 2006. Ultimately, facing the threat of congressional legislation to force divestiture, DP World agreed to sell the U.S. port leases to a U.S. company.

DP World is far from the only major recent transaction in which CFIUS review has played a major role. For example, in the last year, President Bush has required undertakings to address potential national security concerns that CFIUS identified concerning two major transactions: a networking joint venture involving two foreign entities, Nokia's (Finland) network communications business and Siemen's (Germany) communications equipment outfit, which incorporates U.S. subsidiaries; and Lucent Technologies' merger with French telecommunications firm Alcatel.

These cases are pointed reminders that, although the United States is relatively open to foreign investments, such transactions may raise regulatory and political issues. For lawyers involved in transnational M&A, there are important lessons in the heightened focus on CFIUS reviews. First, the number of transactions notified for U.S. national security review has dramatically increased in the last two years-113 in 2006, over twice the 2004 level. Second, CFIUS is reviewing transactions more intensely, and the CFIUS process is becoming increasingly subject to public and political scrutiny. Now more than ever, a basic understanding of the CFIUS process is essential for any lawyer involved in foreign acquisitions of U.S. companies or assets.

This article provides an overview of the CFIUS essentials to help transactional lawyers in identifying potential CFIUS-related issues and determining whether to consult a CFIUS expert. We first briefly describe CFIUS's background, the scope of its authority, and the basics of its review process. We then discuss some strategic considerations for transactions that may fall under CFIUS's purview. We conclude with some brief observations about the future of national security reviews.

Background

Under the 1988 "Exon-Florio" amendment to the Defense Production Act, the president is authorized to investigate the impact on U.S. national security of "mergers, acquisitions, and takeovers" by foreign persons that result in foreign control over a U.S. company or certain U.S. assets. If the president finds (1) "credible evidence" that a transaction would impair national security and (2) no other provision of law grants him authority to take steps to ameliorate this impact, then he may act to block the transaction. The president's findings are not subject to judicial review.

Exon-Florio applies both to proposed mergers and acquisitions as well as to completed transactions. Unless a party to the transaction voluntarily seeks pre-consummation review, there is no time limit on the president's authority to investigate a completed transaction. Under the statute, however, a voluntary notice that results in CFIUS clearance grants the transaction a safe harbor from post-closing review and challenge.

CFIUS is an interagency body with 12 members charged with implementing Exon-Florio. The Department of the Treasury, whose secretary chairs the Committee, and the Departments of Defense, Homeland Security, Commerce, and Justice typically take the most active roles in the CFIUS process, although nonmember U.S. intelligence agencies reportedly are playing an increasingly significant role in CFIUS reviews. Other Cabinet-level departments and economic and national security officers within the executive office of the president also serve on the Committee.

The staff of the Office of International Investment of the Department of the Treasury administers the CFIUS process. The Committee's review process is confidential, and the process is intended to focus on the true national security implications of particular deals rather than political considerations.

The CFIUS notification process is voluntary, requires no filing fee, and imposes no mandatory waiting period before closing the transaction. The CFIUS process has four steps: (1) a voluntary filing with CFIUS by one or more parties to the transaction, (2) a 30-day Committee review of the transaction, (3) a potential additional 45-day Committee investigation, and (4) a 15-day period after the Committee's recommendation for the president's decision to permit or deny the acquisition (or seek divesture after an ex post facto review).

Historically, CFIUS has approved almost all notified transactions during the initial 30-day period. Sometimes clearance occurred after the parties undertook steps to mitigate concerns about the transaction-typically based on prefiling discussion of the issues with CFIUS or member agencies. Today, however, a growing number of transactions are being subjected to a second-phase 45-day investigation as well.

Scope and Focus of CFIUS Review

In determining whether voluntarily to seek "safe harbor" protection by notifying a transaction to CFIUS, parties should assess the risks that (1) CFIUS could investigate the transaction on the initiative of one of its member agencies (either before or after consummation of the transaction) and (2) the president could seek to unravel the transaction. Parties are well advised to consider two questions: (1) does the transaction involve a "foreign" person acquiring a "United States" person? and (2) might the transaction implicate U.S. national security interests?

