National Security Implications on Foreign Investment in ... · 3 3 1. Introduction- national...
Transcript of National Security Implications on Foreign Investment in ... · 3 3 1. Introduction- national...
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National Security Implications on Foreign Investment in the United States,
Europe and Asia
By Giorgi Khurodze [email protected]
July 11, 2008 This is a Bucerius/WHU MLB thesis
12.196 words (excluding footnotes)
Supervisor 1: James J. Hanks, Jr
Supervisor 2: William M. Jack
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1. Introduction______________________________________________________3-5 2. Foreign investment review process in United State_________________________5-8
2.1. Main Functions of the CFIUS_________________________________________8-11
2.2. The CFIUS Review Process__________________________________________11-13
2.3. Procedural steps for the CFIUS notification______________________________13-14
2.4. Information Required from the “US Person“_______________________________14-15
2.5. Information Required from “Foreign Persons “______________________________12-13
3. FINSA and New Procedures___________________________________________15
3.1. Risk Mitigation ___________________________________________________16-17
3.2. Reports to Congress _______________________________________________17-19
4. Recently Proposed Regulation on CFIUS_________________________________19
4.1 “Control” by foreign person _________________________________________19-20
4.2. Additional Content In CFIUS Notification Letter________________________20-21
5. National Security and Foreign Investment in Germany______________________22
5.1. Law Governing Foreign Investment in Germany_________________________22-23
5.2 Foreign Investment Review Process in Germany__________________________23-26
6. National Security influence on Foreign Investment in France__________________27
6.1. The law regulating Foreign Direct Investment in France_____________________27-28
6.2. Foreign investment review process in France_______________________________29-32
7. Foreign Direct Investment and National Security Concerns in China_____________32-33
7.1. Laws Applicable For FDI Review Process in China____________________________33
7.1.1. MOFCOM Foreign Investment Regulation__________________________________33-34
7.1.2. Catalogue for the Guidance of Foreign Invested Enterprises_______________________34
7.1.3. Anti-Monopoly law____________________________________________________34-35
7.2. National Security and Foreign Investment Review Process in China_______________35-37
7.3. Negotiations between U.S. and China on Bilateral Investment Treaty______________37-38
8.Conclusion_____________________________________________________38-40
Bibliography_____________________________________________________41-44
Affirmation______________________________________________________45
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1. Introduction- national security impact on foreign investment in United States, Germany,
France and China
In recent years many countries have implemented laws and regulations concerning the
implications of foreign investment on national security. Those laws and regulations are designed
to restrict certain types of investments that might negatively influence a country’s national
security. Approaches towards national security are different in each country but most laws have a
common opinion that foreign investments in the defense industry, energy sector and investment
by state controlled companies impairs the national security. This paper analyzes laws and
policies of the United States, France, Germany and China regarding how national security
impacts on foreign investment.
The United States with its broadly regulated and newly presented foreign investment policies
will be the core subject of the paper. A substantial part of the topic will be concentrated on legal
requirements and recently adopted changes implemented in the United States after controversies
relating to two foreign transactions in 2006. Those two transactions the acquisition effort of
United States Oil Company (Unocal) by China National Offshore Oil Company (“CNOOC”)
which was owned by Chinese government, and also Dubai Ports World substantially influenced
and triggered congressional and governmental oversight on foreign transactions.1 Despite the
scrutiny on foreign investment, the United States government tries to maintain a balance between
the open market policy and the country’s national security interest. There are certain rules and
regulations that foreign individuals and companies should follow in order to invest in the United
States.2 These legal requirements are mainly driven by national security concerns. The
interagency committee that deals with foreign takeovers and acquisition is the Committee on
Foreign Investment in the United States (CFIUS). Generally, transactions that impair the national
security of the United States are subject to CFIUS investigation. The CFIUS review process is
implemented under the Exon-Florio statute as amended by the Foreign Investment and National
Security Act (FINSA) of 2007 and Executive Order 13,456.3
1 See Robert S. Larissa, Lisa Raisner and Thomas B. Wilner, NEW LAW HEIGHTENS SCRUTINY OF FOREIGN
ACQUISITIONS OF U.S. COMPANIES, NYU JOURNALOF LAW AND BUSINESS 31 MARCH 2008, P-289-290 available at http://www.law.nyu.edu/journals/lawbusiness/issues/uploads/4-1/nyb106.pdf (Last visited Jun. 18, 2008) 2 See Alan P. Larson, David M. Marchick, Foreign Investment and National Security Getting the Balance Right COUNCIL ON FOREIGN RELATIONS, 18, JULY 2006, P-3 available at
www.cfr.org/content/publications/attachments/CFIUSreport.pdf (Last visited Jun. 18, 2008)
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Across Europe there is a debate among politicians in favor of open market and politicians who
think that it is necessary to set restrictions on foreign investments in those industries that are
crucial for national security and national interest. For example there was a strong reaction in
France when New York Stock Exchange declared its intention to takeover Euronext. President
Chirac was supporting a “Franco-German solution” and recommended a Deutsche Börse merger
with Euronext.4 In Germany there is a steadily growing concern about that acquisition of German
companies operating in sensitive sectors by sovereign wealth funds that are incorporated in Asia
and the Middle East. To monitor the acquisition of German companies by foreign state control
enterprises, German government has started to draft a bill that would give the possibility to
create an interagency committee similar to CFIUS.5
Since the Chinese CNOOC failed to acquire U.S. Unocal due to the U.S. national security
interests, the government of China implemented the reverse action by creating problems for the
US investment fund Carlyle Group in acquiring large stake in Xugong Group Construction
Machinery. The Carlyle transaction raised concerns because of the control that US investment
fund was gaining in Chinese the manufacturing industry. Major concern which was the big
foreign stake ownership in Xugong Group Construction has been resolved and the US
investment fund reduced its stake from 85% to 45% but still there is no final decision by Chinas’
Ministry of Commerce (MOFCOM) on approving the transaction.6 In 2006 China passed a new
Antimonopoly Law (AML) that authorizes the Chinese government to examine any transaction
that threatens China’s national security. The law will take effect in August of 2008.7
3 See “CONGRESS STRENGTHENS LAW TO PREVENT FOREIGN INVESTMENTS THAT COULD
THREATEN NATIONAL SECURITY”, ARNOLD & PORTER LLP Client Advisory available at
http://www.arnoldporter.com/resources/documents/A&PCA_CongressStrengthensLaw_080107.pdf (Last visited Jun
15, 2008)
4 See Chirac is against NYSE takeover of Euronext, available at
http://us.ft.com/ftgateway/superpage.ft?news_id=fto060620061502361920 (Last visited Jun 19, 2008)
5 See Bertrand Benoit, Tony Barber and George Parker, Germany plans for own Cfius deal watchdog, Financial
Times, available at http://www.ft.com/cms/s/0/48128c56-6c82-11dc-a0cf-0000779fd2ac.html (Last visited Jun 19,
2008)
6 See Clark, Harry L; Wang, Lisa W, Foreign Investment and National Security, The China Business Review,
January. 1. 2008, P-53, available at http://www.deweyleboeuf.com/files/News/5020bb98-6718-4337-97a6-
64667f03834d/Presentation/NewsAttachment/a3420492-97fd-4f45-9b4b-6800e36248eb/Clark.pdf (Last visited Jun.
