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Ostensibly Kosher: CFIUS Review of Foreign Investment in U.S. Industries

Client Alert

Authors: James D. Rosener and Soumya Sharma


This article was part of a presentation to the American Bar Association Section of Public Contract Law's 2011 Annual Meeting (Toronto, Canada) on August 5-8, 2011.



The role of foreign investment in private companies involved in U.S. national security first came to Congress’s attention in the 1970s when investments by foreign purchasers, especially from the Organization of the Petroleum Exporting Countries (OPEC), began to comprise significantly more assets based in America. With a view to monitor the U.S. policy on foreign investment, President Ford established the Committee on Foreign Investment in the United States (CFIUS) by the Executive Order 11858 of May 7, 1975.1 In 1988, the Congress enacted the Exon-Florio Amendment as part of the 1988 Omnibus Trade and Competitiveness Act. The Exon-Florio Act was enacted in reaction to an increase in foreign investments the United States during the 1980s, especially from Japan, and authorized the President to unwind, suspend or prohibit any acquisition of U.S. business that "threatened to impair the national security." The President delegated the investigation and review process of such investments by foreign purchasers to the CFIUS.

Popular interest and political concerns regarding national security implications of foreign investment reached a pinnacle in 2006 when Dubai Ports World (DP World), an established port operator owned by the government of the Emirate of Dubai, announced its plans to acquire Peninsular and Oriental Steam Navigation Company (P&O), a British shipping company that ran terminal operations at a number of U.S. maritime ports. Although the transaction was approved by CFIUS, the negative publicity regarding United Arab Emirates ownership of six U.S. maritime ports coupled with the threat of a further review provided sufficient pressure on DP World to sell off its stake in P&O to American International Group, a U.S. company. In response to intense focus and congressional criticism related to CFIUS’s review of the DP World case in 2006, the Foreign Investment and National Security Act of 2007 (FINSA) was enacted with effect from October 24, 2007, setting in place a more stringent system for government review of cross-border transactions, especially those involving key U.S. industries or entities owned or controlled by foreign governments.

Following the enactment of FINSA, CFIUS today operates under statutory authority. The functions of CFIUS have steadily increased since its inception when its objective was limited to avoiding governmental involvement in private transactions to the present-day CFIUS, which has a broader and stricter oversight of foreign investments and has begun taking a somewhat proactive role in initiating review of private transactions involving foreign direct investment. The modern CFIUS is a powerful and discreet inter-agency committee chaired by the Secretary of Treasury and its members include the Secretaries of State, Energy, and Homeland Security.

This article provides an overview of the CFIUS review process and discusses some of the pertinent issues involved in the purchase of domestic U.S. businesses by foreign purchasers. Part II offers a brief background to Exon-Florio legislation. Part III discusses the Exon-Florio legislation generally. Part IV catalogues a few examples of notable acquisitions that received a negative response from CFIUS and draws conclusions about the types of acquisitions that do not pass CFIUS muster compared to those that do. Finally, Part V concludes by observing that CFIUS may have to strike a delicate balance going forward in supporting a policy of direct and open foreign investment among nations and national security issues triggered by foreign investments in the United States.


The United States embarked on a radical venture in 1917 with passage of the Trading with the Enemy Act. For the first time on a grand scale, the United States decided to control the export of militarily significant goods and technology to avoid giving aid and comfort to its enemies. As such, that Act was part of the overall war effort. By the end of World War II, and with passage of the Export Control Act of 1949, U.S. policy evolved toward an effort to maintain peace through what effectively was a complete embargo. That policy remained through 1969, but eventually gave way to somewhat more relaxed yet still vigilant export controls, due to the era of détente in the 1960s.

Just prior to the collapse of the Soviet Union in 1989, the U.S. Congress enacted the Exon-Florio Amendment as part of the 1988 Omnibus Trade and Competitiveness Act. Exon-Florio constituted a parallel oversight of U.S. investment activity to complement the control of exports. Its passage signaled a desire to manage foreign acquisitions for national security reasons, particularly high-technology goods and services deemed necessary for defense-related production.

The end of the Cold War as a result of the collapse of the Soviet Union accelerated the policy shift toward lifting some of the U.S. export controls and allowing more freedom for commercial activities. Similarly, Exon-Florio was not aggressively enforced and directly impacted very few deals. Its enforcement remained targeted at defense production capabilities and the need to maintain a U.S. defense industrial base.