The first question can be surprisingly tricky and sometimes requires close analysis of the Exon-Florio statute and the CFIUS regulations. For instance, under Exon-Florio, the same entity or assets could be a "foreign" or "United States" person depending on whether it is the target or the acquirer. Any entity is a U.S. person to the extent of its business activities in the United States. Accordingly, the application of the statute could be triggered if a foreign company acquires (directly or indirectly) the U.S. branch office or subsidiary of a foreign company (as occurred in the DP World case). On the other hand, the same foreign-controlled U.S. branch or subsidiary would be deemed a foreign person for Exon-Florio purposes if it acquires a U.S. company or U.S. assets.

As recent transactions illustrate, the second inquiry is very open-ended and may be susceptible to political considerations. Although the Exon-Florio statute mentions nonexclusive factors such as defense production capacity, U.S. technological leadership, and proliferation concerns, the preamble to the CFIUS regulations warns that the term "U.S. national security" will be "interpreted broadly and without regard for particular industries[,]" its scope lying wholly "within the President's discretion."

In practice, the Committee often has particular interest in transactions when the target U.S. company has export-controlled technologies, classified contracts with the U.S. government, or technologies critical to national defense; or when CFIUS member agencies have specific "derogatory intelligence" about the foreign purchaser. CFIUS also may examine whether the transaction will result in an absence of U.S.-controlled companies that supply technology or products deemed important to U.S. security.

Other recent acquisitions illustrate the breadth of transactions potentially subject to substantial CFIUS scrutiny and undertakings by the parties to address national security concerns. In 2005, CFIUS-related issues played a significant role in Chinese firm CNOOC's bid for U.S. oil firm Unocal. The deal became controversial largely based on public concern that the Chinese government (through CNOOC) might use Unocal to exercise undue influence over U.S. energy supplies. The potential concerns arose from Unocal's crude reserves, which were located primarily outside the United States in Southeast Asia, and technology utilized in certain gasoline blends. Unocal's board ultimately rejected CNOOC's offer in favor of another, lower bidder, possibly based on concerns about delays and a possible negative outcome from a CFIUS review.

Another example demonstrates the potentially very broad range of "national security" concerns subject to CFIUS review. In November 2006, a Florida-based company, Smartmatic, requested and obtained post-hoc CFIUS review of its 2005 acquisition of a U.S. electronic voting machine manufacturer. Smartmatic is controlled by Venezuelan shareholders alleged to have connections with Venezuelan President Hugo Chavez. Members of Congress and pundits pressured CFIUS to conduct an extensive review based on concerns about the security of U.S. elections. Before CFIUS completed its review, Smartmatic sold the voting machine business.

Finally, the president's insistence on "evergreen" clauses in resolving some recent cases means that government inquiry into national security concerns may not be final even after the formal CFIUS review process ends. Evergreen clauses allow the government to reopen its review of the transaction in the future if the parties fail to meet certain considerations.

The CFIUS Review Process

The CFIUS process generally begins with a voluntary filing seeking review of a proposed or completed transaction by one or more of the parties to a transaction that falls within the coverage of Exon-Florio. The Exon-Florio regulations, however, empower members of CFIUS themselves to file notice with the chair of the Committee and trigger a CFIUS review.

For transactions that potentially raise issues, parties generally engage in prefiling consultations and negotiations with the Committee or member agencies. Though not part of the formal CFIUS process, such discussions can influence the outcome and lead parties to modify their transaction before filing to expedite clearance, or avoid the possibility the parties may have to abandon a transaction mid-review that is unlikely to be cleared at all or only on unacceptable terms. For example, when Hutchison Whampoa Ltd.'s 2003 bid for telecommunications firm Global Crossing triggered a 45-day investigation over Hutchison's ties to the Chinese military-even after Hutchison agreed to a purely passive role in the acquired company-Hutchison abandoned the transaction.

