The Exon-Florio National Security Test for Foreign Investment

Congressional research reportMar 29, 2013

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The Exon-Florio National Security Test for

Foreign Investment

James K. Jackson

Specialist in International Trade and Finance

March 29, 2013

Congressional Research Service

7-5700

www.crs.gov

RL33312

CRS Report for Congress

Prepared for Members and Committees of Congress

The Exon-Florio National Security Test for Foreign Investment

Summary

The Exon-Florio provision grants the President the authority to block proposed or pending

foreign acquisitions of “persons engaged in interstate commerce in the United States” that

threaten to impair the national security. This provision came under intense scrutiny with the

proposed acquisitions in 2006 of major operations in six major U.S. ports by Dubai Ports World

and of Unocal by the China National Offshore Oil Corporation (CNOOC). The debate that

followed reignited long-standing differences among Members of Congress and between Congress

and the Administration over the role foreign acquisitions play in U.S. national security. The public

debate underscored the differences between U.S. policy, which is to actively promote

internationally the national treatment of foreign firms, and the concerns of some over the way this

policy applies to companies that are owned by foreign governments that have unlimited access to

the nation’s industrial base. Much of this debate focused on the activities of a relatively obscure

committee, the Committee on Foreign Investment in the United States (CFIUS) and the ExonFlorio provision, which gives the President broad powers to block certain types of foreign

investment.

In the first session of the 110th Congress, Representative Maloney introduced H.R. 556, the

National Security Foreign Investment Reform and Strengthened Transparency Act of 2007, on

January 18, 2007. The measure was approved by the House Financial Services Committee on

February 13, 2007, with amendments, and was approved with amendments by the full House on

February 28, 2007, by a vote of 423 to 0. On June 13, 2007, Senator Dodd introduced S. 1610, the

Foreign Investment and National Security Act (FINSA) of 2007. On June 29, 2007, the Senate

adopted S. 1610 in lieu of H.R. 556 by unanimous consent. On July 11, 2007, the House accepted

the Senate’s version of H.R. 556 by a vote of 370-45 and sent the measure to the President, who

signed it on July 26, 2007. It is designated as P.L. 110-49.

On January 23, 2008, President Bush issued Executive Order 13456 implementing the law. The

Executive Order also establishes some caveats that may affect the way in which the law is

implemented. These caveats stipulate that the President will provide information that is required

under the law as long as it is “consistent” with the President’s (1) authority to conduct the foreign

affairs of the United States; (2) authority to withhold information that would impair the foreign

relations, the national security, the deliberative processes of the executive, or the performance of

the executive’s constitutional duties; or (3) ability to supervise the unitary executive branch.

Despite the recent changes to the Exon-Florio process, some Members continue to question the

way in which the changes in the law are being interpreted by the Obama Administration and the

way in which the law is being used to address cases involving foreign governments, particularly

with the emergence of direct investments through sovereign wealth funds (SWFs). In the 112th

Congress, some Members expressed their concerns to the Obama Administration over the

national security implications of a proposed acquisition of a U.S. technology company by the

Chinese-owned Huawei Technologies. The Obama Administration issued a statement on June 30,

2011, supporting an open investment policy, a commitment to treat all investors in a fair and

equitable manner, and support for business investment from sources both home and abroad in the

economy. On September 28, 2012, President Obama used the authority granted to him under

FINSA to block a Chinese acquisition of a U.S. energy firm.

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The Exon-Florio National Security Test for Foreign Investment

Contents

Background ...................................................................................................................................... 1

The Exon-Florio Provision .............................................................................................................. 3

Treasury Department Regulations ................................................................................................... 5

Transactions Not Subject to a Review ....................................................................................... 5

Control ....................................................................................................................................... 6

National Security ....................................................................................................................... 7

The “Byrd Amendment” .................................................................................................................. 8

The Amended CFIUS Process ......................................................................................................... 9

Critical Infrastructure .............................................................................................................. 12

Procedures ............................................................................................................................... 15

Presidential Authority .............................................................................................................. 16

Factors for Consideration ........................................................................................................ 17

Confidentiality Requirements .................................................................................................. 18

Mitigation and Tracking .......................................................................................................... 19

Congressional Oversight ......................................................................................................... 19

Caseload......................................................................................................................................... 20

Recent Transactions ....................................................................................................................... 22

Conclusions.................................................................................................................................... 24

Figures

Figure 1. Foreign Direct Investment in the United States and U.S. Direct Investment

Abroad, Annual Flows, 1990-2011 ............................................................................................... 2

Tables

Table 1. CFIUS Notifications and Investigations, 1988-2005 ....................................................... 21

Table 2. Foreign Investment Transactions Reviewed by CFIUS, 2008-2010 ................................ 22

Table 3. Industry Composition of Foreign Investment Transactions Reviewed by CFIUS,

2008-2010 ................................................................................................................................... 23

Table 4. Country of Foreign Investor and Industry Reviewed by CFIUS, 2008-2010 .................. 23

Contacts

Author Contact Information........................................................................................................... 27

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Background

According to the Department of Commerce,1 foreigners invested $234 billion in U.S. businesses

and real estate in 2011, up from the $206 billion invested in 2010, as indicated in Figure 1. This

amount reflects the rebound in direct investment activity as a result of the world-wide slump in

foreign investment that occurred following the financial crisis of 2008-2009, a shortage of funds

for acquisitions and mergers, and the global economic recession. Fluctuations in foreign direct

investment flows, although particularly sharp for the United States, are not unique. According to

the United Nations’ World Investment Report, global foreign direct investment inflows increased

by 16.5% in 2011, compared with 2010, and by 9.5% in 2010, after falling by 16% in 2008 and

37% in 2009, marking the bottom of the global slump in direct investment spending.2

The cumulative amount, or stock, of foreign direct investment in the United States on a historical

cost basis3 rose from $2.3 trillion in 2010 to about $2.5 trillion in 2011, after rising very slowly

between 2008 and 2009.4 The United States is both the largest recipient of foreign direct

investment and the largest overseas direct investor. The rise in the value of foreign direct

investment includes an upward valuation adjustment of existing investments and increased

investment spending that was driven by the stronger growth rate of the U.S. economy, the worldwide resurgence in cross-border merger and acquisition activity, and investment in the U.S.

financial and insurance industries.