The September 11, 2001 terrorist attacks and the creation of the U.S. Department of Homeland Security put the foreign investments in the United States under the scanner. Transactions involving critical infrastructure technologies in telecommunications, energy, and transportation, as well as companies involved in biological and chemical industries were determined to be within the ambit of national security based on the need to manage possible terrorist activity.

With the enactment of FINSA and the shifts in global economic and political powers, yet another evolution has begun in the treatment of foreign investment in the United States. That change involves focusing greater scrutiny on the companies and individuals involved in the transaction and potentially including a wider variety of transactions within the meaning of national security. The areas of concerns today have been expanded to include proposed transactions involving critical infrastructure and technology. Critical infrastructure is defined as "systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems or assets would have a debilitating impact on national security" and "critical technologies" is defined as "critical technology, critical components and critical technology items essential to national defense."2

The Exon Florio Legislation

Congress crafted the Exon-Florio legislation to fill gaps that it perceived existed in federal antitrust, environmental and securities laws, as well as in the general power of the President to declare a national emergency and to protect companies involved in defense or national security from takeover by foreign interests. If a foreign acquisition, merger, or takeover of a U.S. business will threaten to impair national security, the Exon-Florio legislation grants to the President the authority to take appropriate action to suspend or prohibit the transaction.3 To exercise that authority, the President must find that (a) credible evidence exists that the foreign interest might take action that threatens to impair national security and that (b) no provisions of law, other than provisions in the International Emergency Economic Powers Act, provide adequate and appropriate authority to protect the national security.4

Prior to the enactment of FINSA, the review process under Exon-Florio was delegated to the CFIUS by an executive order.5 While the filing of a notification with CFIUS is voluntary in most cases, the CFIUS may unilaterally initiate the review of a transaction if: (a) it believes that a transaction for which no voluntary notice has been made may be a transaction that may raise national security considerations; or (b) a member of CFIUS has reason to believe that a transaction is a covered transaction and may raise national security considerations.

The trick question, of course, is knowing when Exon-Florio applies. In general, Exon-Florio covers any acquisition by a foreign company of a company engaged in U.S. interstate commerce (a "covered transaction"). Thus, a foreign company’s acquisition of another foreign company is subject to Exon-Florio if the target company had a business engaged in interstate commerce.

To be somewhat more specific, Exon-Florio coverage extends to transactions that result in "control" that could impair "national security." The term "transaction" under Exon-Florio regulations includes any acquisition, merger or takeover, including any acquisition of an entity through purchase of its voting securities, conversion of its convertible voting securities, or acquisition of its convertible voting securities or proxies, if any of the foregoing involves acquisition of control over the U.S. entity. Further, the term also includes a long-term lease under which a foreign lessee makes substantially all business decisions concerning the operation of a leased entity, as if it were the owner. Finally, the term may also include a joint venture, if the venture involves a foreign entity gaining control through the venture of an existing business of the U.S. entity. The term does not appear to apply to investments known as "greenfield investments," which are new ventures started from scratch.

The term "control" means the power through the ownership of a majority or a dominant minority of the total voting securities, or through proxy voting, contractual arrangements or other means, to determine, direct, or decide matters affecting an entity. Obviously, this test is broad, and there is no bright-line rule.

While the term "national security" is not defined, it is expressly construed to include "those issues relating to homeland security." In determining whether a covered transaction threatens national security, the President and CFIUS may consider a number of factors such as:

  • the capability and capacity of domestic industries to meet national defense requirements, including the availability of human resources, products, technology, materials, and other supplies and services
  • the potential effects of the transaction on sales of military goods, equipment, or technology to any country identified by the Secretary of Defense as posing a potential regional military threat to the interests of the United States
  • the potential national security-related effects on U.S. critical infrastructure, including major energy assets.
  • the potential national security-related effects on U.S. critical technologies
  • whether the covered transaction is a foreign government-controlled transaction (that is, one transaction that could result in control of a U.S. business by a foreign government or a person controlled by or acting on behalf of a foreign government).6

In addition to the factors listed above, the amended law mandates a 45-day investigation and requires an investigation in cases in which:

  • a transaction threatens to impair national security and such threat has not been adequately mitigated before or during the 30-day review process
  • the acquirer is controlled by or acting on behalf of a foreign government
  • a transaction might result in foreign control over critical infrastructure, and
  • the lead agency recommends and CFIUS concurs that an investigation be undertaken.