The formal notification itself must contain a detailed description of the transaction, including timelines and assets or businesses to be acquired, and detailed background concerning the parties. For the target U.S. firm, the filing must identify, among other things, sensitive technologies or information that the firm possesses and U.S. government contracts to which it is a party. For the foreign acquirer, the notification requirements include a description of future plans for the acquired company or assets and details about the parties' ownership structure.

The 30-day initial review period commences once the CFIUS staff gives notice they are satisfied that the filing contains all of the required information. The parties may meet with CFIUS staff during the 30-day initial review (or during any extended 45-day review period) to discuss the transaction. The Committee staff or a member agency may contact the parties for further information or to discuss steps that would mitigate any national security concerns that the transaction raises. In some cases, CFIUS may condition clearance at the end of the 30-day period on such mitigation steps.

If CFIUS decides not to clear the transaction in the 30-day review period, then it must commence an additional 45-day investigation before the end of the initial review period. Occasionally, the parties may decide to withdraw and refile their notice before the end of the 30-day initial review period if the Committee needs more time to review the transaction fully or to agree with the parties on mitigating conditions. The Committee is required to initiate a 45-day investigation when an entity controlled by or acting on behalf of a foreign government engages in an acquisition that could affect national security.

If CFIUS proceeds with a full investigation of the acquisition, then it must conclude its additional review within 45 days. At the conclusion of the investigation, CFIUS will submit a recommendation to the president. The president has 15 days from the date of referral to clear, prohibit, or suspend the transaction.

A 2005 report by the Congressional Research Service found that out of more than 1,500 filings with CFIUS made since Congress passed Exon-Florio, CFIUS had launched 45-day reviews in only 25 cases. CFIUS approved many of these transactions contingent on mitigating conditions before the matter went to a presidential decision; other transactions were abandoned by the parties. In only one case, a 1990 acquisition of a U.S. aerospace manufacturer by a Chinese firm, has the president blocked a transaction.

The situation changed dramatically in 2006, however, reflecting the increased focus on the CFIUS process in the wake of DP World and other controversial transactions. In 2006 alone, CFIUS launched seven 45-day investigations, as many as had been initiated in the prior five years combined. This trend seems likely to continue for the foreseeable future, with CFIUS investigating closely many transactions that may in the past have received only a quick look.

Strategic Considerations

In determining whether voluntarily to notify a deal to CFIUS (or whether a deal is likely to attract CFIUS scrutiny whether notified or not), the parties should:

• Construe the definition of national security broadly. Parties should consider the potential that political or business controversies concerning the transaction could be given sufficient national security "spin" to draw CFIUS scrutiny. They should always take into particular account potential implications for law enforcement and counter-terror capabilities.
  
  
• Scrutinize CFIUS factors particularly closely when the U.S. target maintains sensitive, classified, or export-controlled information and technologies or has contracts with government agencies like the Department of Defense, the Department of Homeland Security, or the intelligence community.
  
  
• Consider the nationality and the structure of the ownership and control of the foreign acquiring company. Connections to foreign governments-especially governments that are not U.S. allies-are especially critical factors in the analysis.
  
  

If a CFIUS notification may be appropriate, then consider the costs and benefits of a voluntary CFIUS filing. Among the benefits of securing CFIUS clearance:

• "Safe harbor" from future Exon-Florio review and the possibility of post-transaction unwinding, thereby eliminating a possible continuing cloud over the transaction following closing. Note, however, the possibility that the government may increasingly resort to evergreen clauses in mitigation agreements for more sensitive transactions cannot be ignored.
  
  
• The opportunity to address CFIUS issues affirmatively on the parties' own terms rather than being forced to start from a defensive posture after the Committee has initiated a review.
  
  
• Generating goodwill for the acquiring company within CFIUS, its member agencies, and Congress by signaling sensitivity to U.S. national security concerns.
  
