Foreign Investment and National Security Act of 2007

1. Foreign Investment and National Security Act of 2007 Phil Baxter Chris Pelkey James Turner Law, National Security & Public Policy George Mason University, Spring 2008 Professor Malawer

2. Does the Foreign Investment & Security Act of 2007 [“FINSA”] strike an appropriate balance between: the economic benefits of foreign investment in the United States and national security concerns about technology and critical infrastructure? Issue:

3. Big Business

4. FDI

5. Foreign Acquisitions

6. Chronology • 1950……. Defense Production Act of 1950 • 1975…….“CFIUS” -- Committee on Foreign Investment in the United States • 1980’s……Foreign Investment jumps • 1988……..Exon-Florio Amendment of 1988 • 1992……..Byrd Amendment • 2001……..Sept 11 attack • 2006……..Dubai Ports Controversy • 2007……..FINSA

7. 110th Congress 1/18/07 -- HR 556 introduced by Rep Carolyn Maloney (D.NY) with 58 bipartisan cosponsors 2/28/07 -- passed House 423-0 6/29/07 -- passed Senate passed by unanimous consent [S1610 Sen. Dodd (R. CT)] 7/26/07 -- Signed by President 10/24/07 -- Effective Date

8. Treasury – Chair Homeland Security Commerce Defense State Justice Executive Office of President -- Management & Budget -- Trade Representative -- Council of Economic Advisors -- Office of Science & Technology Policy -- National Security Council -- National Economic Council Treasury -- Chair (new Assist Secty Created) Homeland Security Commerce Defense State Justice Energy Labor (non-voting) Director Nat’l Intelligence (non-voting) Others, Case by Case -- per President CFIUS – Composition of the Committee -- Pre FINSA-- -- FINSA 2007 --

9. Key Text • In General -- … with respect to any covered transaction, the President, acting through the committee (i) shall review the covered transaction to determine the effects of the transaction on the national security of the United States and (ii) shall consider the factors specified… • Control by Foreign Government – If the Committee determines that the covered transaction is a foreign government-controlled transaction, the Committee shall conduct an investigation… • “Covered Transaction” means any merger, acquisition, or takeover that is proposed … by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States

10. Factors • Exon-Florio 1. Domestic production needed for projected national defense requirements, 2. The capability and capacity of domestic industries to meet national defense requirements, including the availability of human resources, products, technology, materials and other supplies and services, 3. The control of domestic industries and commercial activity by foreign citizens as it affects the capability and capacity of the United States to meet the requirements of national security 4. The potential effects of the proposed or pending transaction on sales of military goods, equipment, or technology to any country identified [as supporting terrorism, proliferating missiles or chemical/biological under designated statutes.] 5. The potential effects of the proposed or pending transaction on United States international technological leadership in areas affecting United States national security

11. Factors – additions • FINSA 5.– addition ..posing a potential regional military threat to US interests 6.The potential national security-related effects on United States critical infrastructure, including major energy assets, 7.The potential national security-related effects on United States critical technologies 8.Whether the covered transaction is a foreign government-controlled transaction [as defined] 9.[the foreign country’s a.) adherence to arms control and non-proliferation treaties and b.) cooperation in counterterrorism, c.) risk of transshipment or diversion] 10.The long term projection of United States requirements for sources of energy and other critical resources, 11. Other factors, as President and Committee determine

12. CFIUS Process Committee Review Withdrawal Approval – Mitigation Committee Investigation Reporting to Congress Presidential Decision

13. CFIUS Process, Expanded

14. CFIUS Actions

15. Totals through 2005 Accessibility of Data and Confidentiality The one Presidential Denial – Undoing a settled Merger – Pres. George H.W. Bush 1990 -- China and Seattle based MAMCO, Inc. metal fabricator for aircraft Approval -- Lucent acquired by French Alcatel 2006

16. 2007 FINSA Features • Process now based on Statute • Additional Reporting to Congress • “Critical Infrastructure” added • Mandatory “investigation” of “foreign government controlled transactions” [yet, exception]