Scott, Sarah P., U.S. International Transactions: First Quarter of 2012. Survey of Current Business, July 2012, p. 59.

World Investment Report 2011: Non-Equity Modes of International Production and Development. New York, United

Nations, 2011, p. 1.

The stock, or position, is the net book value of foreign direct investors’ equity in, and outstanding loans to, their

affiliates in the United States. A change in the position in a given year consists of three components: equity and

intercompany inflows, reinvested earnings of incorporated affiliates, and valuation adjustments to account for changes

in the value of financial assets. The Commerce Department also publishes data on the foreign direct investment

position valued on a current-cost and market value bases. These estimates indicate that foreign direct investment

increased by $311 billion measured at current cost, and by $112 billion measured at market value in 2011. The

cumulative position valued at current cost in 2011 was $2.9 trillion, compared with a market value of $3.5 trillion.

Barefoot, Kevin B. and Marilyn Ibarra-Caton, “Direct Investment Positions for 2011: Country and Industry Detail,”

Survey of Current Business, July 2012. p. 19.

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Figure 1. Foreign Direct Investment in the United States and U.S. Direct Investment

Abroad, Annual Flows, 1990-2011

(in billions of dollars)

$450

$400

$350

$300

$250

$200

$150

$100

$50

US direct investment abroad

Foreign direct investment in the US

Source: CRS from U.S. Department of Commerce data.

Note: the drop in U.S. direct investment abroad in 2005 reflects actions by U.S. parent companies to take

advantage of a one-time tax provision.

With more than $442 billion invested in the United States, the United Kingdom is the largest

foreign direct investor. Japan has moved into the position as the second-largest foreign direct

investor in the U.S. economy with about $260 billion in investments. Following the Japanese are

the Dutch ($240.3 billion), the Germans ($215.9 billion), the Canadians ($211 billion), and the

French ($198.7 billion).

In the first session of the 110th Congress, Members approved, and President Bush signed, P.L.

110-49, which alters the national security process authorized under the Exon-Florio provision.

The changes in the public law provide for greater oversight by Congress and increased reporting

by the Committee on Foreign Investment in the United States (CFIUS) on its decisions. In

addition, P.L. 110-49 ostensibly broadens the definition of national security and requires greater

scrutiny by CFIUS of certain types of foreign direct investments. The law demonstrates the

concern that some Members have with the way in which the Exon-Florio provision is

administered. Some were also concerned with the perceived lack of transparency in the reviews

that are mandated under the Exon-Florio provision, which some Members believe hampered

Congress’s ability to exercise its oversight responsibilities. Not all Members were satisfied with

the law. Some Members argued that the law remained deficient in reviewing investment by

foreign governments through sovereign wealth funds (SWFs), an issue that was attracting little

attention when the law was adopted.

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Members of Congress intended to have P.L. 110-49 address six perceived problems with the

statutes as they existed that Members had identified. These concerns include (1) the principal

members of the interagency Committee on Foreign Investment in the United States (CFIUS) at

times seemed not to be well informed concerning the outcomes of reviews and investigations

regarding proposed or pending investment transactions; (2) CFIUS had interpreted incorrectly the

requirements under the statutes for investigations of transactions that involve firms that are

owned or controlled by a foreign government; (3) reporting requirements had not provided

Congress with enough information about the operations and actions of CFIUS for Members to

fulfill their oversight responsibilities; (4) CFIUS had exercised too much discretion in choosing

which transactions it investigated; (5) the definition of national security used by CFIUS was no

longer adequate in a post-September 11th world; and (6) deadlines placed on CFIUS to complete

reviews and investigations of investment transactions did not provide adequate time in some

instances for the committee to complete its reviews and investigations. In early 2011, some

Members of Congress had requested that the Obama Administration support a recommendation

by CFIUS that the President block a proposed acquisition of 3Leaf Systems by Huawei

Technologies over national security concerns. Instead, Huawei discontinued its efforts to acquire

the U.S. firm.

The Exon-Florio Provision

In 1988, amid concerns over foreign acquisition of certain types of U.S. firms, particularly by

Japanese firms, Congress passed and President Reagan signed the Omnibus Trade and

Competitiveness Act of 1988.5 The Exon-Florio provision, which was included as Section 5021 of

that act, fundamentally transformed CFIUS. This statute grants the President the authority to

block proposed or pending foreign “mergers, acquisitions, or takeovers” of “persons engaged in

interstate commerce in the United States” that threaten to impair the national security. Congress

directed, however, that before this authority can be invoked the President must conclude that

other U.S. laws are inadequate or inappropriate to protect the national security, and that he must

have “credible evidence” that the foreign investment will impair the national security. This same

standard was maintained in P.L. 110-49.

Part of Congress’s motivation in adopting the Exon-Florio provision apparently arose from

concerns that foreign takeovers of U.S. firms could not be stopped unless the President declared a

national emergency or regulators invoked federal antitrust, environmental, or securities laws.

Through the Exon-Florio provision, Congress attempted to strengthen the President’s hand in

conducting foreign investment policy, while limiting its own role as a means of emphasizing that,

as much as possible, the commercial nature of investment transactions should be free from

political considerations. Congress also attempted to balance public concerns about the economic

impact of certain types of foreign investment with the nation’s long-standing international

commitment to maintaining an environment that is open and receptive to foreign investment.

Furthermore, Congress did not intend to have the Exon-Florio provision alter the generally open

foreign investment climate of the country or to have it inhibit foreign direct investments in

industries that could not be considered to be of national security interest. At the time, some

analysts believed the provision could potentially widen the scope of industries that fell under the

national security rubric. CFIUS, however, is not free to establish an independent approach to

P.L. 100-418, Title V, Subtitle A, Part II, or 50 U.S.C. app 2170.

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reviewing foreign investment transactions, but operates under the authority of the President and

reflects his attitudes and policies. As a result, the discretion CFIUS uses to review and to

investigate foreign investment cases reflects policy guidance from the President. Foreign

investors are also constrained by legislation that bars foreign direct investment in such industries

as maritime, aircraft, banking, resources, and power.6 Generally, these sectors were closed to

foreign investors prior to passage of the Exon-Florio provision in order to prevent public services

and public interest activities from falling under foreign control, primarily for national defense

purposes.

