From fretting takeovers to vetting CFIUS: finding a balance in U.S. policy regarding foreign acquisitions of domestic assets

Vanderbilt Journal of Transnational Law, Oct, 2006 by Gaurav Sud

III. CFIUS EXPANSION AND IMPLICATIONS FOR DIRECTORS AND SHAREHOLDERS OF U.S. CORPORATIONS

A. What is CFIUS? A Brief History and Examination of the Mechanics Behind the CFIUS Review Process

The naissance of CFIUS came with Former President Ford's passing of Executive Order 11858 in 1975. (83) President Ford created CFIUS and charged it with "continuing responsibility within the Executive Branch for monitoring the impact of foreign investment in the United States, both direct and portfolio, and for coordinating the implementation of United States policy in such investment." (84) The original motivation for this Executive Order and the ensuing birth of CFIUS was likely the establishment of the Organization of Petroleum Exporting Countries (OPEC), which left several oil-producing nations with surplus cash that they could potentially use to purchase U.S. assets. (85)

Allowing such acquisitions to go forward without government monitoring has raised concerns within the Executive Branch of the U.S. government in the past. One of the most prominent such instances, mentioned by U.S.-China Economic and Security Review Commission (USCC) member Patrick Mulloy in his congressional testimony regarding CFIUS, was the post-OPEC proposed transaction between Kuwait Petroleum Company and Santa Fe International Company, a U.S. entity. (86) The Executive Branch objected to the transaction, but was essentially helpless to do anything about it because of the liberal U.S. statutory framework regarding merger activity. (87) The transaction had to be stalled on antitrust grounds, the only way in which the government could reasonably get involved, until a merger agreement more suitable to the Executive Branch was reached. (88)

This helplessness of the Executive Branch in the face of an undesirable merger was brought to an end with the passage of the Exon-Florio Amendments in 1988. (89) This legislation empowered the President to "investigate and, if necessary, block foreign takeovers of American businesses on national security grounds." (90) Though the Exon-Florio Amendments acknowledge the open investment policy of the United States, they nonetheless authorize the President to "suspend or prohibit foreign acquisitions, mergers, or takeovers of U.S. companies if a foreign controlling interest might take action that threatens national security." (91)

In 1975, the President delegated the investigative authority he was given via the Exon-Florio Amendments to CFIUS. (92)

   Exon-Florio establishes a four-step process for examining a foreign
   acquisition of a U.S. company: (1) voluntary notice by the
   companies, (2) a 30-day review to identify whether there are any
   national security concerns, (3) a 45-day investigation to determine
   whether those concerns require a recommendation to the President
   for possible action, and (4) a Presidential decision to permit,
   suspend, or prohibit the acquisition. (93)

Because notification is completely voluntary, parties who are certain that their transaction does not implicate national security issues can elect not to notify CFIUS, but with full understanding that a failure to do so leaves their transaction "subject to Presidential action indefinitely." (94)