Certain additional considerations have proven useful in Exon-Florio assessments. For example, while control by a foreign government is a national security factor that triggers CFIUS investigation, the existence of a foreign government-controlled transaction is not in itself dispositive. Historically, in reviewing foreign government-controlled transactions, CFIUS has considered factors such as the independence of an investor’s management from the controlling government, financial information, investment objectives, and institutional arrangements of the investor; and compliance of such investors with applicable regulatory and disclosure requirements of the countries in which they invest. CFIUS has determined that a number of foreign government-controlled transactions did not pose any national security concerns.

Also, it is wise to determine whether the U.S. firm has any government contracts and, if so, whether it has any security clearances either for its facilities or its personnel. The existence of government contracts is a key factor in CFIUS interest in reviewing a proposed acquisition. The fact that a direct government contract exists does not, by itself, mean that it poses a national security threat as many contractors manufacture components or subassemblies that are incorporated into other contractors’ products, which are in turn sold to the U.S. Department of Defense.

Careful examination also should be given to the market share for the U.S. firm’s products or services and the number and nationality of other suppliers of the same products or services. CFIUS and its members normally query whether, in the case of a national emergency or armed conflict, the United States still would have adequate access to the relevant products or services from suppliers other than the U.S. firm, assuming foreigners control the firm.

Potentially Broader and Stricter CFIUS Oversight

Upon notification to CFIUS of a proposed or completed acquisition, the party filing begins the Exon-Florio review process. CFIUS first undertakes a preliminary review of the filing, which it must complete within 30 days of the notification. In this preliminary review, CFIUS determines whether an additional 45-day investigation is necessary. If necessary, CFIUS completes the 45-day investigation and provides the President with its findings and recommendation in regard to the transaction. The President then determines whether there is a risk to U.S. national security. If CFIUS determines not to conduct the 45-day investigation, or the President ultimately determines that the transaction poses no risk to national security, then the Exon-Florio review is complete.

In contrast, where there is no voluntary notification, there is a continual threat of divestiture of the entity, and therefore uncertainty in the transaction as an investigation may be initiated at any time, even after the completion of the transaction. Thus, an Exon-Florio filing is usually a prudent move, because of the potentially severe consequences and the uncertainty caused by not filing, in cases in which the foreign investment arguably falls within the parameters of Exon-Florio.

Few Notable Transactions

Yet why worry about an expanded oversight or a shift in focus if Exon-Florio reviews have no teeth? Of more than 1,700 notifications since its inception, the President has blocked only one deal, in 1990.7 But those considering Exon-Florio as toothless fail to fully appreciate its true impact, because they overlook that: (1) some acquisitions likely were never pursued because of Exon-Florio, meaning no notification was ever filed; (2) certain acquisitions likely were pursued differently than originally proposed in order to satisfy the Exon-Florio requirements; (3) many acquisitions were restructured after notification in order to please CFIUS and pacify any internal U.S. government complaints; and (4) a few deals fell apart post-notification when the interested parties refused to meet the U.S. government’s restructuring demands.

Over the past two decades, political figures and various commentators in the popular media and congress have identified, with tremendous vigor, transactions that may compromise the U.S national security. DP World, for instance, is the case in point. Another case in point is the attempted 1992 takeover of a missile division of a subsidiary of LTV Corporation by Thomson-CSF, S.A. Most commentators, including the Congress, have not explicitly defined the term "national security." However it appears that all of these commentators have implicitly adopted the factors illustrated in FINSA that may be used to determine whether a covered transaction poses a threat to national security.

The following paragraphs describe certain recent notable transactions that drew popular media coverage and analyze the factors that possibly influenced CFIUS in its review of these transactions that resulted in their specific outcomes.

Borse Dubai Limited (Dubai, state-owned): purchase of 20 percent interest in the NASDAQ Stock Market, Inc. (cleared 2007)

Following the controversy surrounding DP World and the consequent sale of DP World’s stake in P&O, another controversy regarding the potential acquisition of a U.S. company by a United Arab Emirates-owned buyer arose in September 2007, when the government-owned stock exchange in Dubai, Borse Dubai Limited, announced its plans to acquire the NASDAQ Stock Market, Inc. While there were initial concerns and criticism, the deal passed CFIUS muster on December 31, 2007, when NASDAQ was cleared to proceed with the transaction that would result in Borse Dubai obtaining a significant share in NASDAQ.

