CFIUS Report

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March 31 2010 Since the enactment of the Foreign Investment and National Security Act of 2007 (FINSA), the committee on Foreign Investment in the United States (CFIUS) has published annual reports summarizing CFIUS notices, reviews and investigations and mitigation arrangements addressed in the preceding years. Ostensibly voluntary, CFIUS reviews are effectively mandatory for acquisitions of companies holding security clearances, and are strongly advised for any transaction involving:

* defence, homeland security, energy and intelligence contractors;
* companies engaged in the manufacture or distribution of defense or dual use technologies; and
* companies supporting "critical infrastructure".

Formal CFIUS reviews generally run for 30 days, but investigations can take up to an additional 45 days. In extraordinary cases, the president can block or unwind transactions that threaten national security.

The report provides valuable insight into foreign investment in the United States. The unclassified version of the first annual report was made publicly available in 2008. The second annual report, a summary of 2008 reviews, was declassified and published at the end of 2009 and found the following:

* There were 111 CFIUS reviews in 2006, 138 in 2007 and 155 in 2008. Foreign investment in the US manufacturing sector accounted for almost half of the transactions reviewed from 2006 to 2008, while another third involved the information sector. However, 2008 saw a dramatic drop in the information sector's share of CFIUS case reviews, to 27% of all transactions compared to 42% in 2007. Manufacturing acquisitions remained strong throughout.
* The United Kingdom continues to be the most frequent foreign investor represented in CFIUS reviews, with a total of 106 transactions from 2006 to 2008. Canada maintains a distant second place with 35 reported transactions. However, Canada's 2008 ranking masks a sharp decline - from 21 transactions in 2007 to only six (plus one transaction shared with Singapore) in 2008.
* New statutory requirements that mandate investigations, implemented under FINSA, have fuelled an upward trend in investigations. The number leaped from seven and six investigations in 2006 and 2007, respectively, to 23 investigations in 2008.
* Because parties are given multiple opportunities to amend or withdraw transactions, the impact of the CFIUS process has never been accurately measured by presidentially prohibited transactions. Most cases never get that far and the mere existence of the CFIUS process likely discourages most problematic investments. In 2008 the president did not prohibit any noticed transaction, although two were presented for consideration. In 2008, however, 23 of the 155 notices were withdrawn from CFIUS review. Of those cases, 20 were resubmitted and three were permanently withdrawn. China and Russia, while only minor participants thus far in the CFIUS process, appeared in more reviews in 2008. CFIUS reviewed no Chinese transactions in 2006, but looked at three in 2007 and six in 2008. Reviews of Russian acquisitions increased from two in 2006 and none in 2007 to eight transactions in 2008.
* CFIUS notes that although several investors from the same country may turn up in CFIUS reviews, there is no apparent pattern to such investments. Instead, the range of investments has been diverse.
* In 2008, by executive order, President Bush restricted CFIUS's ability to add terms and conditions to approvals. Under the order such mitigation agreements may be required only where no other law is adequate to address national security concerns. The order, which remains in effect, has greatly reduced the number of mitigation agreements: CFIUS agencies negotiated only two mitigation agreements in 2008, compared to 14 in 2007 and 15 in 2006.
* FINSA requires CFIUS to advise Congress if it finds a coordinated effort by foreign governments or companies to acquire US companies producing 'critical technologies', a term that includes:
*
o defence articles and services regulated by the US Munitions List;
o the Commerce Control List;
o certain nuclear technologies; and
o various toxins and agents.

CFIUS found no such effort, but did warn against industrial espionage, asserting that it is "highly likely" that nations will employ various tactics to obtain US critical technologies.

* Among acquisitions of critical technology companies, the United Kingdom had the largest number in 2008 (49), followed by France (15), Israel (13), Canada (12) and India (11). The IT sector accounted for more than half of India's critical technology acquisitions and all but one of Israel's acquisitions. Only the United Kingdom exceeded Israel's IT acquisitions.
* As required by FINSA, CFIUS also reported on foreign direct investment by any country that boycotts Israel. According to the report, between October 2007 and December 2008, such direct investment represented only a small portion of the more than $400 billion in US-foreign M&A. Among investing nations that participate in the boycott of Israel - a list which includes Kuwait, Lebanon, Qatar and Saudi Arabia - the United Arab Emirates was involved in 21 of 27 reported transactions.