20, 2008)
7 See Clark, Harry L; Wang, Lisa W, Foreign Investment and National Security, The China Business Review,
January. 1. 2008, P-51, available at http://www.deweyleboeuf.com/files/News/5020bb98-6718-4337-97a6-
64667f03834d/Presentation/NewsAttachment/a3420492-97fd-4f45-9b4b-6800e36248eb/Clark.pdf (Last visited Jun.
20, 2008)
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After summarizing the main objectives of this research paper, here will be outlined how the
paper is structured. It is divided on 8 Sections. Section 2 addresses the foreign investment review
process in United States it discusses the main functions of the CFIUS, its review process and
procedural steps that transactions should undergo for the CFIUS notification. Section 2 also
covers information requirements for “US Persons” and “Foreign Persons” while filing a
notification at the CFIUS. Section 3 outlines newly established requirements since FINSA
amended the Exon-Florio, such as negotiation of CFIUS with transaction parties for mitigating
the risk that impairs US national security and monitoring power of the Congress that has been
extended after FINSA enactment. Section 4 will provide an analysis of United States. regulations
recently proposed by Department of Treasury that reforms national security reviews on foreign
investment. Section 5 will be about Germany and its legal requirement on foreign transactions. It
will discuss the relevant law that governs foreign direct investment in Germany under the 2004
Amendment to 1961 Foreign Trade and Payments Act and regulations issued by the Federal
Ministry of Economics and Technology that specifies foreign transactions that might be the
subject of review due to national security concerns.8 Section 6 will discuss France. This Section
addresses the tension between the European Commission and France due to the decision that was
taken by France authorities on including foreign investments in gambling and casino industries
as one of the subjects of governmental reviews. Another issue that is also included in this chapter
is the case when France restricted transfer of foreign funds to the French Church of Scientology,
because French public security was under the risk.9 Section 7 analyzes the foreign transaction
review process in China and new anti-monopoly law that includes article 31 of the chapter IV
about examining foreign acquisitions raising national security concerns.10 Section 8 concludes
the research paper.
2. Foreign investment review process in United States
The United States is the country that catalyzed worldwide foreign investment review processes
in regards to national security. Since the increased scrutiny on foreign investment in sensitive
sectors, countries like Germany, France and China followed the U.S. and extended their
8 See FOREIGN INVESTMENT Laws and policies Regulating Foreign Investment in 10 countries, United State Government Accountability Office; February 2008, P-61 available at www.gao.gov/highlights/d08320high.pdf
(Last visited Jun. 22, 2008)
9 See FOREIGN INVESTMENT Laws and policies Regulating Foreign Investment in 10 countries, United State
Government Accountability Office; February 2008, P-54 available at www.gao.gov/highlights/d08320high.pdf
(Last visited Jun. 22, 2008)
10 Anti-Monopoly Law, ch. IV, art. 31 (Concentratino of Undertakings).
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oversight on foreign investments. This section would make an analysis on how government of
the United States deals with foreign transaction that threatens national security.
In the introduction of the paper it is mentioned that an inter agency committee that reviews
foreign investments impacts on national security is the Committee on Foreign Investment in the
United States (CFIUS) which was established in 1975 by President Ford and its’ function is to
monitor and analyze foreign transactions that might impair U.S. national security. The CFIUS
members are the secretaries of different federal departments and because of the involvement of
nearly all major US Secretaries it is called an “interagency body”.11 The following secretaries are
the members of CFIUS: Treasury; Homeland Security; Commerce; Defense; State; Labor and
Energy, the Attorney General of the United States and the Director of National Intelligence.12
The Head of the Committee is the Secretary of Treasury who delegates the authority to Lead
Agency. The Lead Agency can be any member of the Committee that should act on behalf of
CFIUS. The task of the Lead Agency is to examine all relevant transactions and to find out if
these transactions are in accordance with FINSA and report the results of the investigation to the
Committee.13 Executive order 13,456 gives additional authority to other departments and heads of
the agencies.14 For example, National Security threats are considered by those experienced
individual officials who are authorized by each member of the Committee and who have
discretion in analyzing transactions that might be dangerous for national security. Additionally
official representatives from the Office of the Secretary of Defense for Industrial Policy makes
an analysis for the Department of Defense and another official from the Office of foreign
Financial and Investment Issues makes an analysis for the Department of Homeland Security15.
Besides the Dubai Ports World and Unocal cases, other transactions that where examined by
CFIUS include the purchase of Texas Gulf, Inc, by Elf Aquitaine, the French company which
11 See Joseph D. West, Judith A. Lee, Christine K. Brennan, Dave M. Wharwood, and Patrick F. Speice, Jr,
NATIONAL SECURITY IMPLICATIONS OF FOREIGN INVESTMENT IN U.S. GOVERNMENT
CONTRACTORS, BRIEFING PAPERS second series, October 2007, P-3, available at
http://www.gibsondunn.com/publications/Documents/West-NatlSecImplicationsOfForeignInvestment.pdf (Last
visited Jun. 15, 2008)
12 50 U.S.C.A app. § 2170 (Sec 3) (2).
13 50 U.S.C.A app. § 2170 (Sec 3) (5).
14Executive order 13,456 of January 23, 2008.
