What is CFIUS?
The Committee on Foreign Investment in the United States (CFIUS) was established in 1975, and is an interagency committee which reviews the national security implications of foreign investment in the economy. It is most recently well known for its role in the proposed acquisition of commercial operations at six U.S. ports by Dubai Ports World in 2006. The organization’s mandate includes: “(1) arrang[ing] for the preparation of analyses of trends and significant developments in foreign investments in the United States; (2) provid[ing] guidance on arrangements with foreign governments for advance consultations on prospective major foreign governmental investments in the United States; (3) review[ing] investments in the United States which, in the judgment of the Committee, might have major implications for United States national interests; and (4) consider[ing] proposals for new legislation or regulations relating to foreign investment as may appear necessary.” An important change to the CFIUS mandate arose when “in 1988, amid concerns over foreign acquisition of certain types of U.S. firms, particularly by Japanese firms, Congress approved the Exon-Florio provision of the Defense Production Act.”
Exon-Florio 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.” The Exon-Florio provision was Congress’ resolution to concerns surrounding foreign takeovers of U.S. firms. Alternatively, foreign companies “are also constrained by legislation that bars foreign direct investment in such industries as maritime, aircraft, banking, resources and power.” The Exon-Florio provision was amended by the Byrd amendment in 1992, “which required CFIUS to investigate proposed mergers, acquisitions, or takeovers” in cases where two criterion 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.”
Another interesting characteristic of CFIUS is that it reflects a voluntary system for foreign companies to have their proposed mergers and acquisitions reviewed – although its ‘voluntary’ nature is considered debatable in some circles.
Of note is the following observation about CFIUS: “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 a very interesting move, on February 12, 2011, the People’s Republic of China issued the “Notice on Establishing a Security Review System for Mergers and Acquisitions of Chinese Enterprises by Foreign Investors,” under which acquisitions involving Chinese assets can be reviewed by a ministerial-level review committee on national security grounds. Sectors as broad-ranging as military-related activities, key agricultural products, key energy or natural resources, key infrastructure and transportation services, key technologies and key equipment manufacturing activities could all trigger a review, and if deemed to raise national security concerns, can be rejected. Any deal that proceeds without the relevant Chinese government approval may be unwound on national security grounds.”
The Notice establishes a national security review mechanism for acquisitions of Chinese companies by foreign investors that raise national security concerns. It came into effect on March 5, 2011. The date of this new policy may reflect deeper diplomatic fissures between the United States and China because, just one day earlier, CFIUS advised a Chinese company, Huawei to withdraw its proposed acquisition of 3Leaf Systems. Further, the Ministry of Commerce of the People’s Republic of China (MOFCOM) publicly criticized the CFIUS decision, a marked departure from prior official responses. A potentially problematic area for U.S. companies and investors wanting to expand their businesses in China stems from the lack of a definition of the word “national security” and “key sector” in the document.
Moving Forward: Learning From Past Problems, Clarifying the Mission
As some of the above-referenced current events show, the Chinese response to CFIUS has many of the same ambiguities that the U.S. version continues to have.
Greater clarification on the meaning of key terms is a starting point for improving both trade mechanisms for foreign investment. Clarifying the scope of both programs will strengthen the purpose of each. The fact that China felt the need to codify a program similar to CFIUS serves as a reminder that trade barriers are a very relevant and important topic for national security law.
 Id. at 1.
 Id. at 2.
 Id. at 3.
 Id. at 5.
 Id. at 6.
 Id. at 8.
 China and CFIUS: a double edged sword, Clifford Chance, http://www.cliffordchance.com/publicationviews/publications/2011/03/china_and_cfius_adouble-edgedsword.html at 1.
 China launches national security review system for foreign M&A, Clifford Chance, http://www.cliffordchance.com/publicationviews/publications/2011/02/china_launches_nationalsecurityreviewsyste.html at 1.
 Id. at 2.
 Id. at 2-3.