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Latest M&A review gives foreign investors more certainty in US
By Mark E. Plotkin and David N. Fagan |
January 14, 2009, Wednesday
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NEW regulations setting out the United States' national security review process for foreign mergers and acquisitions of US businesses became effective in the week before Christmas last year.
They are the ultimate step in a lengthy effort to revise and strengthen the reviews undertaken by the Committee on Foreign Investment in the United States (CFIUS).
CFIUS administers the so-called Exon-Florio statute, which provides the US President with the authority to review mergers, acquisitions and takeovers (M&As) that may result in foreign control over a US person or entity engaged in interstate commerce in the United States. (Greenfield investments are not subject to CFIUS review.)
For M&As that threaten to impair US national security in a manner that cannot be mitigated or that is not, in the President's judgment, otherwise addressable, the President can suspend or prohibit such foreign investments, a decision not subject to judicial review.
The Exon-Florio statute itself, and CFIUS as the statute's administering body, came under political attack in the wake of the 2006 Dubai Ports World debacle.
Some in the US Congress sought to tighten drastically the legal regime for foreign investment in the United States.
Fortunately, through the leadership of certain key members of Congress, the Administration and the business community, the debate shifted to improving the review process in a manner that protects national security while preserving the openness of the US to foreign investment.
The end result was the Foreign Investment and National Security Act of 2007, which enhanced Exon-Florio and the CFIUS process. The Treasury Department, working with the other CFIUS agencies, has now issued final regulations implementing the Act.
The amended CFIUS process, which went into effect on December 22, maintains the formal existing timeframes for reviewing M&As, providing a critical measure of certainty to foreign investors and US parties.
While the number of M&As filed with CFIUS has been rising steadily in recent years, CFIUS likely will continue to review just a fraction - generally estimated to be less than 10 percent - of foreign investments in the US.
Even with the enhanced number of filings and increased investigations, the majority of CFIUS' reviews will conclude in the initial 30-day time period.
It is important to note, however, that M&A parties should tread carefully with their discretion on when and whether to notify CFIUS of a transaction and to require CFIUS approval before closing the transaction.
CFIUS does monitor M&A activity, and it is always preferable for parties to raise a transaction with CFIUS voluntarily rather than to have CFIUS formally come calling after the transaction is announced.
Greater clarity
While relatively few covered M&As raise potential national security concerns, the President and CFIUS have the power to unwind a transaction after closing.
Conversely, a CFIUS review and approval provides a form of safe harbor for a transaction that can only be revisited in very limited, exceptional circumstances.
Given this dynamic, parties are well advised to assess the CFIUS-related ramifications of a potential transaction involving foreign investment - and to determine whether a CFIUS review is advisable - in advance of entering into a covered M&A.
In the end, the revised CFIUS regime largely preserves existing practices and timeframes, and provides somewhat greater clarity to transaction parties.
Given the difficult place where the process commenced after Dubai Ports World, this is a positive result, and benefits foreign investors and US parties alike by assuring greater transparency and stability in the CFIUS review process.
(Mark E. Plotkin is a Partner with Covington & Burling LLP. David N. Fagan is an Associate with Covington & Burling LLP. The full version of this article can be found on the website of the Vale Columbia Center on Sustainable International Investment, with whose permission this text has been reprinted.)
They are the ultimate step in a lengthy effort to revise and strengthen the reviews undertaken by the Committee on Foreign Investment in the United States (CFIUS).
CFIUS administers the so-called Exon-Florio statute, which provides the US President with the authority to review mergers, acquisitions and takeovers (M&As) that may result in foreign control over a US person or entity engaged in interstate commerce in the United States. (Greenfield investments are not subject to CFIUS review.)
For M&As that threaten to impair US national security in a manner that cannot be mitigated or that is not, in the President's judgment, otherwise addressable, the President can suspend or prohibit such foreign investments, a decision not subject to judicial review.
The Exon-Florio statute itself, and CFIUS as the statute's administering body, came under political attack in the wake of the 2006 Dubai Ports World debacle.
Some in the US Congress sought to tighten drastically the legal regime for foreign investment in the United States.
Fortunately, through the leadership of certain key members of Congress, the Administration and the business community, the debate shifted to improving the review process in a manner that protects national security while preserving the openness of the US to foreign investment.
The end result was the Foreign Investment and National Security Act of 2007, which enhanced Exon-Florio and the CFIUS process. The Treasury Department, working with the other CFIUS agencies, has now issued final regulations implementing the Act.
The amended CFIUS process, which went into effect on December 22, maintains the formal existing timeframes for reviewing M&As, providing a critical measure of certainty to foreign investors and US parties.
While the number of M&As filed with CFIUS has been rising steadily in recent years, CFIUS likely will continue to review just a fraction - generally estimated to be less than 10 percent - of foreign investments in the US.
Even with the enhanced number of filings and increased investigations, the majority of CFIUS' reviews will conclude in the initial 30-day time period.
It is important to note, however, that M&A parties should tread carefully with their discretion on when and whether to notify CFIUS of a transaction and to require CFIUS approval before closing the transaction.
CFIUS does monitor M&A activity, and it is always preferable for parties to raise a transaction with CFIUS voluntarily rather than to have CFIUS formally come calling after the transaction is announced.
Greater clarity
While relatively few covered M&As raise potential national security concerns, the President and CFIUS have the power to unwind a transaction after closing.
Conversely, a CFIUS review and approval provides a form of safe harbor for a transaction that can only be revisited in very limited, exceptional circumstances.
Given this dynamic, parties are well advised to assess the CFIUS-related ramifications of a potential transaction involving foreign investment - and to determine whether a CFIUS review is advisable - in advance of entering into a covered M&A.
In the end, the revised CFIUS regime largely preserves existing practices and timeframes, and provides somewhat greater clarity to transaction parties.
Given the difficult place where the process commenced after Dubai Ports World, this is a positive result, and benefits foreign investors and US parties alike by assuring greater transparency and stability in the CFIUS review process.
(Mark E. Plotkin is a Partner with Covington & Burling LLP. David N. Fagan is an Associate with Covington & Burling LLP. The full version of this article can be found on the website of the Vale Columbia Center on Sustainable International Investment, with whose permission this text has been reprinted.)
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