15 See Joseph D. West, Judith A. Lee, Christine K. Brennan, Dave M. Wharwood, and Patrick F. Speice, Jr,
NATIONAL SECURITY IMPLICATIONS OF FOREIGN INVESTMENT IN U.S. GOVERNMENT
CONTRACTORS, BRIEFING PAPERS second series, October 2007, P-3, available at
http://www.gibsondunn.com/publications/Documents/West-NatlSecImplicationsOfForeignInvestment.pdf (Last
visited Jun. 15, 2008)
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was two-thirds owned by the government of France. The takeover of Santa Fe International
Corporation, and Fujitsus’ proposed acquisition of a majority stake in the Fairchild
Semiconductor Corporation. The number notifications that CFIUS received between 1988 and
2003 was 1,460, however only twenty-one were investigated by CFIUS and presented to the
President. Nine of the twenty-one companies fear that their transactions would have been
blocked by the president and withdrew their investment decisions. From those investment offers
that remained, The President did not prohibit any of them, except in one case, China National
Aero-Technology Import and Export Corporation and MAMCO. In that case, the United States
President concluded that there was necessity of divestiture. 16 One of the unique aspects of Exon-
Florio is that the transaction blocked by the President can not be reviewed by the courts.17
In recent years, certain CFIUS matters have attracted the public’s attention. Especially
acquisitions of United States telecommunication companies by foreign investors were in the
center of publics’ attention. CFIUS expressed its’ concerns in two telecom cases: 1) The
purchase of controlling stake by America Movil, S.A. de C. V. (a Mexican company) in
Telecomunicaciones de Puerto Rico, Inc. (TELPRI) which was wholly owned by Verizon
Communications, Inc.18 and 2) the merger of French company Alcatel and Lucent Technology.19
CIFUS security agreement in regards to TELPRI transaction states reasons why the acquisition
of TELPRI by a foreign purchaser threatens the United States national security. According to the
security agreement, United States government considers the communication sector crucial to
maintaining public safety and protecting the country’s national security. On the other hand the
security agreement states that the government is obliged to protect confidentiality of its citizens
by ensuring that U.S. communication information will not be spread. Another issue identified by
CFIUS and outlined in the TELPRI security agreement is TELPRIS’ subsidiary in Puerto Rico,
which is a government contractor and provides services in telecommunication. Contrary to the
acquisition proposal, on behalf of U.S. government, CFIUS declared why the transaction
threatened United States national security. CFIUS was concerned about calls and information
16
See J. Eugene Marans, John H. Shenefield, Joseph E Pattison, John T Byam, Manual of Foreign Investment in the
United States, 3 edition, 2004, P-588
17 See Thomas E. Crocker, WHAT BANKS NEED TO KNOW ABOUT THE COMING DEBATE OVER CFIUS,
FOREIGN DIRECTINVESTMENT, AND SOVEREIGN WEALTH FUNDS, Banking Law Journal, May 2008, P-
458-459
18 See “Verizon to Sell Caribbean and Latin American Telecom Operations in Three Transactions Valued at $3.7
Billion,” Verizon Press Release (Apr. 3, 2006) available at
http://investor.verizon.com/news/view.aspx?NewsID=731 (Last visited Jun. 23, 2008)
19 See Keith Regan, Alcatel, Lucent Make Merger Plans Official, 04.03.2006 available at
http://www.ecommercetimes.com/story/49724.html (Last visited Jun. 23, 2008)
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about U.S. telecom users being disclosed to foreign governments. CFIUS was also concerned
with foreigners getting access to classified information related to United States law enforcement
activities.20
The merger of Alcatel and Lucent Technology was carried out more smoothly. The United States
government reached a deal with Lucent Technologies and Alcatel. According to the deal, both
companies had to execute a National Security Agreement and a Special Security Agreement. In
exchange to this agreement, CFIUS recommended to the President, that merger could be
approved. Based on CFIUS recommendation, the President gave merger approval.21
2.1 Main Functions of the CFIUS
When the CFIUS was first established in 1975 its prime role was to monitor and coordinate
United States foreign investment policy. By passing the Exon-Florio Amendment to the Defense
Production Act in 1988, Congress extended CFIUS’ capacity by giving formal approval to the
President to examining the impacts of foreign mergers and acquisitions on national security. The
President is authorized to ban or suspend a transaction if it contains a threat to United States
national security. Generally, CFIUS closely scrutinizes transactions that involve22 Foreign
government, foreign interest, foreign nationals and foreign person. 23 CFIUS defines foreign
government quite broadly and includes governmental bodies, agencies and departments other
than the United States and also the enterprises which are controlled and owned by a foreign
government.24 According to subsections (a)(4) of the Section 721 of the Defense Production
Act, in order to mitigate the risk that could “result in the control of any person engaged in
interstate commerce in the United States by Foreign government,” all transactions managed by a
20 See Warren G. Lavey TELECOM GLOBALIZATION AND DEREGULATION ENCOUNTER U.S.
NATIONAL SECURITY AND LABOR CONCERNS, Program on Information Resources Policy, Harvard
University, June 2007, P-9 available at http://pirp.harvard.edu/pubs_pdf/lavey/lavey-p07-2.pdf (Last visited Jun.
23, 2008)
21 See The White House Release “Statement on CFIUS Recommendation Regarding Proposed Merger of Lucent
Technologies, Inc., and Alcatel” November 17, 2006 available at
http://www.whitehouse.gov/news/releases/2006/11/20061117-13.html (Last visited Jun. 23, 2008)
22 The New Law Governing CFIUS National Security Review of Foreign Investment, MILLER & CHEVALIER
LLP, Volume 14, Issue 6/October 11, 2007; P-1 http://www.milchev.com/files/Publication/498011d8-27cb-49d1-
9947-0071cc3938ba/Presentation/PublicationAttachment/4e5c8c4f-cfc2-4807-b67e-
018a54ddfc51/International%20Alert%20%5BNew%20Law%20Governing%20CFIUS)%20October%2011%20200
7.pdf (Last visited Jun. 15, 2008)
23 31 C.F.R. § 800.210-800.213.
24 31 C.F.R. § 800.210.
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foreign government require mandatory investigation.25 Since the Exon-Florio provision was
amended in 1992 those transactions that are connected with foreign governments or foreign
government controlled entities need a 45-day review process. According to the 1992
Amendment, United State companies performing highly classified work for the Department of
Energy or Department of Defense are not allowed to be acquired by entities affiliated with a
foreign government.26 Additionally, government contractors having more than $500 million in
contracts under national security or defense programs may not be purchased by the companies
controlled by a foreign government.27 However, under the FINSA amendment, CFIUS will not
require investigation if the Secretary of Treasury and the lead Agency state that the transaction
involving the foreign government does not threaten the national security of the United States. 28
”Foreign interest” refers to persons and governments of foreign countries.29 All the natural
persons that are not citizens of the United States are regarded as “foreign nationals.”30
Corporations governed by foreign interests can be defined as “Foreign persons.”31 While
describing a foreign person, it is necessary to understand that the location of the business unit is
not important. It is more significant whether the individual or entity is controlled by a foreign
interest.32
One of the most important functions of the CFIUS is to verify if a particular transaction contains
a threat to National Security. “National Security” is not defined in Exon-Florio or in FINSA. The
Committee relies on case-by-case examples of national security and stated that “transactions that
involve products, services, and technologies that are important to U.S. national defense
requirements will usually be deemed significant with respect to the national security.”33 The
25
50 U.S.C.A app. §2170 (Sec2)(a4)
26 The Exon-Florio process, KAYE SCHOLER LLP, January 2007,
http://www.abanet.org/buslaw/newsletter/0059/materials/pp6.pdf ( Last visited, Jun. 15, 2008)
27 The Exon-Florio process, KAYE SCHOLER LLP January 2007,
http://www.abanet.org/buslaw/newsletter/0059/materials/pp6.pdf ( Last visited, Jun. 15, 2008)
28See FOREIGN INVESTMENT; Laws and policies Regulating Foreign Investment in 10 countries United State
Government Accountability Office; February 2008; available at www.gao.gov/highlights/d08320high.pdf (Last
visited Jun. 22, 2008)
29 31 C.F.R § 800.211.