During consideration of the Exon-Florio proposal, debate focused on three issues that generated a

clash of views: (1) what constitutes foreign control of a U.S. firm?; (2) how should national

security be defined?; and (3) which types of economic activities should be targeted for a CFIUS

review? Of these issues, the most controversial and the most far-reaching was the lack of a

definition of national security. As originally drafted, the provision would have considered

investments which affected the “national security and essential commerce” of the United States.

The term “essential commerce” was the focus of intense debate between Congress and the

Reagan Administration.

The Treasury Department, headed by Secretary James Baker, objected to the Exon-Florio

provision, and the Administration vetoed the first version of the Omnibus Trade legislation, in

part due to its objections to the language in the measure regarding “national security and essential

commerce.” The Reagan Administration argued that the language would broaden the definition of

national security beyond the traditional concept of military/defense to one which included a

strong economic component. Administration witnesses argued against this aspect of the proposal

and eventually succeeded in prodding Congress to remove the term “essential commerce” from

the measure and in narrowing substantially the factors the President must consider in his

determination. According to one participant, Congress placed the Exon-Florio provision in the

statutes under Title VII of the Defense Production Act to indicate that the provision should be

interpreted “as dealing with the broad industrial base issues addressed by that statute, not the

more narrow national security controls dealt with in export control measures.”7

Through Executive Order 12661, President Reagan implemented provisions of the Omnibus

Trade Act. In the Executive Order, President Reagan delegated his authority to administer the

Exon-Florio provision to CFIUS,8 particularly to conduct reviews, to undertake investigations,

and to make recommendations, although the statute itself does not specifically mention CFIUS.

As a result of President Reagan’s action, CFIUS was transformed from a purely administrative

body with limited authority to review and analyze data on foreign investment to one with a broad

mandate and significant authority to advise the President on foreign investment transactions and

to recommend that some transactions be blocked.

CRS Report RL33103, Foreign Investment in the United States: Major Federal Statutory Restrictions, by Michael V.

Seitzinger.

Ibid.

Executive Order 12661 of December 27, 1988, 54 F.R. 779.

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Treasury Department Regulations

After extensive public comment, the Treasury Department issued its final regulations in

November 1991 implementing the Exon-Florio provision.9 Although these procedures were

amended through P.L. 110-49, they continued to serve as the basis for the Exon-Florio review and

investigation until new regulations were released on November 21, 2008.10 These regulations

created an essentially voluntary system of notification by the parties to an acquisition and they

allowed for notices of acquisitions by agencies that are members of CFIUS. Despite the voluntary

nature of the notification, firms largely comply with the provision, because the regulations

stipulate that foreign acquisitions that are governed by the Exon-Florio review process that do not

notify the committee remain subject indefinitely to divestment or other appropriate actions by the

President. The regulations make it clear that the President alone determines “whether a

transaction threatens national security.” Also, the regulations state that the Exon-Florio provision

will not be interpreted narrowly in a way that might preclude the ability of CFIUS to review any

transaction for its impact on national security. The Treasury Department, however, as the lead

agency, indicated in the regulations that it would judge transactions to have “significant”

importance for national security if they “involve products, services, and technologies that are

important to U.S. national defense security requirements.”11 The regulations also indicate that

notifications provided to the committee are considered to be confidential and the information is

not released by the committee to the press or commented on publicly.

Transactions Not Subject to a Review

Another aspect of the regulations that has come under increased scrutiny due to the sharp runup in

investments through sovereign wealth funds (SWFs) is the types of transactions that CFIUS

generally will not subject to a national security review. According to Treasury Department

regulations, investment transactions that are not considered transactions under the Exon-Florio

provision and, therefore, not subject to a CFIUS review. Treasury regulations also stipulate that

the extension of a loan or a similar financing arrangement by a foreign person to a U.S. business

will not be considered a covered transaction and will not be investigated, unless the loan conveys

a right to the profits of the U.S. business or involves a transfer of management decisions. The

main provisions are:

1) An acquisition of voting securities pursuant to a stock split or pro rata stock dividend

which does not involve a change in control.

2) An acquisition of any part of an entity or of assets that do not constitute a U.S. business.

3) An acquisition of securities by a person acting as a securities underwriter, in the ordinary

course of business and in the process of underwriting.

4) An acquisition pursuant to a condition in a contract of insurance relating to fidelity,

surety, or casualty obligations if the contract was made by an insurer in the ordinary course

of business

Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons. 31 C.F.R. Part 800.

31 CFR Part 800, November 21, 2008.

31 CFR 800 Discussion of Final Rule.

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5) An acquisition in which the parent of the entity making the acquisition is the same as the

parent of the entity being acquired.

6) An acquisition of convertible voting securities that does not involve control.

7) A purchase of voting securities or comparable interests “solely for the purpose of

investment,” or an investment in which the foreign investor has “no intention of determining

or directing the basic business decisions of the issuer.” In addition, investments that are

solely for investment purposes are defined as those: 1) in which the transaction does not

involve owning more than 10% of the voting securities of the firm; or 2) those investments

that are undertaken directly by a bank, trust company, insurance company, investment

company, pension fund, employee benefit plan, mutual fund, finance company, or brokerage

company “in the ordinary course of business for its own account.”12

Foreign investors representing SWFs invested heavily in the mid to late 2000s in U.S. financial

institutions ranging from NASDAQ to Morgan Stanley, Merrill Lynch, and Citigroup as a number

of these financial institutions experienced a drop in the value of assets associated with the subprime mortgage crisis. In some cases, the foreign investments have accounted for less than 10%

of the voting securities of the firm and were classified as investments only for the purpose of

investment apparently to avoid a CFIUS review or investigation.