It is interesting to note that, unlike the DP World case, this transaction was approved with little or no resistance from anywhere. Moreover, similar transactions such as the takeover by state-owned Dubai Aerospace Enterprise of U.S. aviation maintenance businesses such as Standard Aero Holdings and Landmark Aviation and the acquisition by Saudi Arabia’s Sabic of GE’s plastic division also received little or no attention and passed through the CFIUS investigation with relative ease. So what made the DP World matter so different? One possible explanation could be that ports constitute critical infrastructure and, as such, have the potential to make Capitol Hill a little more nervous than foreign acquisitions of stock exchanges, aviation maintenance businesses and plastic manufacturers. Financial Times had once reported an interesting remark from Sen. Chuck Schumer (D-NY), who had not only played a vital role in galvanizing the DP World case but was also responsible for generating the greatest interest and excitement in America’s ports since the Boston Tea Party:

"Asked whether the improved climate for foreign investment meant that a hypothetical second attempt by Dubai to purchase US port operations would pass muster on Capitol Hill today, Mr. Schumer is emphatic. ‘[A similar deal by] Dubai Ports World could never get done now. It’s not because it’s Dubai – it’s because it’s ports,’ he says, pointing to the ‘nightmare’ scenario of a nuclear weapon being smuggled through one of the nation’s harbours."8

Huawei Technologies (China), purchase of 3Com Corp. and Huawei Technologies (China), purchase of 3Leaf

If there is one foreign acquirer that can be said to have been "jilted by CFIUS" then probably Huawei Technologies, a Chinese telecommunication equipment maker, fits the bill rather perfectly as its attempted acquisitions of U.S. technology assets have been blocked or unwound by CFIUS not once but twice! In 2008, the CFIUS blocked Huawei Technologies’ proposed acquisition of 3Com Corp., a communications networking equipment manufacturer. In February 2011, CFIUS requested a review of Huawei’s acquisition of certain assets of 3Leaf Systems post-closing and determined that Huwei should unwind its purchase. Based on news reports and media coverage, it appears that Huawei has a concerning history and possible links to the Chinese military. It is reported that the founder and current CEO of Huawei was a member of China’s People’s Liberation Army (PLA).

In recent years, the CFIUS has been rather swift in blocking Chinese deals. In 2009, CFIUS blocked the purchase of Firstgold Corp., a development stage mining company, by Northwest Non Ferrous International Investment Company Ltd., a Chinese corporation. It is reported that this sale was blocked because the mining company was located near sensitive military assets. Similarly, in 2005, the China National Offshore Oil Corporation (CNOOC), through its Hong Kong subsidiary (CNOOC Ltd.), announced an unsolicited bid to acquire the U.S. energy company Unocal. Pursuant to filing with the CFIUS, CNOOC subsequently withdrew its bid among concerns of foreign ownership of U.S. energy companies.

So would it be appropriate to generalize that U.S. is suspicious about investments from China and as such may not be open to Chinese investors? Probably not, especially in light of certain recent Chinese transactions that have passed CFIUS muster including the acquisition of American oil and natural gas projects by the Chinese state-owned oil company CNOOC Ltd., the purchase of a stake in a U.S. power generating company by the China Investment Corporation and the sale of Ford’s Volvo unit to a Chinese automobile manufacturer. So can we then say that the United States is more concerned about Chinese investments in critical technology? Again, that may not be true, as the China-based Lenovo Group’s acquisition of IBM’s personal computer business was cleared without much of a hiccup. One reason possibly could be that Lenovo is a publicly listed entity and does not have suspicious ties with the PLA and has a relatively cleaner history than Huawei, which was once linked to selling communication technology to Saddam Husain’s regime in Iraq.

Before summarizing the types of transaction that may be blocked by CFIUS, it is important to keep in mind that many of these decisions are driven, to a large extent, by current geopolitical factors surrounding certain sectors. Also, since the political landscape is constantly shifting, it is worth noting that what may be driving the CFIUS in today’s decision may not be as relevant tomorrow. However, based on the analysis of recent deals blocked by CFIUS, it may be inferred that the following kinds of deals are more likely than others to be blocked by CFIUS:

  • takeover by Chinese companies of U.S. technology, energy and defense related assets, and
  • investments by Middle Eastern companies in critical infrastructure.

This conclusion certainly does not mean that investments or takeovers by U.S. allies such as the United Kingdom or Canada shall have a free pass. All it really means is that such transactions are likely to be under the microscope in today’s CFIUS review. Also, it may be worthwhile to keep in mind that French-owned Thomson-CSF bowed out from its purchase of a majority stake in LTV’s missiles division due to the uptick in negative fervor surrounding sale of U.S. weapon manufacturers to state-owned foreign buyers despite the fact that France has been a traditional U.S. ally.


