Exon-Florio: two years later - 1988 amendment to the Defense Production Act - Legal Aspects of Exporting and Investing

Foreign investors in the United States enjoy one of the most liberal investment climates in the world. During the post-war era, successive U.S. Administrations, with the support of the Congress, have pursued an "open" investment policy and encouraged the free flow of capital in response to market forces, based on the conviction that access to market-driven capital - from whatever source - is the best guarantee of an efficient and healthy economy.

The United States does not "screen" inward investment as do many countries of the world. Instead, we rely exclusively on our fabric of domestic laws, both state and federal, to ensure that foreign investment does not assume forms inimical to our interests. For example, in cases where a foreign investment may raise competition concerns, we invoke our antitrust laws; if environmental concerns arise, they are dealt with under our network of statutes intended to protect against environmental degradation.

The United States does treat foreign direct investment differently from domestic investment in certain respects. The United States maintains certain investment reporting requirements that do not apply to domestic investors, and prohibits or limits foreign investment in certain economic sectors, such as the nuclear power-generating field and radio and TV broadcasting. However, these latter restraints are based strictly on national security concerns, and do not have a significant effect on the overall U.S. investment climate.

Partially as a result of our open investment policy, foreign direct investment in the United States increased substantially during the 1980s, both in absolute terms and compared to U.S. direct investment overseas. This increase raised concerns in some quarters that the United States was being "sold off" to foreign interests. Concern was particularly acute with respect to the high-technology sectors of the U.S economy, where continued U.S. leadership was perceived to be a risk.

"Exon-Florio" Provision Enacted in 1988

In 1988, the Congress reacted to these concerns by enacting the so-called "Exon-Florio" provision as a new section 721 of the Defense Production Act. Exon-Florio provides the President with authority to investigate proposed or pending mergers, acquisitions, and "takeovers" by or with foreign persons to determine their effects on national security. It also grants the President authority to suspend or block those transactions that lead to control of a domestic firm by a "foreign person" if he determines that the foreign acquiror might take actions that would threaten the national security. In some cases, the President can even order a completed transaction to be "undone"; that is, he can direct the acquiring party to divest itself of its investment.

Exon-Florio has now been part of the U.S. investment landscape for a little over two years. During this period, the Administration has implemented the provision in a manner that should provide ample assurance to current and potential foreign investors that the United States continues to encourage investment and to discourage discrimination against foreign investors. Let's look briefly at how Exon-Florio has been administered and what its implications are for a continued favorable climate for foreign direct investment in the United States.

Role of "CFIUS"

Exon-Florio grants to the President or his designee the authority to investigate proposed or pending transactions. The President has delegated this authority to the Committee on Foreign Investment in the United States ("CFIUS" or the "Committee"), an inter-agency committee first established in 1975 and chaired by the Secretary of the Treasury.

CFIUS reviews proposed transactions brought to its attention ("notified") either by one or more of the parties to the transaction or by one of the CFIUS member agencies themselves. Under Exon-Florio, notifications are strictly voluntary; however, to date every notification considered by the Committee has been by a party or parties to the transaction and not by any member agency. This may be due in part to the fact that, although Exon-Florio imposes no regulatory requirements on any investors, the President does have the authority under Exon-Florio to compel divestiture in certain circumstances of unnotified transactions, even if they are already completed.

A "clearance" by CFIUS of a proposed transaction thus provides assurance to the parties that the transaction will not subsequently be disturbed unless the Committee determines that its conclusions were based on false or misleading information provided by the parties.

Under the Presidential delegation, CFIUS enjoys broad discretion in its review and investigations of proposed transactions. Since the enactment of Exon-Florio, CFIUS has reviewed more than 500 proposed transactions. In addition, CFIUS has provided informal advice to many firms and their counsel on critical questions regarding whether notification of a particular transaction might be appropriate.

Of all the cases reviewed by CFIUS, only 12 have been found to merit a formal investigation. And in only one case has the Committee recommended to the President that the transaction be blocked (in that case, the transaction was completed during the CFIUS review). The President has adopted each of the Committee's recommendations over this period.

How Long Does an

Exon-Florio Review Take?

Congress intended that Exon-Florio not impose major delays on transactions leading to direct foreign investment. Under Exon-Florio, the entire review process must take place within a tight, 90-day schedule. An investigation of any transaction must commence within 30 days of receipt by CFIUS of notification, and the investigation itself must be completed within 45 days. The President must order whatever steps he deems appropriate within 15 days of the completion of the Committee's investigation. If the President fails to act, the proposed transaction can move forward to closing with the substantial assurance that the President will not intervene.

Thus, with the exception of those transactions that merit investigation, the Committee's reviews are normally completed within 30 days or less.