30 31 C.F.R. § 800.212.
31 31 C.F.R. § 800.213.
32 31 C.F.R § 800.222.
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following are the conditions that the President of the United States weigh while determining the
issue of national security in connection with a specific transaction:
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
5) the potential effects of the proposed or pending transaction on United States international
technological leadership in areas affecting United States national security.”34
Recently there is a new function for CFIUS created by growing number of investments from
Sovereign Wealth Funds (“SWFs”) in United States business sectors. Despite that CFIUS has not
banned any SWFs investments, politicians have expressed concerns.35 A SWFs investment that
recently triggered attention related to the 7.5$ billion equity infusion in Citigroup by an Abu
Dhabi state-owned investment authority that resulted in 4.9 percent foreign ownership in
Citigroup. Another controversial SWF investment was $3 billion injection in Blackstone by a
Chinese private equity firm.36 The reason for concern is that SWFs are private equity firms
established and backed by the governments like Russia, Qatar, China, Dubai, Abu Dhabi,
Norway, Kuwait, and Singapore. Therefore, United States officials think that instead of investing
solely in business activities, the money generated in the SWFs may be invested in sensitive
sectors for United States national security and used for political purposes by foreign
33
See Joseph D. West, Judith A. Lee, Christine K. Brennan, Dave M. Wharwood, and Patrick F. Speice, Jr,
NATIONAL SECURITY IMPLICATIONS OF FOREIGN INVESTMENT IN U.S. GOVERNMENT
CONTRACTORS, BRIEFING PAPERS second series, October 2007, P-5, available at
http://www.gibsondunn.com/publications/Documents/West-NatlSecImplicationsOfForeignInvestment.pdf (Last
visited Jun. 15, 2008)
34 50 U.S.C.A. app. § 2170 (f) available at
http://www.law.cornell.edu/uscode/html/uscode50a/usc_sec_50a_00002170----000-.html (Last visited Jun. 15,
2008)
35 See Thomas E. Crocker, WHAT BANKS NEED TO KNOW ABOUT THE COMING DEBATE OVER CFIUS,
FOREIGN DIRECTINVESTMENT, AND SOVEREIGN WEALTH FUNDS, Banking Law Journal, May 2008, P-
463
36 See Mark Gordon, Mark F.Veblen, Sovereign Wealth Fund Investment intheU.S.–Just Warming Up? P-1
available at www.heritage.org/Research/TradeandForeignAid/upload/hl_1063.pdf (Last visited Jun 24, 2008)
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governments.37 Besides the worries that United States government expresses towards SWFs,
some government officials and scholars acknowledge that it is important not to block SWFs
transactions or “adopt protectionist investment policies”38 An example that illustrates United
States government effort for attracting the foreign investors is agreement that was reached by the
United States Department of Treasury with the governments of Singapore and Abu Dhabi.39 The
agreement describes principles that SWFs should use as a reference point when investing in the
United States. It can be useful for the process of creating best practices for SWFs that is
currently under implementation in the International Monetary Fund (IMF) and the Organization
for Economic Cooperation and Development (OECD). Provisions of the agreement specify that
SWF investment should only have business interests, rather than long-term political intentions of
the controlling government. On the other hand, a SWF should disclose the information about its
goals for the investment and in financial statements. The agreement also states that competition
between the SWF and private sector should be fair and recommends particular policies for
countries receiving investments from SWFs. 40
2.2 The CFIUS Review Process
On June 26, 2007 the President signed the Foreign Investment and National Security act of
2007(FINSA).41 This modification extended CFIUS power in reviewing foreign transactions that
might impact national security. Under the new law, CFIUS should consider some additional
relevant consequences of the foreign transaction involving acquisition of the United States
“critical infrastructure” including “major energy assets.” FINSA defines “critical infrastructure”
42 “as systems and assets, whether physical or virtual, so vital to the united States that the
incapacity or destruction of such systems or assets would have a debilitating impact on national
37 See Mark Gordon, Mark F.Veblen, Sovereign Wealth Fund Investment in the U.S.–Just Warming Up? P-2
available at www.heritage.org/Research/TradeandForeignAid/upload/hl_1063.pdf (Last visited Jun 24, 2008)
38 See Daniella Makheim, Sovereign Wealth Funds and U.S. National Security, Published by the Heritage
Foundation, March 6, 2008, P-4, available at
http://www.heritage.org/Research/TradeandForeignAid/upload/hl_1063.pdf (Last visited Jun 24, 2008)
39 See Treasury Reaches Agreement on Principles for Sovereign Wealth Fund Investment with Singapore and Abu
Dhabi, March 20, 2008, available at http://www.treas.gov/press/releases/hp881.htm (Last visited Jun 24, 2008)
40 See Treasury Reaches Agreement on Principles for Sovereign Wealth Fund Investment with Singapore and Abu
Dhabi, March 20, 2008, available at http://www.treas.gov/press/releases/hp881.htm (Last visited Jun 24, 2008)
41 NISPOM ¶¶2-300 to 2-310.
42 50 U.S.C.A app. §2170 (a) (7).