  

The costs and burdens are not insignificant and include:

• The expense and trouble of generating the required information and making the necessary submissions as well as the delays inherent in the review process.
  
  
• The risk that notification itself might raise issues that would not otherwise have triggered scrutiny, although that risk will often be relatively small given the ready availability of information about most transactions and the increased public and political focus on deals that may implicate national security concerns.
  
  
• Concessions CFIUS might require in return for approval of a transaction. In past transactions, these have included divesting subsidiaries with sensitive technology, "walling off" the foreign parent from control of the U.S. entity and access to certain information, or entering agreements concerning network security or government access to critical infrastructure. (However, concessions might be required anyway if a CFIUS member agency initiates a CFIUS investigation.)
  
  

Another issue to consider is how competing bidders, business rivals, or other stakeholders might utilize the CFIUS process to obtain leverage over the parties or to impact the timing and certainty of the transaction. The existence of actual or potential alternative suitors who do not raise Exon-Florio issues may result in foreign suitors paying a risk/time premium or agreeing to conditions such as breakup fees to compensate the target for the risk. In the case of unsolicited or hostile bids, a target company might try to use the CFIUS process to call into question or delay the closing of the transaction. During the CFIUS process, spurned bidders or unhappy competitors may try to encourage delay, demand concessions, or seek the transaction's prohibition by giving the Committee information that is unfavorable to the parties.

Finally, before making a filing, counsel should strongly consider informal consultation with the CFIUS staff about the transaction, whether a filing is required, and how best to proceed.

When to file is often almost as important a strategic consideration as whether to file. A key factor is the amount of scrutiny and controversy that the transaction is likely to generate among the CFIUS members, political leaders, and the media. Although the formal review and decision timelines for the formal CFIUS process may appear short, the Committee can ask the parties to delay their filing or withdraw and refile to give itself more time to examine a transaction.

Similarly, if concessions are likely to be required, it almost always makes good sense to begin discussions with the Committee and interested members before filing. By doing so, it is often possible to resolve (or at least go far toward resolving) the question of concessions before the parties make their CFIUS notification. Parties often obtain the best results, both in terms of timing and ultimate outcome, by beginning a dialogue very early in the process.

Counsel also should consider whether successfully completing the CFIUS process may facilitate other required regulatory reviews or evaluations undertaken by other agencies, such as FCC license transfers or export control reviews. In some cases, obtaining another critical approval before notifying CFIUS of the transaction may facilitate the CFIUS review or the development of a common set of conditions; in other cases, filing with CFIUS before another review may be the best course.

The Future

The CFIUS playing field is likely to continue to shift. The U.S. House recently passed legislation to address perceived flaws in the CFIUS review process. The Senate is currently considering its own bill. CFIUS itself has recently added staff and adopted internal changes to its procedures, such as requiring sign-off by higher-level officials before clearing transactions.

Furthermore, counsel should be mindful that many other countries have been instituting regimes to review or restrict foreign direct investment within their borders that may include voluntary or mandatory filing. In Canada, for example, the Investment Canada Act creates a mandatory reporting regime for certain foreign investments into Canada. In September 2006, the Chinese Ministry of Commerce posted new rules for foreign direct investment, which included a new screening requirement for direct investment in areas that China deems central to its national economic security and cultural identity. The government of Thailand also recently announced a review of its foreign direct investment policies.

The heightened scrutiny that CFIUS is applying to foreign acquisitions as well as similar regimes in other jurisdictions may affect tactics for auctions for certain companies. Targets need to take into account the additional time and risk that may be associated with national security reviews. Foreign acquiring companies may need to be more active in making commitments to address the risk of national security reviews, so as not to be at a disadvantage relative to domestic bidders. In any event, counsel should plan in advance in order to navigate through these foreign investment filings and minimize the potential for surprises and a challenge to the transaction by CFIUS or a foreign authority.