Congress
to shoot down unwanted bidders By Russell L Smith
WASHINGTON - The recent effort by the
China National Overseas Oil Company (CNOOC) to
acquire the US oil company Unocal unleashed what
can only be described as a firestorm of
opposition. The motivations for that opposition
were mixed, and included pure political efforts to
"kill" the CNOOC bid by rival Chevron, a strong
negative climate of opinion in Washington about
China, and perhaps some legitimate concerns about
the potential impact of such an acquisition on the
national security of the United States. However,
whatever the motivation, the opposition ultimately
manifested itself in a series of legislative
actions that focused on the laws and structures in
place for the United States government to screen
mergers, acquisitions and takeovers of US assets
by foreign entities. Although CNOOC ultimately
withdrew its bid for Unocal, the debate over the
extent and manner to which such foreign investment
should be regulated continues, and proposals that
Congress will be debating this fall could change
that regulation dramatically. If those changes
happen, the US could become much less attractive
for foreign investors, and the trade deficit
dollars that return to the US from foreign
investment could begin migrating to other, more
welcoming venues.
Under the so-called
"Exon-Florio" provision of US law, the president
has the authority to accept, reject, or require
changes in mergers, acquisitions or takeovers that
result in the ownership or control of US entities
by foreign persons. The standard by which the
president is to exercise that authority is based
on the potential impact of the proposed
transaction on the national security of the United
States. If the proposed transaction involves a
non-government foreign acquirer, then the
president is to judge whether the transaction
"will ... threaten to impair the national
security". If the proposed transaction involves an
acquisition by an entity that is controlled or
acting on behalf of a foreign government, the
standard for possible presidential action is
whether the transaction "could affect the national
security".
Once the president makes one of
the threshold determinations described above, the
Exon-Florio provision allows the president to act
only if he determines that there is no other
provision of US law that can address the national
security concerns raised by the transaction.
The president's determinations are to be
made on the basis of an investigation, which may
be conducted by officials that the president
designates to implement the law. The presidential
designee in the case of the Exon-Florio law is an
inter-agency group called the Committee on Foreign
Investment in the United States (CFIUS), which is
led by the Treasury Department and has 12
government agencies as regular members. Parties to
transactions subject to the Exon-Florio law may
voluntarily notify CFIUS of a proposed
transaction, or CFIUS may otherwise become aware
of such a transaction. CFIUS has 30 days to
conduct an initial review of a proposed
transaction. If during that review CFIUS
determines the transaction does not raise national
security concerns, the transaction is considered
"cleared".
If CFIUS determines that there
are national security questions that need further
review, CFIUS may undertake a formal
investigation, which may take up to an additional
45 days. Again, as a result of this investigation
CFIUS may clear the transaction, request that the
parties make changes in the terms, or indicate
that it has identified serious national security
concerns that warrant final review by the
president. Presidential review is limited to an
additional 15 days, at which time the president
must decide whether to reject, approve, or ask for
modifications in a proposed transaction.
Determinations made under Exon-Florio are not
reviewable in US courts.
The CFIUS review
process is strictly confidential, is designed to
impose minimal burdens on most transactions in
terms of delay (with a maximum review period of 90
days), and attempts, to the greatest extent
possible, to protect transactions from political
intervention. These attributes stem from the
concerns that were expressed at the time the
Exon-Florio law was enacted - that while it was
legitimate to put in place a national security
"screen" for foreign acquisitions of US assets,
that screen should recognize and respect the
historic US policy of welcoming foreign
investment, because it brings back to the United
States billions of dollars used to purchase
imported goods, and because it creates new
economic opportunities for American workers.
Moreover, limiting the criteria for possible
rejection to national security concerns reflects
the fact that the overwhelming volume of foreign
investment in the United States is benign, and
that transactions warranting scrutiny are
extraordinary and should be treated as such.