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security.” One of the most important changes in the amendment is the new regulation addressing
the issue of mitigation agreements.43
Exon-Florio does not require parties to notify CFIUS about foreign transactions, notification
remains voluntary. Mergers or acquisitions that are undergone without notifying CFIUS,
however, can always be challenged by members of the CFIUS. Additionally, the President has
the authority to order reexamination of a completed transaction.44 Those transactions that have
not been reviewed by CFIUS, can not be investigated again except under the circumstances when
the first review process was inaccurate or based on fraudulent information. In cases where
CFIUS is concerned about national security matters, parties often submit notification and avoid
the risk of involuntary review.45
Upon a party’s notification, CFIUS will judge the facts presented in the notification statement
and have 30 days to decide whether a transaction needs to be fully investigated.46 Usually, based
on the documentation that is presented to the Committee, CFIUS concludes that a full
investigation is not essential and the review is finished.47 If CFIUS determines that a transaction
should be investigated, members of the Committee must present their findings to the President
within 45 days.48 After CFIUS submits its decision to the president, the president has 15 days to
decide if the given transaction threatens to impair the national security of the United States and
suspend or prohibit any covered transaction.49 According to a Government Accountability office
(GAO) report, if the committee is unable to judge and identify National Security concerns in the
fixed 30 day period, CFIUS frequently gives permission to the parties to withdraw the
notification and resubmit it since the National Security risk mitigates. Risk mitigation is usually
the result of negotiation between the foreign companies and CFIUS.50 One of the most important
43 50 U.S.C.A app. §2170 (f) (6)
44 31 C.F.R. §§ 800.401-.402.
45 50 U.S.C.A app § 2170 (b) (1) (ii) (iii).
46 50 U.S.C.A app § 2170 (b) (1) (E).
47 31 C.F.R. § 800.502 (a).
48 50 U.S.C.A app § 2170 (b) (2) (C).
49 50 U.S.C.A app § 2170 (d) Sec. 6.
50 See FOREIGN INVESTMENT Laws and policies Regulating Foreign Investment in 10 countries, United State
Government Accountability Office; February 2008, P-35 available at www.gao.gov/highlights/d08320high.pdf (Last visited Jun. 22, 2008)
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steps for the CFIUS review process is the designation of the “lead agency.” The lead agency is
designated for every single case by the Secretary of Treasury. Its role is to negotiate with
transaction parties and mitigate the risks of national security.51 Functions of the lead agency and
the risk mitigation process would be described in more detail in the sections below.
2.3 Procedural steps for the CFIUS notification.
Parties should make notification to CFIUS by submitting thirteen copies of the required
information to the staff Chairman of the Committee, also one signed copy and one electronic
Adobe Acrobat (PDF) or Microsoft Word format copy by e-mail.52 Voluntary notice information
can also be submitted jointly by the transaction parties, but it must be accurate and signed by all
parties.53 All information should characterize the main essentials of the transaction and define
the acquisition: Merger; consolidation, the purchase of voting securities or otherwise.54 The
Acquiring “foreign person” and the acquired “U.S. person” should submit information about
their names, working addresses and the principal places of business.55 CFIUS also needs the
contact information about any parent company of the foreign person making the acquisition and
also who will have actual influence and control over the acquired company. It is important that a
notification letter contained indicate the date when the transaction is supposed to be finished or
the date of an already concluded transaction.56 It should be clear from the notification whether
the US person intends to conclude an asset deal or share deal.57
2.4 Information Required from the “US Person“
A US parent company is obliged to present all the relevant information about its businesses. If
the companies’ subsidiary is part of the transaction, notification must also contain the data on
subsidiaries business activities. CFIUS will focus its attention on whether the United States
51 Noel J. Francisco and Bevin Newman, Congress Reforms CFIUS Review Process, available at
http://www.mondaq.com/article.asp?articleid=51466 (Last visited Jun. 27, 2008)
52 31 C.F.R § 800.401 (1).
53 31 C.F.R § 800.402 (a).
54 31 C.F.R § 800.402 (1) (i) (ii).
55 31 C.F.R § 800.402 (1) (iii).
56 31 C.F.R § 800.402 (1) (v) (vi) (vii).
57 31 C.F.R § 800.402 (2) (3).
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parent or its subsidiary manufactures classified or unclassified products and if either of them is a
contractor with a United States governmental agency that has a responsibility relating to national
defense. Therefore, notification documents must identify all the government contracts that are
valid during the transaction period or during five years before the deal. A US Person should
disclose whether it was a prime contractor or a first tier-subcontractor of any agencies of
Department of Defense and whether it supplied technologies that have a military application.58 It
is also important to provide the relevant Commodity Control List number and describe technical
data if the US person produces products that are subject to the U.S. Export Administration
Regulations and International Traffic in Arms Regulations.59
2.5 Information Required from “Foreign Persons “
Like the US person, the acquiring foreign person should also describe its own business and the
business of its parent company in the same way as it is shown in its annual reports.60 CFIUS
needs information from the foreign person about its future plans with respect to reducing,
eliminating or selling research and development facilities and if they are planning changes or
revocation of classified DOD contracts affecting national security. Business plans of the foreign
person often contain intentions about selling product lines or technologies and changing quality
of the product. In certain circumstances, foreign investors need to shut down or move offshore
the facilities that are in the United States. This kind of modification in core business activities of
the acquired US Company might impair national security and should therefore it be reported to
the Committee.61 One of the most important issues is whether the foreign person is acting as an
agent or representative of a foreign government and if after the acquisition whether the foreign
government will gain the power to determine, direct or decide matters affecting an entity.62 This
power might be dissolution of the company; the sale of all principal assets of the company,
moving of research and development facilities to another location; the ability of making changes
in the articles of association and termination or non-fulfillment of contracts of the entity.63
Information also has to cover legal documentation that describes if the above mentioned rights
58 31 C.F.R § 800.402 (v) (A) (B).
59 31 C.F.R § 800.402 (4) (i).
60 31 C.F.R § 800.402 (5) (i).
61 31 C.F.R § 800.402 (5) (ii) (A) (B) (C) (D) (E).
62 31 C.F.R § 800.402 (5) (iii) (iv).
63 31 C.F.R § 800.204 (1) (2) (3) (4) (5).
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are exercised based on a shareholders agreement, statute, contract or regulation. If the foreign
government holds convertible or voting securities in an acquiring company, it should be disclose
the percentage and the amount of such securities. The notification letter must state if the entities
principal officers or the members of the board of directors are appointed by a foreign
government.64
3. FINSA and New Procedures
Prior the amendments taking affect, the only cases when the “45-day review” process was
applicable were those transactions which were backed by the foreign governments and could
impair national security.65 However, the new amended legislation requires a 45-day investigation
of all transactions that shows foreign government interest in an acquiring company except when
the Secretary of the Treasury and the Lead Agency conclude that no further investigation is
required.66 The second reason for a mandatory 45-day review is when the acquisition involves
“critical infrastructure” by a foreign person that might present the risk to national security.
