Tuesday, October 2, 2007
Last week, Nasdaq announced a series of transactions which included a 19.99% equity investment by Borse Dubai, with voting rights on this stake limited to 5%. In addition, a Borse Dubai affiliate is to be the beneficiary of a trust holding another 8.4%, a stake without voting rights that would be managed by an independent trustee and eventually sold. The deal was reached in furtherance of Nasdaq's increasingly winning bid for OMX and its disposition of its shareholding in the London Stock Exchange.
An issue in this deal appears to be CFIUS approval. CFIUS stands for the Committee on Foreign Investment in the United States, an inter-agency committee chaired by the Secretary of Treasury. It is charged with administering the Exon-Florio Amendment. This law grants the President authority to block or suspend a merger, acquisition or takeover by a foreign entity if there is “credible evidence” that a “foreign interest exercising control might take action that threatens to impair the national security” and existing provisions of law do not provide “adequate and appropriate authority for the President to protect the national security in the matter before the President." The President has delegated this review process largely to CFIUS.
The statute was enacted in 1988 in response to the 1987 attempt by Fujitsu, a Japanese electronics company, to acquire Fairchild Semiconductor Corporation. That was back when the Japanese were going to take over the United States (who could forget Gung-Ho and Rising Sun?!). Congress struck back at this "menace" by passing the Exon-Florio Amendment. And in July of this year, Congress passed The National Security Foreign Investment Reform and Strengthened Transparency Act. The bill further enhanced the CFIUS review process, and adds to the factors for review critical infrastructure and foreign government-controlled transactions. In either instance CFIUS can initiate a mandatory review. Like the 1988 bill, this amendment was a response to perceived foreign investment "threats". This time it was the acquisition of Peninsular & Oriental Steam by Dubai Ports and the ensuing political brawl and heavy congressional protest which led to Dubai Ports terminating the U.S. component of its acquisition.
Nasdaq has helpfully not filed the agreements for this transaction, so the extent of Borse Dubai's control over Nasdaq post-transaction are unknown, but the 5% voting stake indicates that it will not exercise indicia of control. Therefore, arguably CFIUS does not have authority to initiate mandatory review (or even jurisdiction for a voluntary one). Nonetheless, Nasdaq is making a big deal of voluntarily initiating an Exon-Florio review here. But, Exon-Florio has always been a voluntary process until the recent amendments -- making such a filing and clearing the review process removes the ability of the President to later unwind the transaction on national security grounds.
Of late, CFIUS has been much more attentive to foreign takeover transactions. According to one news report, CFIUS considered 113 transactions in 2006, up 74 percent from the previous year. And CFIUS conducted seven second-stage investigations in 2006, equaling the number of the previous five years combined. Nonetheless, I can't see why CFIUS would object here -- this appears to be merely a 5% voting stake and I would suspect that Nasdaq has put limitations on their acquiring an increased controlling stake in Nasdaq (which would require a new CFIUS review in any event). Though again, we don't have the agreements so don't know. you would think since Nasdaq was a regulator it would more fully disclose. Nonetheless and as noted, the spur for the most recent legislative reform was congressional protest at another Dubai acquisition. That dispute was always puzzling: Dubai Ports was acquiring an English company with port operations in the United States and Dubai Ports is headquartered in the United Arab Emirates, one of our strongest allies in the Mid-East. Here, Dubai may have been scarred by that experience and asked for this review themselves. Better safe than sorry, and likely why Nasdaq and Borse Dubai are initiating this voluntary review. They are playing to political concerns more than the legal prerequisites of Exon-Florio. Our economy reached the stature it has today as a result of direct investment from abroad; hopefully for our sake we will remain hospitable this time around. This is likely given the legal case.
For a summary of the final legislative provisions of the CFIUS reform bill, see this client memo by Wiley Rein here. For more on Exon Florio and the CFIUS process see my prior posts: CFIUS Reform to Become Law; GE, The Saudis and Exon-Florio; and The Politics of National Security.