DP World Controversy Continues

The Dubai Ports World acquisition of Peninsular & Oriental Steam Navigation Co. closed in London last week.  Both companies operate port terminals all over the world.  DP World is controlled by the government of Dubai, one of the United Arab Emirates, and P&O is based in London.

Only ten percent or so of the P&O business is located in the United States.  It operates terminals at five American ports, including New York and New Orleans.  The purchase of the American operations ignited a grass-roots bushfire that enveloped Washington, D.C.  Irate callers clogged the lines of radio talk show hosts and then of their congressmen. 

Undeniable evidence that the controversy had gone white-hot appeared when Jay Leno disparaged the acquisition in his nightly monologue on the Tonight Show.  He noted that it was like “putting Bill Clinton in charge of Hooters.”

Congress refused an offer of a forty-five day formal investigation of the national security implications of the deal.  Members of Congress from both parties rushed to propose over two dozen bills aimed at halting the acquisition.  After a quick 62-2 vote by a panel in the House of Representatives to block the transfer of port operations in the United States, DP World threw in the towel. 

On March 9th, DP World announced that it would “transfer” its new United States operations to a “United States entity.”  In other words, DP World will incorporate a United States corporation and drop the United States terminal operations into the newly created subsidiary.  The United States subsidiary will either resell the assets or implement a corporate structure that isolates the assets from any management control by its parent, DP World.  If DP World takes the latter tack, as it probably will with some of the terminals, Congress will find itself in the business of evaluating the merits of “Chinese wall” parent/subsidiary corporate structures.

The discontent remains.  Jay Leno deadpanned in response to the DP World announcement that “the good news is that Congress forced Dubai to sell the ports… the bad news is that the sale is to Iran.”

The public learned late three salient facts about our ports:  First, terminal operators do not own the ports, government port authorities do.  The terminal operators lease space to run loading cranes and dock ships.  Second, eighty percent of the terminals in the United States are already run by foreign-owned operators.  Some of the port operators are state-owned (China and Singapore), some are publicly traded and others are privately owned by families.  Third, port security is in the hands of federal customs officials and the Coast Guard, not the terminal operators.  Moreover, the laborers the terminal operators must use to load and unload ships are unionized dock workers.

The dispute has also bought focus on the otherwise obscure Committee on Foreign Investment in the United States (CFIUS), an interagency group delegated with the responsibility for reporting to the President on foreign acquisitions that threaten national security.  A 1988 act, known as the Exon-Florio Amendment, empowers the President to investigate and, if necessary, to block foreign acquisitions that “threaten to impart the national security.”  Investigations are voluntary if the foreign-buyer is privately owned and mandatory if the foreign buyer is state-owned and the acquisition “could affect the national security.” 

The President delegated investigating authority to CFIUS, which had been created in 1975.  CFIUS conducts the necessary investigations and makes recommendations to the President on whether the President should block the acquisition.  CFIUS is chaired by the Secretary of the Treasury and has eleven other members.  It is composed of representatives of the Departments of Treasury, State, Defense, Commerce, and Justice, the Offices of the United States Trade Representative and of Management and Budget, the Council of Economic Advisors, and the Assistants to the President for Economic Policy and for National Science Affairs.  CFIUS acts in confidence because it receives confidential and sensitive business information from deal participants.

The key term in the statute, “national security,” is undefined in either the statute of the CFIUS regulations.  The background of the statute is in a concern over foreign acquisition of products or key technologies essential to the United States defense industry.  This notion is elastic.  The controversy that stimulated the 1988 Amendment, for example, was the attempted takeover of Fairchild Semiconductor Corporation in 1987 by Fujitsu, Ltd (a Japanese company).  Fairchild supplied semiconductor chips to, among others, the United States defense industry.  A 1992 threatened acquisition of the missile division of bankrupt LTV Corporation by Thompson-CSF, a French company, led to the 1992 Byrd-Exon Amendment that started “mandatory investigations” for state-owned company acquisitions.

In practice, CFIUS has recommended that the President block only one takeover after a formal investigation (the proposed sale of a Seattle defense contractor to a Chinese company) and has threatened to recommend that the President block four or five others.  The CFIUS threat of an adverse recommendation is usually enough to stop, or modify most acquisitions; a formal report to the President is not necessary.  In the DP World acquisition, CFIUS had determined initially that a mandatory forty-five day investigation was not necessary even though Dubai is state-owned.  After the public outcry, CFIUS had started a formal investigation.

Some members of Congress, not content with the CFIUS procedure, have proposed legislation to give Congress a greater say in foreign acquisitions of “critical infrastructure industries,”  which could include everything from water and energy companies to those involved in telecommunications or media.  Such legislation has two dangers. 

First, it could very quickly mix national security concerns with economic protectionism and radically change the position of the United States in the world economy.  International investment is a mutual game; our companies invest abroad because foreign companies can invest here.  We cannot cherry-pick those investments we want in the United States (let Honda own an Ohio automotive plant but not a trucking company, for example) without having our companies excluded abroad.  Second, giving the power to Congress to, in essence, charter foreign companies, will return us to the days of the early 1800s when states chartered domestic corporations one-by-one.  The result was organized graft and corruption and government-sponsored monopolies as state legislatures took payoffs to refuse charters of new companies that would compete with established ones, unless the new company could offer more.

One hopes that the cooler heads in Congress will prevail on these new bills.