M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Tuesday, May 1, 2007

The Politics of National Security

Ilene Gotts, an antitrust partner at Wachtell Lipton Rosen & Katz and Leon Greenfield, partner at WilmerHale, have just published a new article on the Exon-Florio Act in Competition Law Report, "Does the U.S. Foster National Champions: Foreign acquisitions and national security". The article is a warning concerning the enhanced enforcement, and proposed legislation to expand the scope, of the Exon-Florio provisions of the Defense Production Act of 1988.

The Congress enacted the Exon-Florio Amendment, Section 721 of the Defense Production Act of 1950, as part of the Omnibus Trade and Competitiveness Act of 1988.  The statute 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 Exon-Florio provision is implemented by the Committee on Foreign Investment in the United States ("CFIUS"), an inter-agency committee chaired by the Secretary of Treasury. In their article, Gotts and Greenfield point out that CFIUS review is becoming stricter.  Gotts & Greenfield report that “a growing number of transactions are being subjected to a second-phase 45-day investigation as well."  Moreover, CFIUS is throwing road-blocks in front of many proposed and agreed acquisitions such as the one mooted by CNOOC, the Chinese oil company, of Unocal. 

The latest incarnation of the statute arose out of 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?!).  The current spur 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.  The dispute was 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. 

Nonetheless, the firestorm has spurred congressional interest.  On February 28, 2007, the U.S. House of Representatives passed the National Security Foreign Investment Reform and Strengthened Transparency Act of 2007 (H.R. 556) by a vote of 423 to 0. The key changes established by H.R. 556 to the CFIUS review process include:

  • Appointing the Secretary of Homeland Security and Secretary of Commerce to serve as Vice Chairpersons of CFIUS and requiring that the Director of National Intelligence conduct reviews of any investment that poses a threat to national security.
  • Increasing the role of Congressional oversight by mandating greater reporting by CFIUS either during or after it completes reviews and providing Congress with a greater amount of detailed information about its operations.
  • Mandating that CFIUS conduct extended investigations of any transaction wherein the acquiring entity is owned or controlled by a foreign government.
  • Requiring that the Secretaries of the Treasury, Homeland Security, and Commerce (or the Deputy Secretary of each agency) sign off on CFIUS approvals in order to ensure that all principal members of CFIUS are aware that all reviews and investigations have been completed.

The Bill has Presidential support and it looks like some form of this Bill will pass Congress this term. The effect of these changes would be to make our country less-welcoming of important foreign investment.  While CFIUS review may be necessary in certain circumstances and this Bill is one of the more moderate proposals, the Bill could still result in increased and undue scrutiny and politicization of foreign takeovers.  We are not France (who has protected its yogurt-maker Danone, from outside takeover, by designating it a national champion).  Our success today can relate back to British investment in our railroads in the 19th century.  It would be a shame if we hamstrung our continued growth by unduly and irrationally limiting foreign investment. 


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