Control

A key factor in the Exon-Florio process is applying the term “control” to evaluating the role of a

foreign investor in any proposed transaction. While the statute does not provide a definition of

this term, a definition is included in the Treasury Department’s regulations. According to those

regulations, control is not defined as a numerical benchmark,13 but instead focuses on a functional

definition of the term, or a definition that is governed by the influence the level of ownership

permits the foreign entity to affect certain decisions by the firm. According to the Treasury

Department’s regulations:

The term control means the power, direct or indirect, whether or not exercised, and whether

or not exercised or exercisable through the ownership of a majority or a dominant minority

of the total outstanding voting securities of an issuer, or by proxy voting, contractual

arrangements or other means, to determine, direct or decide matters affecting an entity; in

particular, but without limitation, to determine, direct, take, reach or cause decisions

regarding:

(1) The sale, lease, mortgage, pledge or other transfer of any or all of the principal assets of

the entity, whether or not in the ordinary course of business;

31 CFR 800.302.

There are other statutes that do use numerical benchmarks. According to Section 13(d) of the Securities Exchange

Act of 1934 (15 U.S.C. §78m(d) any person who acquires 5% or more of the publicly traded securities of a U.S. firm

must report the acquisition of the shares to the Securities and Exchange Commission. For statistical purposes, the

United States defines foreign direct investment as the ownership or control, directly or indirectly, by one foreign person

(individual, branch, partnership, association, government, etc.) of 10% or more of the voting securities of an

incorporated U.S. business enterprise or an equivalent interest in an unincorporated U.S. business enterprise 15 CFR §

806.15 (a)(1). This level of ownership requires foreign owners to file quarterly and longer annual reports with the

Department of Commerce as part of the quarterly and annual reports on the balance of payments and gross domestic

product (GDP).

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(2) The reorganization, merger, or dissolution of the entity;

(3) The closing, relocation, or substantial alteration of the production, operational, or

research and development facilities of the entity;

(4) Major expenditures or investments, issuances of equity or debt, or dividend payments by

this entity, or approval of the operating budget of the entity;

(5) The selection of new business lines or ventures that the entity will pursue;

(6) The entry into termination or non-fulfillment by the entity of significant contracts;

(7) The policies or procedures of the entity governing the treatment of non-public technical,

financial, or other proprietary information of the entity;

(8) The appointment or dismissal of officers or senior managers;

(9) The appointment or dismissal of employees with access to sensitive technology or

classified U.S. Government information; or

(10) The amendment of the Articles of Incorporation, constituent agreement, or other

organizational documents of the entity with respect to the matters described at paragraph (a)

(1) through (9) of this section.

National Security

Neither Congress nor the Administration have attempted to define the term national security as it

appears in the Exon-Florio statute. Treasury Department officials have indicated, however, that

during a review or investigation each member of CFIUS is expected to apply that definition of

national security that is consistent with the representative agency’s specific legislative mandate.14

The concept of national security was broadened by P.L. 110-49 to include “those issues relating to

‘homeland security,’ including its application to critical infrastructure,” and “critical

technologies.”

The Treasury Department provides some guidance through its regulations to firms that are

deciding whether they should notify CFIUS of a proposed or pending merger, acquisition, or

takeover. The guidance states that proposed acquisitions that need to notify CFIUS are those that

involve “products or key technologies essential to the U.S. defense industrial base.” This notice is

not intended for firms that produce goods or services with no special relation to national security,

especially toys and games, food products, hotels and restaurants, or legal services. CFIUS has

indicated that in order to assure an unimpeded inflow of foreign investment it would implement

the statute “only insofar as necessary to protect the national security,” and “in a manner fully

consistent with the international obligations of the United States.”15

Senate Armed Services Committee, Briefing on the Dubai Ports World Ports Deal, February 23, 2006.

Ibid.

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The “Byrd Amendment”

In 1992, Congress amended the Exon-Florio statute through Section 837(a) of the National

Defense Authorization Act for Fiscal Year 1993 (P.L. 102-484). Known as the “Byrd” amendment

after the amendment’s sponsor, the provision requires CFIUS to investigate proposed mergers,

acquisitions, or takeovers in cases where two criteria are met:

(1) the acquirer is controlled by or acting on behalf of a foreign government; and

(2) the acquisition results in control of a person engaged in interstate commerce in the United

States that could affect the national security of the United States.16

This amendment came under intense scrutiny by the 109th Congress as a result of the DP World

transaction. Many Members of Congress and others believed that this amendment required

CFIUS to undertake a full 45-day investigation of the transaction because DP World was

“controlled by or acting on behalf of a foreign government.” The DP World acquisition, however,

exposed a sharp rift between what some Members apparently believed the amendment directed

CFIUS to do and how the members of CFIUS are interpreting the amendment. In particular, some

Members of Congress apparently interpreted the amendment to direct CFIUS to conduct a

mandatory 45-day investigation if the foreign firm involved in a transaction is owned or

controlled by a foreign government. Representatives of CFIUS have argued that they interpret the

amendment to mean that a 45-day investigation is discretionary and not mandatory. In the case of

the DP World acquisition, CFIUS representatives argued that they had concluded as a result of an

extensive review of the proposed acquisition prior to the case being formally filed with CFIUS

and during the 30-day review that the DP World case did not warrant a full 45-day investigation.

They conceded that the case met the first criterion under the Byrd amendment, because DP World

was controlled by a foreign government, but that it did not meet the second part of the

requirement, because CFIUS had concluded during the 30-day review that the transaction “could

not affect the national security.”17

The intense public and congressional reaction that arose from the proposed Dubai Ports World

acquisition spurred the Bush Administration in late 2006 to make an important administrative

change in the way CFIUS reviews foreign investment transactions. CFIUS and President Bush

approved the acquisition of Lucent Technologies, Inc. by the French-based Alcatel SA, which was

completed on December 1, 2006. Before the transaction was approved by CFIUS, however,

Alcatel-Lucent was required to agree to a national security arrangement, known as a Special

Security Arrangement, or SSA, that restricts Alcatel’s access to sensitive work done by Lucent’s

research arm, Bell Labs, and the communications infrastructure in the United States.

The most controversial feature of this arrangement is that it allows CFIUS to reopen a review of

the deal and to overturn its approval at any time if CFIUS believes the companies “materially fail

to comply” with the terms of the arrangement. This marks a significant change in the CFIUS

process. Prior to this transaction, CFIUS reviews and investigations had been portrayed, and had

been considered, to be final. As a result, firms were willing to subject themselves voluntarily to a

CFIUS review, because they believed that once an investment transaction was scrutinized and

P.L. 102-484, October 23, 1992.

Briefing on the Dubai Ports World Deal before the Senate Armed Services Committee, February 23, 2006.

