George Grammas of Squire, Sanders & Dempsey reviews the recent legislation reforming the process by which the U.S. reviews foreign investments for their national security implications: United States: New Law Enhances Scrutiny of Foreign Acquisitions of US Critical Infrastructure (October 24, 2007).
Critical infrastructure ("telecommunications, energy, transportation") became a review concern after 9-11, but in a hap-hazard sort of way:
Neither the Exon-Florio [the statute setting up the review process - Ben] provision nor the regulations defined "national security" or precisely described the types of transactions that are within the provision’s scope. While this scope originally was interpreted narrowly as relating only to defense-industry transactions, the scope has broadened, in the years following the September 11, 2001 terrorist attacks and the addition of the Department of Homeland Security as a CFIUS [Committee on Foreign Investment in the US - the interdepartmental committee that does the security reviews - Ben] member, to include transactions involving "critical infrastructure," although this term also has not been clearly defined.
The lack of a definition created uncertainty which led to various problems:
This has created uncertainty for businesses involved in foreign acquisitions with only indirect connections to national security. This uncertainty increased further after the failed Dubai Ports World transaction in 2005-2006, when political controversy and pressure from lawmakers caused CFIUS to adopt a more cautious approach, leading to more frequent investigations, required mitigation measures and withdrawn transactions. CFIUS also experienced a dramatic increase in notified transactions, as foreign investors responded to the uncertainty by reporting transactions that would not previously have been considered to be within the scope of Exon-Florio. As a result, pressure grew to reform the process, both from legislators concerned with safeguarding national security and from foreign investors seeking greater certainty in the process.
The new law provides some more clarity, but leaves a lot for explication in agency rulemaking:
The law formalizes the existing CFIUS practice of considering "critical infrastructure" transactions to be within the scope of its review. While the bill itself includes only a brief definition of "critical infrastructure," it calls for a more detailed definition in forthcoming regulations, as well as published guidance from CFIUS on the types of transactions that have raised national security considerations....
FINSA [the Foreign Investment and National Security Act of 2007, the reform legislation - Ben ] will take effect in late October 2007, 90 days following its enactment. Implementation regulations and published guidance on the types of transactions considered to have national security implications are called for within 180 days of the effective date, in April 2008. The regulations and published guidance should provide a more detailed definition of "critical infrastructure" and greater certainty regarding the types of transactions that could be viewed as presenting a threat to national security.
Treasury officials must be hard at work drafting a proposed rule for public comment.
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