CFIUS can override the 45-day review process if the national security impairments are mitigated
during the 30-day review period.67
Parties often avoid the 45-day investigation by withdrawing their notification letters. To prevent
such actions, CFIUS adopted another new procedure under FINSA. If a notice is withdrawn, the
Committee should track any actions taken by the parties in connection with the transaction prior
to resubmission of the notice, set a specific time frame and establish interim protections to
address concerns with respect to the transactions.68
According to FINSA, it is required that business transactions such as mergers, acquisitions and
takeovers be certified by the chief executive officer of any party. The Certification must state the
that CFIUS notification letter fully complies with Exon-Florio requirements and also should
certify accurateness of information.69
64 31 C.F.R § 800.402 (B) (C).
65 See FOREIGN INVESTMENT Laws and policies Regulating Foreign Investment in 10 countries, United State
Government Accountability Office, February 2008, P-33 available at www.gao.gov/highlights/d08320high.pdf (Last visited Jun. 22, 2008)
66 50 U.S.C.A app. § 2170(sec 2) (2) (D).
67 50 U.S.C.A app. § 2170 (sec 2) (2) (III).
68 50 U.S.C.A app. § 2170 (Sec 5) (2) (A) (i) (ii) (iii).
69 50 U.S.C.A app. § 2170 (Sec 8).
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3.1 Risk Mitigation
Nearly two decades after implementation of the Exon-Florio, CFIUS developed a practice of
mitigating the risks of foreign transactions. In the past, Committee members often informally
negotiated with parties to a transaction to mitigate the risks that raise issues of national security.
These negotiations held during the 30-day review period or even before submitting the notice to
the CFIUS. Instead of mitigating or removing risks during informal negotiations, it became
necessary to adopt a legally binding procedure for risk mitigation that CFIUS would follow.70
FINSA grants authority to the Lead Agency to use legal force to negotiate with the United States
and Foreign person and to lessen the risks that might have a negative effect on national
security.71 Federal agencies or departments may be designated by the CFIUS to negotiate on
behalf of the committee to modify, monitor and enforce agreements in order to mitigate any
threat to national security.72
Under FINSA, in every half-year, agencies that are designated by CFIUS are obliged to report to
the Committee about mitigation agreements and parties who are subject to those agreements
should report on the implementation of any material change in circumstances. All the
departments and the agencies that are involved in the mitigation process should notify CFIUS
about any modification of a concluded mitigation agreement. If the modification is “significant”,
then it should be reported to the Director of National Intelligence and to those federal agencies or
departments that “may have material interest in such modification.”73
Executive Order 13,456 sets certain requirements for the departments or lead agency seeking to
propose a mitigation plan. The agency that intends to propose mitigation measures is obliged to
prepare and present a written statement for the committee that will describe threats and
consequences of the proposed investment transaction. The threats should be identified based on
an analysis that is conducted by the Director of National Intelligence. The second step that the
lead agency should carry out is to set forth measures for how it plans to mitigate the risk. After
discussing the particular facts, the Committee decides whether the mitigation is appropriate. If
70 See James K. Jackson, Exon-Florio Foreign Investment Provision: Comparison of H.R. 556 and S. 1610; CRS
Report for Congress; Updated July 2007; P-33 available at http://assets.opencrs.com/rpts/RL34082_20070713.pdf
(Last visited Jun. 27, 2008)
71 50 U.S.C.A app. § 2170 (Sec 3) (K) (5).
72 50 U.S.C.A app. § 2170 (Sec 5) (1) (A).
73 50 U.S.C.A app. § 2170 (Sec 5) (3).
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the approval is granted, the lead agency shall seek to negotiate such measure with the transaction
parties.74
Under the FINSA, the CFIUS is required to develop a method that would give an opportunity to
the members of the Committee to evaluate a company’s compliance with a mitigation agreement
that was required for approval of a transaction. However, such methods should not interrupt
CFIUS from reviewing the other transaction and the resources should be allocated properly and
not be “unnecessarily diverted.” 75
3.2 Reports to Congress
Many Members of Congress expressed concerns about information related to the Dubai Ports
World transaction. Some members of Congress were arguing that the present statute does not
obligate CFIUS to provide enough information to Congress. Also Congress complained about an
incorrect interpretation of the statute that required investigation of those transactions involving
the companies that are controlled by a foreign government. Some members of Congress thought
that it was necessary to carry out changes in current regulations that would give them a chance to
better monitor similar transactions such as the Dubai Ports World transactions and to address
public concerns more effectively. Accordingly, FINSA extended the monitoring power of the
Congress.76
Before July 31st of each year, the Chairperson of CFIUS must send a report to the Chairman and
ranking member of the committee of jurisdiction in the Senate and the House of Representatives,
that would cover detailed information about all reviews and investigations that they have
conducted within a previous year. The Report should describe the nature of business activities of
those parties who were involved in transactions and should contain information about the
pending review process or investigation, information on the notice or withdrawal and any
decision or action by the President taken under the Exon-Florio provision. 77 The submitted
report would include information related to the number of filings, withdrawals, investigations or
actions and decisions undertaken by the President. Additionally, CFIUS is required to provide
74 Executive Order 13,456 (Sec 7) (b).
75 50 U.S.C.A app. §2170 (Sec 5) (3) (B) (ii).
76 See James K. Jackson, Exon-Florio Foreign Investment Provision: Comparison of H.R. 556 and S. 1610; CRS
Report for Congress; Updated July 2007; P-37 available at http://assets.opencrs.com/rpts/RL34082_20070713.pdf
(Last visited Jun. 27, 2008)
77 50 U.S.C.A app. § 2170 (sec 7) (b) (1).
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cumulative information concerning business sectors involved in the filings and the countries
from which investments originated.78 The description of the arrangements that were used by the
Committee to mitigate national security risks and the methods the Committee or lead agency
used for determining if the parties followed the conditions stated in the mitigation agreement, as
well as a comprehensive discussion of all perceived adverse effects of business transactions on
the critical infrastructure or national security of the United States. Finally CFIUS has to disclose
whether the companies resubmitted withdrawn notifications or abandoned the transaction.79
CFIUS must also inform Congress about critical technologies. For example, CFIUS must present
its evaluation of companies that implemented a coordinating strategy for acquiring a United
States company involved in research, development or production of critical technologies in
which the United States is a chief producer. In its annual report CFIUS should also evaluate the
possibility of industrial espionage activities that are directed or assisted by foreign governments
against private companies with the aim to obtain commercial secrets. 80
While conducting the study on foreign investment the Secretary of Treasury must consult with
the Secretary of State and the Secretary of Commerce. The study should mostly cover affects of
investments in critical infrastructure and other industries that are relevant for United States
national security and must underline investment affecting critical infrastructure and national
security by 1)foreign governments, entities controlled by or acting on behalf of foreign
government, or persons of foreign countries which comply with any boycott of Israel or 2)
foreign governments, entities controlled by or acting on behalf of a foreign government, or
person of foreign countries which do not ban organizations designated by the Secretary of State
as foreign terrorists organizations.” 81
If CFIUS fails to comply with the above requirements, the inspector general of the Department
of the Treasury is assigned to investigate the failure and send the investigation report to the
chairman and ranking member of each committee of the House and the Senate who has
jurisdiction over any aspect of the report including the Committees on International Relations,
78 50 U.S.C.A app. §2170 (sec 7) (b) (2) (B) (C).