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approved by the members of CFIUS the firms could be assured that the investment transaction

would be exempt from any future reviews or actions. This administrative change, however, means

that a CFIUS determination may no longer be a final decision and it adds a new level of

uncertainty to foreign investors seeking to acquire U.S. firms. A broad range of U.S. and

international business groups are objecting to this change in the Administration’s policy.18

The Amended CFIUS Process

In the first session of the 110th Congress, Representative Maloney introduced H.R. 556, the

National Security Foreign Investment Reform and Strengthened Transparency Act of 2007, on

January 18, 2007. The measure was approved by the House Financial Services Committee on

February 13, 2007, with amendments, and was approved with additional amendments by the full

House on February 28, 2007, by a vote of 423 to 0. On June 13, 2007, Senator Dodd introduced

S. 1610, the Foreign Investment and National Security Act of 2007. On June 29, 2007, the Senate

adopted S. 1610 in lieu of H.R. 556 by unanimous consent. On July 11, 2007, the House accepted

the Senate’s version of H.R. 556 by a vote of 370-45 and sent the measure to the President, who

signed it on July 26, 2007. It is designated as P.L. 110-49. On January 23, 2008, President Bush

issued Executive Order 13456 implementing the law. The Executive Order makes a number of

substantive changes to the law. This report incorporates the changes made by this statute and by

the Executive Order.

P.L. 110-49 establishes CFIUS by statutory authority and has the Secretary of the Treasury serve

as the chairman of CFIUS. The measure follows the same pattern that was set by Executive Order

by allotting the committee 30 days to conduct a review, 45 days to conduct an investigation, and

15 days for the President to make his determination. The President retains his authority as the

only officer with the authority to suspend or prohibit mergers, acquisitions, and takeovers, and the

measure places additional requirements on firms that resubmitted a filing after previously

withdrawing a filing before a full review could be completed.

Over time, the three-step Exon-Florio process apparently had evolved to include an informal

stage of unspecified length that consisted of an unofficial CFIUS determination prior to the

formal filing with CFIUS. This type of informal review developed because it likely served the

interests of both CFIUS and the firms that were involved in an investment transaction. According

to Treasury Department officials, this informal contact enabled “CFIUS staff to identify potential

issues before the review process formally begins.”19 This informal process is likely to continue

under the provisions of P.L. 110-49.

Firms that are party to an investment transaction apparently have benefitted from this informal

review in a number of ways. For one, it allowed firms additional time to work out any national

security concerns privately with individual CFIUS members. Secondly, and perhaps more

importantly, it provided a process for firms to avoid risking potential negative publicity that could

arise if a transaction were to be blocked or otherwise labeled as impairing U.S. national security

Kirchgaessner, Stephanie, “US Threat to Reopen Terms of Lucent and Alcatel Deal Mergers,” Financial Times,

December 1, 2006. P. 19; Pelofsky, Jeremy, “Businesses Object to US move on foreign Investment,” Reuters News,

December 5, 2006.

Testimony of Robert Kimmett, Briefing on the Dubai Ports World Deal Before the Senate Armed Services

Committee, February 23, 2006.

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interests. For some firms, public knowledge of a CFIUS investigation has had a negative effect on

the value of the firm’s stock price.

After a lengthy review by CFIUS in 2000, Verio, Inc., a U.S. firm that operates websites for

businesses and provides internet services, was acquired by NTT Communications of Japan.

Verio’s stock price reportedly fell during the CFIUS investigation as a result of uncertainty in the

market about prospects for the transaction. The CFIUS review was instigated by the FBI, which

had expressed concerns during the initial review stage that the majority interest of the Japanese

government in NTT could give it access to information regarding wiretaps that were being

conducted on email and other Web-based traffic crossing Verio’s computer system. After

completing its investigation, however, CFIUS did not recommend that President Clinton block

the transaction.

The potentially negative publicity that can be associated with a CFIUS investigation of a

transaction apparently has had a major impact on the transactions CFIUS has investigated. Since

1990, nearly half of the transactions CFIUS investigated were terminated by the firms involved,

because the firms decided to withdraw from the transactions rather than face a negative

determination by CFIUS. In 2006, for instance, the prospect of a CFIUS investigation apparently

was the major reason the Israeli firm Check Point Software Technologies decided to call off its

proposed $225 million acquisition of Sourcefire, a U.S. firm specializing in security appliances

for protecting a corporation’s internal computer networks. In addition, the decision by the China

National Offshore Oil Company (CNOOC) to drop its proposed acquisition of Unocal oil

company in 2005 was partly due to concerns by CNOOC about an impending CFIUS

investigation of the transaction.

Between December 2009 and July 2010, two Chinese firms withdrew their proposed acquisitions

of U.S. firms due to opposition from at least one CFIUS agency. In December 2009, the Chinese

firm Northwest Nonferrous International Investment Corp., a subsidiary of China’s largest

aluminum producer, attempted to acquire U.S.-based Firstgold due to objections by the U.S.

Department of the Treasury that Firstgold had properties near sensitive military bases. In June

2010, China’s Tangshan Caofedian Investment Corporation withdrew its proposed acquisition of

Emcore, which makes components for fiber optics and solar panels due to “regulatory

concerns.”20 As previously indicated, in early 2011, CFIUS recommended that President Obama

block a proposed acquisition of 3Leaf Systems by Huawei Technologies unless Huawei agreed to

restructure its proposed acquisition. Initially, Huawei indicated that it would appeal its case to the

President, but eventually decided to drop its proposed acquisitions.

On September 29, 2012, President Obama used authority granted to him under the Exon-Florio

provision and P.L. 110-49 to direct the Chinese-owned Ralls Corporation to divest itself of four

wind turbine project companies in Boardman, Oregon, that were in or within the vicinity of

restricted air space at a Naval Weapons Systems Training Facility. Ralls Corporation had failed to

notify CFIUS of the acquisition in early 2012 and subsequent negotiations with CFIUS had failed

to devise a mitigation agreement that was satisfactory to both CFIUS and Ralls. Under the

investment, the Chinese firm planned to install wind turbines manufactured by Sany Corporation

in China. Ralls had filed a suit against CFIUS claiming that CFIUS had been arbitrary and

capricious in its treatment of Ralls. That suit, however, was made moot by President Obama’s

decision.

Kirchgaessner, Stephanie, “US Blocks China Fibre Optics Deal Over Security,” Financial Times, June 30, 2010.

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For CFIUS members, the informal process was beneficial because it gave them as much time as

they have felt was necessary to review a transaction without facing the time constraints that arise

under the formal CFIUS review process. This informal review likely also gave the CFIUS

members added time to negotiate with the firms involved in a transaction to restructure the

transaction in ways that could have addressed any potential security concerns or to develop other

types of conditions that members felt are appropriate in order to remove security concerns.

