InsideCounsel » July 2008
National Insecurity
Proposed regulations won’t impede foreign takeovers of U.S. corporations.
When Dubai Ports World (DPW) announced its intention in 2006 to purchase the U.S. sea terminal operations owned by Peninsular and Oriental Steam Navigation Co., based in the UK, it catapulted the Committee on Foreign Investment in the United States (CFIUS), charged with examining the national security aspects of foreign takeovers of U.S. corporations, into the political limelight.
Indeed, CFIUS scrutiny posed little meaningful regulatory risk to business before the DPW debacle reared its head.
“With very few exceptions, the CFIUS system worked well before DPW, with little or no Congressional interest or oversight, and only an occasional critical GAO [General Accounting Office] report,” says Stephen Canner, staff chair of CFIUS from 1988 to 1992 and currently vice president, investment policy, at the New York-based U.S. Council for International Business.
But arriving as it did on the heels of the furor surrounding Chinese National Offshore Oil Corp.’s proposed purchase of Unocal, it wasn’t long before the fallout from DPW led to cries for legislative reform. These culminated in passage of the Foreign Investment and National Security Act of 2007 (FINSA). The legislation, which took effect in October 2007, formally ended the halcyon days of the CFIUS rubber-stamp era.
It wasn’t until six months later, however, that CFIUS got around to drafting proposed regulations to address the changes to the law and codify the administrative practices that define the regulatory process.
Reg Relief
When CFIUS finally released the proposed regulations in April, Wall Street observers—many of whom feared that the regulations would discourage investment from abroad—were relieved.
“The regulations do a good job of sending signals to the market that the U.S. is open for foreign investment,” Canner says.
In other words, apart from implementing the changes mandated by law, the regulations define key concepts and provide guidance to the way CFIUS will administer its broad authority to screen foreign investment without creating additional procedural barriers in the review process.
“The message is one of little substantive change from current procedures, providing continuity of process, greater transparency and more certainty about what will happen and how the process will be conducted,” says Edward Rubinoff, a partner at Akin Gump Strauss Hauer & Feld. This is not to say the regulations are perfect, or perfectly clear.
“There is less certainty than is desirable on a number of issues, including the key concept of ‘control,’” Rubinoff says. “That’s significant because the regulations make it clear that CFIUS will consider each transaction on a case-by-case basis, with no bright-line test.”
The difficulty is that “control” is the cornerstone of FINSA, as CFIUS screens only those investments that would result in control by a foreign person over a U.S. business that would threaten national security.