79 50 U.S.C.A app. §2170 (sec 7) (b) (2) (D) (E) (F).
80 50 U.S.C.A app. § 2170 (sec 7) (b) (3) (i) (ii).
81 50 U.S.C.A app. § 2170 (sec 7) (b) (3) (c) (1) (A) (B).
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Financial Services, Commerce Science and Transportation of the Senate; Banking, Housing and
Urban Affairs; Energy and Commerce of the House of Representatives.82
4. Recently Proposed Regulation on CFIUS
On April 21, 2008 the Treasury Department issued new proposed regulations. The new
regulation is designed to implement FINSA and sets certain procedures that CFIUS should use
while considering national security issues relating to foreign investment.83 The new provisions in
the proposed regulation are the determination of controlling factors and supplementary
information requirements in the CFIUS notification letter.
4.1 “Control” by foreign person
While determining national security concern, CFIUS closely examines whether the transaction
would shift the control of the entity from “U.S. Person” to “Foreign Person.” The Proposed rules
did not substantially change the determination of the control and its still defined based on
individual cases. CFIUS supposes that if the foreign person has the power to make decisions on
fundamental matters of the companies’ it has a control.84 CFIUS closely examines those
transactions that would give control of the United State Company to a “foreign person” that is
affiliated or owned by the foreign government. According to existing rules transactions that
involves the acquisition of 10 percent of voting stock and solely aimed for investment, is exempt
from the CFIUS review procedure. However the newly proposed rule is more strict and
differentiates two investment situation 1) when the transaction parties are advised to file a
notification letter to CFIUS (“active” investment) and 2) when review is not necessary
(“passive” investment). For example, exclusion of 10 percent purchase from a FINSA statute
would only be applicable if the investment is passive.85 On the other hand a new proposal
82 50 U.S.C.A app. § 2170 (sec 7) (b) (3) (d) (1) (2).
83 See Christopher R. Wall , Department of Treasury Proposes New CFIUS regulations for Foreign Investment,
Pillsbury, Winthrop Shaw Pittman LLP , May 15, 2008 P-1 available at
http://www.pillsburylaw.com/content/portal/publications/2008/5/200851516053265/International%20Trade%20Vol
%201500%20No%201518%2005-15-08.pdf (Last visited Jun 28, 2008), See Treasury Department Issues Proposed
Regulation Reforming U.S. National Security Reviews on Foreign Investment, Skadden, Arps, Slate, Meagher &
Flom LLP and its affiliates, April 22, 2008, P-1 available at
http://www.skadden.com/content/Publications/Publications1389_0.pdf (Last visited Jun 28, 2008)
84 See Sheppard Mullin, Treasury Proposes New Rules For Reviewing Foreign Investment In U.S. Companies,
Government Contracts Blog, May 15. 2008, available at
http://www.governmentcontractslawblog.com/2008/05/articles/export-controls/treasury-proposes-new-rules-for-
reviewing-foreign-investment-in-us-companies/ (Last visited Jun. 29, 2008)
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includes a number of rules for the protection of foreign minority shareholders that would not be
regarded as foreign control including the authority to interrupt the sale of all majority assets of
the company, or to hinder an entity from concluding a contract with big investors, a permission
from minority investors in amending the corporate charter. In case of changes in ownership
structure of the company, the minority shareholder would be granted some protection
mechanisms in terms of anti-dilution rights. Anti-dilution rights give minority shareholders the
option to acquire additional shares and uphold its position in the company.86
The other difference related to current regulation and newly proposed rules relates to the
acquisition of convertible shares by the foreign acquirer. The current regulation states that
purchase of convertible securities will not shift the control of the company until the shares would
be converted from preferred to common stock. According to new rules, it can be assumed that
convertible securities would serve as a safe harbor for the foreign person in case it does not
control the time of conversion.87
4.2 Additional Content In CFIUS Notification Letter
The New rules also suggest but not require transaction parties to meet informally with official
representatives of CFIUS before filing a notification. This option is beneficial for transaction
parties and also for the CFIUS. A US and Foreign person can avoid further misunderstanding
and timely respond national security concerns that might arise during negotiations. It is also
helpful for CFIUS to better understand and analyze the transaction features and to give advice
about filing of any necessary documentation. Nevertheless “prefiling” negotiation is not
mandatory, the parties of the “covered transaction” should talk to CFIUS representatives for
securing smooth review of their covered transaction.88 After negotiating with CFIUS, parties
85 See Christopher R. Wall , Department of Treasury Proposes New CFIUS regulations for Foreign Investment,
Pillsbury, Winthrop Shaw Pittman LLP , May 15, 2008 P-3 available at
http://www.pillsburylaw.com/content/portal/publications/2008/5/200851516053265/International%20Trade%20Vol
%201500%20No%201518%2005-15-08.pdf (Last visited Jun. 29, 2008)
86 See Treasury Department Issues Proposed Regulation Reforming U.S. National Security Reviews on Foreign
Investment, Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates, April 22, 2008, P-1 available at
http://www.skadden.com/content/Publications/Publications1389_0.pdf (Last visited Jun 28, 2008)
87 See Christopher R. Wall , Department of Treasury Proposes New CFIUS regulations for Foreign Investment,
Pillsbury, Winthrop Shaw Pittman LLP , May 15, 2008 P-3 available at
http://www.pillsburylaw.com/content/portal/publications/2008/5/200851516053265/International%20Trade%20Vol
%201500%20No%201518%2005-15-08.pdf (Last visited Jun. 29, 2008)
88 See Treasury Department Issues Proposed Regulation Reforming U.S. National Security Reviews on Foreign
Investment, Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates, April 22, 2008, P-2 available at
http://www.skadden.com/content/Publications/Publications1389_0.pdf (Last visited Jun 28, 2008)
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should move forward and collect the documentation that is required for voluntary notification.