On January 23, 2008, President Bush issued Executive Order 13456, which implemented P.L.

110-49 and made various changes to the law. The Treasury Department finalized its regulations

implementing the law on November 21, 2008.21 Presently, the committee consists of nine

members, including the Secretaries of State, the Treasury, Defense, Homeland Security,

Commerce, and Energy; the Attorney General; the United States Trade Representative; and the

Director of the Office of Science and Technology.22 The Secretary of Labor and the Director of

National Intelligence serve as ex officio members of the committee.23 Executive Order 13456 also

added five more members to CFIUS in order to “observe and, as appropriate, participate in and

report to the President.” These members include the Director of the Office of Management and

Budget, the Chairman of the Council of Economic Advisors, The Assistant to the President for

National Security Affairs, the Assistant to the President for Economic Policy, and the Assistant to

the President for Homeland Security and Counterterrorism. The President can also appoint

temporary members to the committee as he determines.

The law now requires CFIUS to review all “covered” foreign investment transactions to

determine whether (1) a transaction threatens to impair the national security; (2) the foreign entity

is controlled by a foreign government; or (3) the transaction would result in control of any

“critical infrastructure that could impair the national security.” A covered foreign investment

transaction is defined as any merger, acquisition, or takeover which results in “foreign control of

any person engaged in interstate commerce in the United States.” As previously indicated, the

Treasury Department’s regulations exclude certain types of transactions from being classified as

covered transactions and, therefore, not subject to a CFIUS review. Such transactions are

specified as those that are undertaken “solely for the purpose of investment,” or an investment in

which the foreign investor has “no intention of determining or directing the basic business

decisions of the issuer.”

31 CFR Part 800, November 21, 2008; Federal Register, November 21, 2008, p. 70702.

The United States Trade Representative and the Director of the Office of Science and Technology were added

through E.O. 13456, issued January 23, 2008.

Executive Order 11858 of May 7, 1975, 40 F.R. 20263 established the committee with six members: the Secretaries

of State, the Treasury, Defense, Commerce, and the Assistant to the President for Economic Affairs, and the Executive

Director of the Council on International Economic Policy. Executive Order 12188, January 2, 1980, 45 F.R. 969, added

the United States Trade Representative and substituted the Chairman of the Council of Economic Advisors for the

Executive Director of the Council on International Economic Policy. Executive Order 12661, December 27, 1988, 54

F.R. 779, added the Attorney General and the Director of the Office of Management and Budget. Executive Order

12860, September 3, 1993, 58 F.R. 47201, added the Director of the Office of Science and Technology Policy, the

Assistant to the President for National Security Affairs, and the Assistant to the President for Economic Policy.

Executive Order 13286, Section 57, February 28, 2003, added the Secretary of Homeland Security. P.L. 110-49

reduced the membership of CFIUS to six Cabinet members and the Attorney General, it added the Secretary of Labor

and the Director of National Security as ex officio members, and removed seven White House appointees.

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Critical Infrastructure

A new element to the Exon-Florio process that was added by P.L. 110-49 is the addition of

“critical industries” and “homeland security” as broad categories of economic activity that could

be subject to a CFIUS national security review. Arguably, the events of September 11, 2001,

reshaped congressional attitudes toward the Exon-Florio provision. This change became apparent

in 2006 following the public disclosure that Dubai Ports World24 was attempting to purchase the

British-owned P&O Ports,25 with operations in various U.S. ports. After the September 11th

terrorist attacks Congress passed and President Bush signed the USA PATRIOT Act of 2001

(Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and

Obstruct Terrorism).26 In this act, Congress provided for special support for “critical industries,”

which it defined as:

systems and assets, whether physical or virtual, so vital to the United States that the

incapacity or destruction of such systems and assets would have a debilitating impact on

security, national economic security, national public health or safety, or any combination of

those matters.27

This broad definition is enhanced to some degree by other provisions of the act, which identify

certain sectors of the economy that are likely candidates for consideration as components of the

national critical infrastructure. These sectors include telecommunications, energy, financial

services, water, transportation sectors,28 and the “cyber and physical infrastructure services

critical to maintaining the national defense, continuity of government, economic prosperity, and

quality of life in the United States.”29 The following year, Congress adopted the language in the

Patriot Act on critical infrastructure into The Homeland Security Act of 2002.30

By adopting the terms “critical infrastructure” and “homeland security,” following the events of

September 11, 2001, Congress demonstrated that the attacks had fundamentally altered the way

many in Congress viewed the concept of national security. As a result, some policymakers in

Congress and elsewhere concluded that economic activities are a separately identifiable

component of national security and, therefore, should be protected from foreign investment that

transfers control to foreigners or shifts technological leadership abroad. This viewpoint, however,

was not shared by some policymakers within the Bush Administration, who argued that including

critical infrastructure and homeland security in P.L. 110-49 did not alter the overriding focus of

the Exon-Florio provision on investments that directly affect U.S. national defense security. In

P.L. 110-49, critical infrastructure is defined as “systems and assets, whether physical or virtual,

so vital to the United States that the incapacity or destruction of such systems or assets would

have a debilitating impact on national security.” As a result, Congress and the various

Dubai Ports World was created in November 2005 by integrating Dubai Ports Authority and Dubai Ports

International. It is one of the largest commercial port operators in the world with operations in the Middle East, India,

Europe, Asia, Latin America, the Caribbean, and North America.

Peninsular and Oriental Steam Company is a leading ports operator and transport company with operations in ports,

ferries, and property development. It operates container terminals and logistics operations in over 100 ports and has a

presence in 18 countries.

P.L. 107-56, Title X, §1014, October 26, 2001; 42 U.S.C. §5195c(e).

Ibid.

42 U.S.C. §5195c(b)(2).

42 U.S.C. §5195c(b)(3).

6 U.S.C. §101(4).

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administrations have sparred at times over transactions that CFIUS has approved over the

objections of various Members of Congress. Some of these cases include the following:

In May 2007, GE and Saudi Basic Industries Corporation (SABIC) announced that SABIC

would acquire GE Plastics for $11.6 billion. GE intended to use the proceeds from the sale to

buy back a large amount of its own stock to finance other projects and to improve its stock

price. SABIC, which is 70% owned by the Saudi Government, is the largest public company

in the Middle East and one of the 10 largest petrochemical manufacturers in the world. Some

in Congress objected to the acquisition because GE Plastics produces products that have

important defense applications, including such bullet resistant and bomb blast shielding

products as Armorgard, Suregard and Lexgard laminates. After a CFIUS review yielded no

opposition to the transaction, the acquisition was completed.

