CFIUS Guidance Alert

December 18, 2008

On December 8, 2008, the U.S. Department of the Treasury published in the Federal Register a notice providing guidance on the newly implemented amendment to Section 721 of the Defense Production Act of 1950.  The guidance aims to clarify certain aspects of Section 721, which was modified by the Foreign Investment and National Security Act of 2007 (FINSA).  FINSA was signed into law on July 26, 2007, and became effective on October 24, 2007.  Final regulations implementing FINSA were published on November 14, 2008.

Section 721 authorizes the President to suspend or prohibit a transaction, by or with any foreign person, that may result in control of a U.S. business by a foreign person and that may threaten to impair national security.  By executive order, the President’s authority is delegated to the Committee on Foreign Investment in the United States (CFIUS), an interagency body chaired by the Secretary of the Treasury.  CFIUS reviews transactions it believes may raise national security concerns.  A party to a transaction that could raise national security considerations can make a voluntary filing to CFIUS and thereby gain "safe harbor" status for the transaction. 

Treasury’s guidance attempts to clarify the scope of the national security interests addressed by Section 721, and the factors that give rise to national security concerns.  It states that "CFIUS focuses solely on any genuine national security concerns raised by a covered transaction, not on other national interests."  It describes the law’s requirements as demonstrating a "focus on national security alone."  This emphasis appears specifically to exclude economic security or industrial policy aims.  

Noting that the statute does not define "national security," the guidance attempts better to describe how the law addresses national security interests.  Referring to the national security factors listed in the statute (Section 721(f)), the guidance defines a "national security risk" as "a function of the interaction between threat and vulnerability, in light of the potential consequences of that interaction for U.S. national security."  "National security considerations" are facts that "have potential national security implications."  These facts are evaluated on a case-by-case basis.  A national security consideration may give rise to a finding of a national security risk.  Treasury emphasizes throughout its guidance, however, that the finding of a national security consideration does not also mean finding a national security risk.

The guidance addresses four major categories of national security factors: the nature of the U.S. business, the nature of the foreign person, foreign government control, and corporate reorganization.  The guidance illustrates in broad terms specific factors that it has found material to finding a national security consideration. 

Regarding the nature of the U.S. business, Treasury identifies government contractors as a distinct category of businesses drawing CFIUS attention, including in circumstances involving sole-source arrangements and where companies have access to classified information.  The guidance highlights contractors’ work related to the defense, security, and "national security-related law enforcement sectors," singling out "weapons and munitions manufacturing, aerospace and radar systems."  However, it also notes that CFIUS has reviewed deals related to a broad range of goods and services affecting the government’s national security-related functions.  The guidance cites involvement in the energy sector, whether related to government contracting or not, as a factor.  Such work includes natural resource exploitation and transportation, power generation, and power distribution.  Non-energy related factors include involvement in maritime shipping, port terminal operation, and aviation maintenance.  Treasury also cites transactions that could affect the U.S. financial system. 

The guidance notes the statute’s special emphasis on factors related to "critical infrastructure."  However, it provides no examples of such factors, except to highlight infrastructure related to "major energy assets."  Treasury sets out a number of examples of advanced technology-related factors that have presented national security considerations.  These include involvement in semiconductor design and production, dual-use technology, cryptography and data protection, and internet security.  Treasury also notes that a "significant portion" of transactions reviewed for technological content are related to goods or services subject to U.S. export controls. 

Regarding the foreign person acquiring control, the guidance focuses on the extent of a foreign government’s control over that person.  Treasury noted that CFIUS also has looked into a foreign acquirer’s record on issues that could affect U.S. national security, for example, an intention to terminate the U.S. business’ government contracts.   CFIUS also examines the foreign person’s government’s record on nonproliferation and other national security-related issues.  The guidance lays out a number of considerations specific to foreign government-controlled transactions.  The types of government entities potentially creating national security considerations include government pension funds and sovereign wealth funds.  In guidance aimed at government controlled investment funds, Treasury states that CFIUS considers whether a fund’s investment management priorities are based "solely on commercial grounds" and the fund’s overall independence from its parent government.  CFIUS further considers whether the fund discloses to the public its investment activities, investment objectives, finances, and regulatory compliance record.

Treasury also addresses corporate reorganizations as a category of national security concerns.  However, the guidance simply notes that concerns would arise only in an "exceptional case," and only if the change gave rise to new relevant national security factors.  The guidance provides no examples of factors giving rise to an exceptional case, except to describe the general circumstance in which a reorganization might raise a national security concern, that is, where control of a U.S. business passes from one foreign person to the person’s foreign affiliate, and the succeeding person introduces new national security considerations. 

The discussion of the CFIUS review process emphasizes that parties filing a voluntary notice should provide CFIUS with the information that would be necessary to complete a review.  It also reminds filers to provide information relevant to other applicable national security-related regulatory authorities, e.g., export control regulations. 

Though Treasury did not address Congress’ role in the CFIUS process, attention should also be given to whether a transaction will attract Congressional interest.  Given the scope of Section 721 such interest could come from several committees, including those related banking and financial services, homeland security, and the military.  FINSA reinforced Congressional oversight in the review process.  CFIUS must provide an annual report to Congress on its work, detailing the transactions it has reviewed, analyzing foreign direct investment and critical technologies, and reporting on foreign direct investment from certain countries.  When CFIUS concludes an action, it must certify to Congress that the transaction creates no unresolved national security concerns. 

Gibson, Dunn & Crutcher LLP

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