Finally, it was acknowledged that unless steps
were taken to isolate the process from political
pressures, the United States would lose
substantial credibility in its efforts to create
an open investment climate for American companies
in other countries.
Since the enactment of
the Exon-Florio law in 1988, about 1,500
transactions have been notified to CFIUS. Of
those, 25 have been subject to a 45-day
investigation, and one has been referred to the
president and subsequently rejected. Until the
CNOOC bid, while some critics had argued that this
record indicated that the CFIUS process was
inadequate to "catch" potentially problematic
acquisitions and needed strengthening, they
offered no evidence of any transaction that had in
fact threatened the national security of the
United States, however that term might be defined.
Those involved in the CFIUS process could testify
to the fact that the agencies involved have used
the initial 30-day review to examine proposed
transactions rigorously to assure that national
security issues have been addressed under a
variety of other US authorities, and have not
hesitated to "stop the clock" by asserting a lack
of complete documentation until concerns could be
addressed.
Despite the substantially
positive record, the CNOOC bid has now opened the
CFIUS process to an organized and bipartisan
congressional effort that may result in very
dramatic and potentially harmful changes. Goaded
by a contingent of former US government officials,
union leaders, and business sectors threatened by
Chinese competition, key members of Congress have
offered amendments to the Exon-Florio law as part
of the debate on the Defense Appropriations Act,
which Congress will be considering this fall.
Possible changes in the law are:
1. Extending the period
of CFIUS initial review to 60 days from the
current 30. 2. Requiring
CFIUS to send the results of every investigation
to the president, and to the Senate Committee on
Banking, Housing and Urban Affairs and the House
Committee on Financial Services.
3. Allowing the chairmen of
those committees to request that CFIUS investigate
a transaction involving an entity controlled by a
foreign government. 4.
Requiring, in every case in which a transaction is
not suspended or prohibited, that the transaction
be reviewed by Congress before it can be
consummated. Congress would be given up to 40
"legislative days" to pass a resolution of
disapproval of a transaction, which the president
could sign or veto. The reference to "legislative
days" opens a transaction to long and uncertain
delays since legislative days are only those days
on which Congress is in session. If a transaction
was under congressional review at the time
Congress adjourned for the year, it could be held
up for up to three months. 5.
Adding "energy security" and "economic security"
to the areas to be investigated and evaluated in
reviewing transactions. 6.
Changing the coordinating agency from the Treasury
to the Commerce Department.
Members of
Congress also continue to warn that China's
objectives in investing in the United States
should be uniformly suspect, and to imply that, in
general, US investment policy should be hostile to
China. If the proposals which are quite clearly
and unapologetically intended to politicize the
foreign investment review process and weaken
confidentiality protections are enacted into law,
the predictable consequence will be that foreign
investors, and most certainly not just Chinese
investors, will rightly see the United States as
no longer committed to an open investment climate.
They will feel much more free to use their dollars
to buy assets in other countries where the rules
are similar to the current US law. It is worth
noting in this regard that China is attracting
very high levels of foreign direct and portfolio
investment. and is carefully liberalizing its
investment regulation.
The argument that
"Unocal could not buy CNOOC" may or may not be
true, but recent news reports indicate that Yahoo
was quite free to buy a 40% stake in the Chinese
web company Alibaba.com, and to enter into a joint
operating arrangement for its Chinese operations.
If the Exon-Florio law is changed in the ways now
being proposed, a similar investment by
Alibaba.com in Yahoo might be considered "off
limits". Americans could be faced with the
criticism that US investment rules are more
exclusionary than those of China. If that becomes
the case, the criticism will not come solely from
China - it will be widespread, and foreign
investors will vote with their feet.
Russell L Smith is an attorney
with Willkie Farr & Gallagher LLP and a
contributing writer to the KWR International
Advisor.
(Posted with permission from
KWR International, Inc,
(KWR), a consulting firm specializing in the
delivery of research, communications and
advisory services.)