Proposed Regulations

Have Been Issued

CFIUS issued proposed regulations on July 14, 1989 (54 Fed. Reg. 29744) that contain a detailed explanation of CFIUS procedures and offer a variety of preliminary interpretations regarding the scope and requirements of the provision. A detailed look at these regulations is beyond the scope of this article, but some of the procedural and legal issues addressed by the proposed regulations, and discussed below, have generated significant public comment.

What is the Proper Scope of Presidential Authority Under Exon-Florio? Under Exon-Florio, the President may "take such action for such time as the President considers appropriate to suspend or prohibit any acquisition, merger, or takeover, of a person engaged in interstate commerce in the United States . . . by or with foreign persons so that such control will not threaten to impair the national security."

On its face, this language permits the President to take any action that he deems appropriate to suspend or prohibit any foreign merger, acquisition, or takeover if necessary to preserve national security.

However, elsewhere in the Exon-Florio provision, Congress created very precise preconditions that must be satisfied before the President can act.

a. Control. There must be a determination that the transaction will lead to "control" by the foreign acquiror. This is not always as easy as it may seem, since actual control may not always flow from theoretical control, or may control transfer immediately or even automatically under the terms of the parties' agreement.

b. Credible evidence. The President must find that there is "credible evidence" leading him to believe that the foreign interest exercising control "might take action" that "threatens to impair the national security."

This language does not provide a basis for the President to block a transaction merely because he is uneasy about the implications of that transaction for our national security. And it requires more than the likelihood of actions that may affect the national security in remote, speculative ways. In the context of an Exon-Florio review, this is a very difficult standard to meet.

c. Other Laws Not Adequate. The President must also determine that no other law (besides the International Emergency Economic Powers Act) provides adequate and appropriate authority to protect the national security in the case of the pending transaction. This is a particularly difficult finding for the President to make because of the great variety of federal laws enacted for just this purpose.

For example, what if the foreign interest is acquiring a company that has classified defense contracts? In such a case, mechanisms are available, under the Defense Industrial Security program, through which the new owner can be totally insulated from any management control over, or access to, information related to these contracts. Today, many U.S. firms that are directly or indirectly foreign-owned, engaged in classified defense contracts, work through mechanisms such as these.

What if the concern is that the foreign acquiror may simply "loot" a company of sensitive technology or technical data and use it to drive other U.S. firms from the marketplace? In this case, U.S. export control laws, designed to control the export of national security-sensitive goods and technology to overseas destinations, may apply. If the technology is truly critical to the national security, a validated license for the export of the goods or technology would be required, and could be denied in appropriate circumstances. In order to support action under Exon-Florio, the President would have to find that export controls could not effectively be employed, or that the acquiror is likely to engage in conduct intended deliberately to violate U.S. law.

What Types of Transactions are Appropriate for Notification Under Exon-Florio? The statistics speak for themselves: only a very small percentage of transactions notified to CFIUS will justify an Exon-Florio investigation. For the parties, a critical decision will in many instances be whether or not to go the trouble and expense of filing a notification with the Committee. Even in cases that may appear to have no national security implications, however, there may be some comfort available through the notification process that the proposed transaction will not be reopened by CFIUS after it is consummated.

The proposed regulations offer some guidance on the question of what transactions might be notified. For example, the proposed regulations make clear that a notification is not recommended if:

* the entire output of a company consists of products and/or services that bear no special relationship to the national security;

* the transaction does not involve the purchase of an ongoing, sustainable business; or

* the investment is for portfolio purposes only and could not result in the acquisition of "control."

On the other hand, the proposed regulations suggest that notification is appropriate where the party to be acquired:

* exports products that are subject to individual validated export licenses:

* is a supplier to any military service of the U.S. government;

* has classified government contracts with the U.S. government; or

* owns or deals in technology that has or could have military applications.

Between these two extremes lies large and uncertain terrain. The proposed regulations do not define the term "national security" (it is not defined in the statute). They provide little guidance regarding what types of technology and what industry sectors will trigger scrutiny by the Committee. These issues may receive clarification if, as anticipated, the Committee publishes its final regulations early in 1991.

What Does the Future Hold?

The Defense Production Act - of which Exon-Florio is a part - expired Oct. 20, 1990, and was not renewed by the 102nd Congress prior to its adjournment. It is anticipated that the 103rd Congress will move promptly to address extension of the Act early in 1991. In the meantime, CFIUS has announced that it would continue to receive voluntary notifications, and continues to handle its normal caseload. CFIUS also continues its development of final regulations to replace those issued in 1989. The final regulations will undoubtedly address many of the issues noted above, as well as others identified in the course of two years' experience with Exon-Florio.

For further information, contact the Office of the Staff Chairman, Committee on Foreign Investment in the United States, Room 5100, U.S. Department of the Treasury, Washington, D.C. 20220, tel. (202) 566-2386; or the Office of the Chief Counsel for International Commerce, Room 5882, U.S. Department of Commerce, Washington, D.C. 20230, tel. (202) 377-0937.

COPYRIGHT 1991 U.S. Government Printing Office
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