The Exon Florio Amendment of the Defense Production Act of 1950, which was further amended by the Foreign Investment National Security Act (FINSA), authorizes the US president to investigate the effect on US national security of “mergers, acquisitions, and takeovers … which could result in foreign control of persons engaged in interstate commerce in the United States”. The president may suspend or prohibit a transaction if he finds that: (1) there is credible evidence that the foreign acquiring party may take action that threatens to impair US national security; and (2) US law does not otherwise provide adequate protection against such action.
Thus, the two key issues in any review under Exon-Florio are (1) the sensitivity of the US assets being sold from a national security, law enforcement or public safety perspective; and (2) the risks associated with the foreign buyer acquiring control.
The authority to review transactions under Exon Florio has been delegated to the Committee on Foreign Investment in the United States (CFIUS), a 12-member interagency committee chaired by the US Department of Treasury and including the departments of commerce, defence, justice, state, energy and homeland security, as well as the assistant to the president for national security affairs, among others. CFIUS reviews are not required by law, but review and clearance of a transaction provides a safe harbour against future restrictions to the transaction.
Any transaction that could result in the acquired control of a US business by a foreign person is subject to review, but CFIUS is authorized to examine only whether the foreign acquirer’s actions threaten to impair US national security. The term “national security” is not defined, but has been broadly interpreted to include transactions affecting law enforcement, public safety and critical infrastructure as well as more traditional notions of national security. Thus, acquisitions involving the energy, transportation, telecommunications, financial services or sensitive technology sectors, as well as government contractors, are likely candidates for CFIUS review.
Similarly, the term “control” does not refer to the percentage of shares or number of board seats, and may result not only from the acquisition of ownership of a majority or significant minority of voting interests or board seats, but also through other means.
The acquisition of a majority interest will be presumed to convey control. A minority interest may also be considered one of control depending on factors such as the percentage of ownership acquired, both in absolute terms and relative to other shareholders and board representation. In addition, “negative control”, i.e. the power to block important decisions, constitutes control that is subject to CFIUS’ jurisdiction.
Generally, if a purchaser buys an interest of 10% or less and the investment is purely passive, CFIUS will not review the transaction. However, this exception is limited. The “control” test focuses on factors that may indicate control, and on the acquirer’s ability to influence a company’s key corporate and business decisions.
Also, if a foreign government owns a minority stake and a minority of board seats in a foreign company, CFIUS may view the company as being controlled by the foreign government investor. This interpretation is important as the revisions to Exon-Florio made by FINSA generally require purchases by government-controlled buyers to undergo a more extensive review (75 days rather than 30 days), which is also the case for acquisitions involving critical infrastructure.
To initiate the review process, the parties to a transaction jointly submit a voluntary notice to CFIUS with information regarding the transaction and the parties. CFIUS strongly encourages parties to consult with it prior to making a formal notification. The review process is confidential, and the information submitted is exempt from disclosure under the Freedom of Information Act.
CFIUS proceedings can have up to three stages: an initial review, an investigation, and a referral to the president. To date, most CFIUS proceedings are completed within the initial 30-day review. CFIUS examines the national security vulnerability and risk associated with the transaction and obtains a risk assessment from the Director of National Intelligence. Additional information may also be sought and CFIUS may request the parties to take steps to mitigate any perceived national security concerns.
If all national security issues are not resolved in 30 days, CFIUS will initiate a second-stage investigation that can take another 45 days. If after this CFIUS agrees that there are no national security issues or that such issues have been resolved, the review is terminated and the transaction is cleared. If such concerns have not been resolved for all CFIUS member agencies, the transaction is referred to the president, who must decide within 15 days whether to take action to suspend, prohibit or restrict the transaction. In this case, the process can up to 90 days.
If the parties intend to notify CFIUS, they should develop a comprehensive strategy to address the regulatory, political and public relations aspects of the review. Because FINSA has given Congress a greater oversight role in CFIUS proceedings, that strategy should include plans for informal discussions with key Congressional offices about the transaction and its benefits to the US.
Jeanne S Archibald is a partner at New York-based law firm Hogan & Hartson. The firm has 1,300 lawyers in 28 global offices.
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