17. Economic Considerations • CFIUS and the Economy • Past Experiences • CNOOC • Dubai Port Deal • 3Com/China • FINSA Changes and Economic Concerns • Issue Group Positions

18. Sovereign Wealth Funds What are they? What role do they play on US economy? Threat to National Security? Future of SWFs

19. Economic Policy Implications Increased risk and uncertainty for investing companies/governments Global repercussions

20. Foreign Relations How will SWFs and CFIUS affect foreign relations? National Security vs. Foreign Affairs Global development of other “CFIUS” groups

21. National Security - Pros of FINSA • FINSA provides broader oversight into transactions and M&A • Tighter grip on security • Greater ability to probe foreign interests • Evergreen clause

22. National Security - Cons of FINSA • Difficult to maintain • Not enough structure for compliance review • Increased Congressional oversight • Political vendettas • Subject to 3rd party interests

23. Policy recommendations • More specific guidelines for the involved parties to follow • Limit the ability of Congress to politicize the transactions • Not use as an excuse for protectionism • Keep eye on global retaliation

24. 109th Congress – Policy Alternatives • --CFIUS should be a part of Dept of Homland Security, not under Treasury's Supervision • --Congress, by joint resolution, should be able to block deals even if the President has approved • --Specified Congressional Committee Chairs should be able to require an "investigation" even if the CFIUS doesn't think so. • -- "Economic Security" of US should be a factor considered in national security • --Certain foreign transactions (with foreign gov’t control) should bepresumed disallowed until a finding of safety is made

25. 109th Congress – Policy Alternatives (cont.) • -- Create a defined list of critical infrastructure and only a narrowlydefined type of U.S. Corporation (with US officers and US majorityshareholders) could own them • --Require foreign corporations involved in certain transactions to create U.S. subsidiaries with U.S. controlling officers • --Greater Role for DNI such as having to actually certify the transaction is safe. • -- More frequent and more detailed reporting by President to Congress

26. References Dion, Maeve. "Foreign Direct Investment in Critical Infrastructure: An Update on the New CFIUS Law." The CIP Report [Critical Infrastructure Protection Program, George Mason University Law School] vol. 6, no. 7 (January 2008): 6-21 [available from http://cipp.gmu.edu/archive/cip_report_6.7_REVISED.pdf ]. Exon-Florio Amendment. codified at 50 App. U.S.C. §2170 (2006) Foreign Investment and National Security Act of 2007. Pub. Law 110-49, 121 Stat 246, July 27, 2007 [50 App U.S.C.A. §2170 (October 2007 Pamphlet No. 2]. Jackson, James K. "The Exon-Florio National Test for Foreign Investment." In CRS Report for Congress. Washington, DC: Congressional Research Service, 2006. [available from http://digital.library.unt.edu/govdocs/crs/permalink/meta-crs-9704:1 ] Larson, Alan P and David M. Marchick. "Foreign Investment and National Security; Getting the Balance Right." In Council Special Report No 18, Appendix A. Washington, DC: Council on Foreign Relations, 2006. Lee, Ronald D. "The Dog Doesn't Bark: CFIUS, the National Security Guard Dog with Teeth." The M & A Lawyer, February 2005, 5. Malawer, Stuart S. "Global Mergers and National Security." Virginia Lawyer, December 2006, 34-39. Nibley, Stuart B. "Companies Called Up." Legal Times, April 1, 2002. Thomas Library of Congress, 2008 [cited March 1, 2008. Available from http://thomas.loc.gov/cgi-bin/bdquery/z?d110:HR00556:@@@R|TOM:/bss/d110query.html| Youngstown Sheet & Tube Co. v. Sawyer, 343 U.S. 579 (1950). Hall, Jessica and Sophie Taylor, “Bain, 3Com deal stalled on Chinese stake.” Washington Post, February 21, 2008. McCormick, David H. “Wealth Funds and the U.S. Economy.” Testimony before Committee on Senate Joint Economic, February 13, 2008. Davis, Bob. “Americans see Little to Like in Sovereign-Wealth Funds.” The Wall Street Journal, February 21, 2008.

27. Questions?