The United States has typically maintained and endorsed an open foreign investment policy. However, it also has rules and regulations that trigger regulatory considerations in the event of a foreign acquisition of a domestic business. While most of these rules were largely motivated by serious national concerns, it is also important to recognize that much has changed in corporate America since the 2008 financial crisis. On the one hand, the dollar weakened; traditional sources of raising capital, such as through public market channels, dried up; and banks froze lending, but on the other hand, the foreign direct investment in the United States surged and reached a record of $325.3 billion,9 there has been emergence of cash-rich Sovereign Wealth Funds and the U.S. economy became a prime destination of foreign direct investment. These developments have put the debate about the impact of foreign investments on U.S. security interests back in the headlines.

While foreign investments have been crucial in providing the much-needed liquidity to corporate America, it also has the potential to interfere with the national security of the country. Exon-Florio provides extremely broad discretionary authority to suspend and unwind such transactions without much of a procedural protection to foreign investors. The challenge before the CFIUS is to keep the process transparent, reliable and legitimate. Clearly, it is a tall order to have the ability to block transactions that threaten national security without appearing to be endorsing a protectionist attitude towards foreign investments.

Winston Churchill once quipped that "the United States usually does the right thing - after trying everything else first." The truth of this statement likely will be proved again in the way Exon-Florio filings are handled by CFIUS in light of the emerging competition from China, the war on terrorism and the resulting implications on U.S. policy governing foreign investment in the United States. While stricter scrutiny surely can be expected, that scrutiny is likely to be focused more on the identity of the purchaser, especially when such investors have or are suspected to have nexus with anti-U.S. networks. It is worth reiterating that shifts in political and international relations with nations almost always have the potential to change the nature of the review of transactions that ultimately are included in CFIUS oversight in the future. That said, it is imperative for foreign investors and their representatives to be sensitive to the legal requirements and political risks associated with a covered transaction.


1 Executive Order 11858, as amended most recently by Executive Order 13456 (73 Fed. Reg. 4677, Jan. 23, 2008).

2 50 U.S.C.A § 2170(a)(6), (7).

3 31 C.F.R. § 800.101 (2009).

4 Section 721 of the Defense Production Act of 1950 (50 U.S.C. app. 2170), enacted by section 5021 of the Omnibus Trade and Competitiveness Act of 1988, Pub. L. No. 100-418, 102 Stat. 1107 (1988) (commonly known as the Exon-Florio Amendment because of its two primary sponsors, then-Sen. James Exon (D-Neb.) and then-Rep. Jim Florio (D-N.J.)).

5 With Executive Order 11,858, President Ford originally established CFIUS in 1975 to evaluate the general impact of foreign investment in the United States. Exec. Order No. 11,858 (1975), 3 C.F.R. § 990 (1971-1975), reprinted in 15 U.S.C. § 78b (1994). President Reagan in 1988 by Executive Order 12,661 delegated to CFIUS the express task of carrying out the national security investigations under the Exon-Florio Amendment and reporting its findings to the President. Exec. Order No. 12,661 (1988), 3 C.F.R. § 630 (1993), reprinted in 15 U.S.C. § 2901 (1994).

6 These factors correspond to those listed in 50 U.S.C. app. 2170(f).

7 See U.S. GAO, Defense Trade: Mitigating National Security Concerns under Exon-Florio Could Be Improved (released October 15, 2002) (Of 320 acquisitions notified to the Committee from 1997 through 2001, only 4 were investigated; and only 1 resulted in a presidential determination.). Former President Bush on February 1, 1990 issued Order on the China National Aero-Technology Import and Export Corporation Divestiture of MAMCO Manufacturing, Incorporated. 55 Fed. Reg. 3,935 (Feb. 6, 1990). The order directed China National Aero-Technology Import and Export Corporation (CATIC) to divest all interests in the Seattle-based company MAMCO. MAMCO produced export-controlled metal components designed for American commercial aircraft, thereby threatening national security due to CATIC’s ownership by China’s Ministry of Aerospace Technology (a close affiliate of the People’s Liberation Army).

8 Financial Times Article published on April 25, 2008: Left in the cold: Foreign bidders find themselves out of favour.

9 Data published by The Bureau of Economic Analysis (BEA), an agency of the Department of Commerce.

James D. Rosener

Mr. Rosener acknowledges the assistance and contribution of Soumya Sharma in preparing this article. Ms. Sharma is an attorney with the Corporate and Securities Practice Group of Pepper Hamilton LLP, resident in the New York office.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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