On November 27, 2007, Citigroup Inc. and the Abu Dhabi Investment Company (ADIC)

announced that ADIC would acquire 4.9% of Citigroup’s shares for an investment of $7.5

billion. The Abu Dhabi-Citigroup investment transaction involves a complex exchange of

cash and stock. For $7.5 billion, Citigroup will sell ADIA between 201 million and 235

million shares of Citigroup stock, depending on the value of Citigroup’s stock at the

predesignated time periods, at an interest rate of 11.00% on a complex hybrid security that is

comprised of mandatory convertible shares, which consist of a contract to purchase stock at

different purchase dates, and the payment of interest on each series of preferred securities

and a payment on the purchase contracts. The Abu Dhabi investment entity has stated that its

interests are purely economic and that it will have no role in the management or the

governance of Citigroup nor any presence on its board.31

On September 28, 2007, 3Com Corporation announced that it had agreed to be acquired by

Bain Capital Partners for $2.2 billion, or $5.30 per share. Bain Capital, is a privately-held

asset management and investment firm, and Huawei Technologies is the largest networking

and telecommunications equipment supplier in China. 3Com is a publicly held company that

specializes in networking equipment and in the Tipping Point network intrusion prevention

software. Such software is used by various U.S. defense firms to prevent outside groups from

accessing their confidential databases. In 2003, 3Com formed a joint venture with Huawei

Technologies, known as Huawei-3Com, to manufacture routers and switches for internet and

broadband uses. In November 2006, 3Com acquired the half of Huawei-3Com that it did not

own for $822 million. As part of the most recent transaction, affiliates of Huawei

Technologies would have acquired a minority interest in 3Com and would have become a

commercial and strategic partner of 3Com. On February 20, 2008, Bain Capital and Huawei

Technologies withdrew their offer to acquire 3Com, due to an inability to successfully

negotiate a mitigation agreement with members of CFIUS. Bain Capital and Huawei

reportedly will restructure the deal and resubmit it at a later date in 2008.32

Some policymakers also perceive greater risks to the economy rising from foreign investments in

which the foreign investor is owned or controlled by foreign governments as a result of the

terrorist attacks. The Dubai Ports World case, in particular, demonstrated that there was a

difference between the post-September 11 expectations held by many in Congress about the role

of foreign investment in the economy and of economic infrastructure issues as a component of

national security. For some Members of Congress, CFIUS has seemed out of touch with the postSeptember 11, 2001, view of national security, because it remains founded in the late 1980s

Timmons, Heather, and Julia Werdigier, “For Abu Dhabi and Citi, Credit Crisis Drove Deal,” The New York Times,

November 28, 2007.

“US Insiders Point to Bain Errors Over 3Com,” The Financial Times Limited, march 3, 2008.

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orientation of the Exon-Florio provision, which views national security primarily in terms of

national defense and downplays or even excludes a broader notion of economic national security.

Between December 2009 and July 2010, two Chinese firms withdrew their proposed acquisitions

of U.S. firms due to opposition from at least one CFIUS agency. In December 2009, the Chinese

firm Northwest Nonferrous International Investment Corp., a subsidiary of China’s largest

aluminum producer, attempted to acquire U.S.-based Firstgold due to objections by the U.S.

Department of the Treasury that Firstgold had properties near sensitive military bases. In June

2010, China’s Tangshan Caofedian Investment Corporation withdrew its proposed acquisition of

Emcore, which makes components for fiber optics and solar panels, due to “regulatory

concerns.”33

In 2012, two investments by Chinese firms attracted public and congressional attention: an

investment by the Chinese firm Sany Group in a wind farm project, known as the Butter Creek

Projects, in Oregon by Ralls Corp.; and Wanxiang’s acquisition of battery-maker A123 Systems

Inc. In March 2012, Ralls acquired the wind farm assets from Terna Energy SA, an Athens,

Greece-based company, without reporting the transaction to CFIUS. In June, 2012, CFIUs

contacted Ralls and requested the firm file a voluntary notification to have its investment

retroactively reviewed. After reviewing the acquisition, CFIUS recommended that Ralls stop

operations until a complete investigation could be completed as a result of objections by the U.S.

Navy over the placement of wind turbines by Ralls near or within restricted Naval Weapons

Systems Training Facility airspace where drones (unmanned aerial vehicles) are tested. After a

full investigation, CFIUS recommended that President Obama block the investment by ordering a

divestment of the transaction and imposed other requirements on Ralls to remove equipment it

had installed.

On September 28, 2012, President Obama issued an executive order34 that argued that there was

credible evidence that the Ralls acquisition threatened to impair U.S. national security and

ordered Ralls to divest itself of the Oregon wind farm project. In response, the Ralls Corporation

filed a suit on October 1, 2012, challenging the Obama Administration’s authority to block the

investment. On February 22, 2013, the United States District Court for the District of Columbia

dismissed the suit by ruling that the court lacked jurisdiction, since the CFIUS statute states that

the President’s decisions are not subject to judicial review, known as a finality provision.35 Ralls

argued that the President was authorized only to “suspend or prohibit” a transaction, not to order

a removal of equipment or a divesture.

The court ruled, however, that the statute grants the President broad authority by authorizing him

to take “such action for such time” as he considers appropriate. The suit also argued that Ralls

was treated unfairly under the Due Process Clause of the Fifth Amendment, but the court ruled

that it lacked jurisdiction on this motion as well by the CFIUS statute. Nevertheless, the court

indicated that its ruling would not prohibit Ralls’ due process claim to proceed. The Ralls’ due

process claim apparently focused on whether the President and/or CFIUS should be required to

Kirchgaessner, Stephanie, US Blocks China Fibre Optics Deal Over Security, Financial Times, June 30, 2010.

Order Signed by the President Regarding the Acquisition of Four U.S. Wind Farm Project Companies by Ralls

Corporation, The White House, September 28, 2012. Available at: http://www.whitehouse.gov/the-pressoffice/2012/09/28/order-signed-president-regarding-acquisition-four-us-wind-farm-project-c.

Ralls Corporation vs. Committee on Foreign Investment in the United States, et al., Civil Action Number 12-1513;

available at: https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2012cv1513-46.

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provide companies that proceed through the CFIUS review and investigation process with an

opportunity to review, respond to, and rebut any evidence used to make a Presidential

Determination. One issue involved in requiring access to such information is the fact that

CFIUS’s analysis for any particular transaction is based on classified information that generally is

not available to the public. Ralls has appealed the case.

In another case, China’s Wanxiang Group received approval in January 2013 from CFIUS to

acquire electric car battery maker A123 Systems. Wanxiang outbid other potential buyers by

offering to pay $257 million for the U.S. company. Some Members of Congress and the Strategic

Materials Advisory Council argued against the acquisitions on the grounds that it could

jeopardize the nation’s energy security. Others opposed the acquisition because A123 Systems

had received nearly $250 million in a federal grant to support clean energy, although half of the

grant was never released. A123 Systems manufactures lithium-ion batteries for Fisker

Automotive, BMW hybrid 3- and 5-series cars, and the all-electric Chevrolet Spark.

Procedures

According to the amended Exon-Florio provision, the President or any member of CFIUS can

initiate a review of an investment transaction in addition to a review that is initiated by the parties

to a transaction providing a formal notification. As amended, CFIUS has 30 days to review a

transaction to decide after it receives the initial formal notification by the parties to a merger,

acquisition, or a takeover, whether to investigate a case as a result of its determination that the

investment “threatens to impair the national security of the United States.” National security also

includes “those issues relating to ‘homeland security,’ including its application to critical

infrastructure.” In addition, CFIUS is required to conduct an investigation of a transaction if the

committee determines that the transaction would result in foreign control of any person engaged

in interstate commerce in the United States. During such a review, the members of CFIUS are

also required to consider the 12 factors that Congress has authored as a basis for assessing the

impact of the investment. If during this 30-day period all of the members of CFIUS conclude that

the investment does not threaten to impair the national security, the review is terminated. If,

however, at least one member of the committee determines that the investment does threaten to

impair the national security, CFIUS can proceed to a 45-day investigation.

During the 30-day review stage, the Director of National Intelligence, although not a member of

CFIUS, is required to carry out a thorough analysis of “any threat to the national security of the

United States” of any merger, acquisition, or takeover. This analysis is required to be completed

“within 20 days” of the receipt of a notification by CFIUS, but the statute directs that the DNI

must be given “adequate time,” presumably if this national security review cannot be completed

within the 20-day requirement. This analysis would include a request for information from the

Department of the Treasury’s Director of the Office of Foreign Assets Control and the Director of

the Financial Crimes Enforcement Network. In addition, the Director of National Intelligence is

required to seek and to incorporate the views of “all affected or appropriate” intelligence

agencies.

CFIUS is also required to review “covered” investment transactions in which the foreign entity is

owned or controlled by a foreign government, but the law provides an exception to this

requirement. A review is exempted if the Secretary of the Treasury and certain other specified

officials determine that the transaction in question will not impair the national security. It is

somewhat unclear, however, how this requirement is meshing with the established process. The

measure does not amend or alter the current statute in the area that has been the source of

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differences between CFIUS and Congress. In particular, the current statute states that the

President, and through him CFIUS, can use the Exon-Florio process “only if” he finds that there

is “credible evidence” that a foreign investment will impair national security. As a result, if

CFIUS determines, as was the case in the Dubai Ports transaction, that it does not have credible

evidence that an investment will impair the national security, then it argues that it is not required

to undertake a full 45-day investigation, even if the foreign entity is owned or controlled by a

foreign government.

During a review or an investigation, CFIUS and a designated lead agency have the authority to

negotiate, impose, or enforce any agreement or condition with the parties to a transaction in order

to mitigate any threat to the national security of the United States. Such agreements are to be

based on a “risk-based analysis” of the threat posed by the transaction. Also, if a notification of a

transaction is withdrawn before any review or investigation by CFIUS can be completed, the

amended law grants the committee the authority to take a number of actions. In particular, the

committee could develop (1) interim protections to address specific concerns about the

transaction pending a re-submission of a notice by the parties; (2) specific time frames for resubmitting the notice; and (3) a process for tracking any actions taken by any parties to the

transaction.

Presidential Authority

As previously indicated, P.L. 110-49 grants the President the authority to block proposed or

pending foreign “mergers, acquisitions, or takeovers” of “persons engaged in interstate commerce

in the United States” that threaten to impair the national security. Congress directed that before

this authority can be invoked the President must (1) conclude that other U.S. laws are inadequate

or inappropriate to protect the national security; and (2) have “credible evidence” that the foreign

investment will impair the national security. As a result, if CFIUS determines, as was the case in

the Dubai Ports transaction, that it does not have credible evidence that an investment will impair

the national security, then it argues that it is not required to undertake a full 45-day investigation,

even if the foreign entity is owned or controlled by a foreign government. After considering the

two conditions listed above (other laws are inadequate or inappropriate, and he has credible

evidence that a foreign transaction will impair national security), the President is granted almost

unlimited authority to take “such action for such time as the President considers appropriate

to suspend or prohibit any covered transaction that threatens to impair the national security

of the United States.” In addition, such determinations by the President are not subject to judicial

review, as was emphasized in the ruling by the U.S. District Court for the District of Columbia in

the case of Ralls vs. the Committee on Foreign Investment in the United States.

In addition, the President, acting through CFIUS, is required to conduct a National Security

investigation and to take any “necessary” actions as part of the 45-day investigation if the review

indicates that at least one of three conditions exists. These three conditions are (1) as a result of a

review of the transaction, CFIUS determines that the transactions threaten to impair the national

security of the United States and that the threat had not been mitigated during or prior to a review

of the transaction; (2) the foreign person is controlled by a foreign government; or (3) the

transactions would result in the control of any critical infrastructure by a foreign person, the

transactions could impair the national security, and that such impairment had not been mitigated.

At the conclusion of the investigation or the 45-day review period, whichever comes first, the

committee can decide to offer no recommendation or it can recommend that the President

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suspend or prohibit the investment. The President is under no obligation to follow the

recommendation of the committee to suspend or prohibit an investment.