The newly proposed rules also contain some other provisions that previously were not part of
filing requirement. For example proposed rules require information submission about financial
institutions that are engaged in a covered transaction and if the transaction party was a United
States government contractor for the past three years. Besides the above mentioned requirements
the new rule proposes that the notification letter should hold the biographies of the United States
and foreign person’s top management including directors and CEO’s. The parent company or the
other entities holding 5% or more interest in a transaction corporation are additional subject of
the notification letter. The Proposed notification rules underline another filing requirement such
as the description of any kind of military service that was conducted by companies’ directors and
senior executives in a foreign country.89
New rules have also been proposed in regard to information that is required from a United States
person. Currently, United States persons must list in notification letter all contracts with the
agencies of Department of Defense (DOD). But the newly proposed regulation obliges them to
declare not only the contracts with DOD agencies but also the other contracts that they have with
various U.S. governmental agencies. U.S. person should also include the overall proportion of
the market share for the products they produce and the services they offer. One of the interesting
additions of the new proposal is to identify defense articles and services that have not been
pointed out in the State Department export controls list. Inclusion of such products or services
without being the subject of export control list is based on parties’ discretion and assumption
whether it is necessary or not to designate them.90
Lastly proposed regulations empower CFIUS with new authority by setting civil punishment, in
cases when parties did not accomplish the preconditions set by CFIUS,91
89 See Christopher R. Wall , Department of Treasury Proposes New CFIUS regulations for Foreign Investment,
Pillsbury, Winthrop Shaw Pittman LLP , May 15, 2008 P-3 available at
http://www.pillsburylaw.com/content/portal/publications/2008/5/200851516053265/International%20Trade%20Vol
%201500%20No%201518%2005-15-08.pdf (Last visited Jun 29, 2008), See Treasury Department Issues Proposed
Regulation Reforming U.S. National Security Reviews on Foreign Investment, Skadden, Arps, Slate, Meagher &
Flom LLP and its affiliates, April 22, 2008, P-2 available at
http://www.skadden.com/content/Publications/Publications1389_0.pdf (Last visited Jun 29, 2008)
90 See Christopher R. Wall , Department of Treasury Proposes New CFIUS regulations for Foreign Investment,
Pillsbury, Winthrop Shaw Pittman LLP , May 15, 2008 P-4 available at
http://www.pillsburylaw.com/content/portal/publications/2008/5/200851516053265/International%20Trade%20Vol
%201500%20No%201518%2005-15-08.pdf (Last visited Jun 29, 2008)
91 See Treasury Department Issues Proposed Regulation Reforming U.S. National Security Reviews on Foreign
Investment, Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates, April 22, 2008, P-3 available at
http://www.skadden.com/content/Publications/Publications1389_0.pdf (Last visited Jun 29, 2008)
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5. National Security and Foreign Investment in Germany
Similarly to the United States policy, the German government has two approaches toward
foreign investment. As a matter of policy Germans tries to maintain open market and impose
some investment restrictions on industries that are critical to the countries national security.
When considering impacts of foreign investment another important factor that should be
determined by the German government is the balancing position between the articles of EC
Treaty. The balancing position is the provision of the EC treaty that requires the European Union
(EU) member states to secure the free movement of capital and to allow nationals of non-
member states to do business without any unnecessary limitations, on the other side. Article 296
of EC Treaty permits the member state to impose restrictions when necessary to protect a
country’s “essential security interests.”92
5.1. Law Governing Foreign Investment In Germany
The primary law that regulates foreign investment in Germany is the 1961 Foreign Trade and
Payments Act, amended in 2004. Germany amended the act because of a number of foreign
investments in sensitive industries that impacted German national security. Section 7 of the
amendment, identifies reasons why the German government may restrict free movement of
investment.93 For example investments may be restricted for “guaranteeing the vital security
interests of the Federal Republic of Germany, prevent a disturbance of the peaceful coexistence
between nations, or prevent a major disruption of the foreign relations of the Federal Republic of
Germany.”94 Section 7 specifies types of German corporations operating in industries that are
vital for national security. Foreign companies interested in acquisition of German entities acting
operating an industry that produces weapons or other military equipment are subject to
governmental investigation and can be prohibited.95 In its report the United States Government
Accountability Office stated that catalyst for the German amendment was the acquisition of a
controlling stake by a United States private equity fund in a German company that was
92 See Bulletin EU 12-2006 The internal market (26/27), Public Procurement available at
http://europa.eu/bulletin/en/200612/p110026.htm (Last visited July 1, 2008)
93 See FOREIGN INVESTMENT; Laws and policies Regulating Foreign Investment in 10 countries, United State
Government Accountability Office; February 2008, P-60 available at www.gao.gov/highlights/d08320high.pdf (Last visited July 1, 2008)
94 See Section 7 (1), Foreign Trade and Payments Act of the Federal Republic of Germany, available at
http://www.bafa.de/bafa/en/export_control/legislation/export_control_awg_en.pdf (Last visited July 1, 2008)
95 See Section 7 (2), Foreign Trade and Payments Act of the Federal Republic of Germany, available at
http://www.bafa.de/bafa/en/export_control/legislation/export_control_awg_en.pdf (Last visited July 1, 2008)
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producing submarines. Export control laws existed prior the amendment, but did not adequately
address the issue of national security. The members of German government became deeply
concerned that they could not prevent foreign acquisition of those German companies that
manufactured sensitive technologies.96
Since the passage of new amendment, the German Ministry of Economics and Technology
specified transactions that would be under the close scrutiny of German government. Foreigners
seeking to acquire German companies that are involved in production of certain items identified
in part B of German War and Weapons Act would be the subject of governmental review. Items
listed in this Act are: Projectiles, Combat Aircraft and Helicopters, Vessels of War and Special
Naval Equipment, Combat Vehicles, Barrel Weapons, Light Anti-Tank Weapons, Military
Flame Throwers, Mine-Laying and Mine-Throwing Systems, Torpedoes, Mines, Bombs and
Laser weapons.97
5.2 Foreign Investment Review Process in Germany
Unlike the Unite States Germany does not have an interagency committee similar to CFIUS that
separately examines transactions that might impair national security. However, investment
reviews are lead by the Federal Ministry of Economics and Technology, which receives
information from other ministries (Ministry of foreign affairs and Ministry of defense) if a
particular transaction creates an issue of national security. Approval of the transaction is based
on the discretion of governmental official who reviews an investment. The transaction might be
banned when ministry official concludes that it is not safe for national security. As mentioned
above, Germany does not have intergovernmental agency similar to CFIUS but recently there
was discussions among German politicians to create a committee that would have the same
function as CFIUS.98 Together with the attempt of establishing an interagency committee, the
German government proposed legislation that would amend the Foreign Trade and Payments act.
The purpose of this amendment is to extend the oversight on foreign capital inflow for the
96 See FOREIGN INVESTMENT, Laws and policies Regulating Foreign Investment in 10 countries, United State
Government Accountability Office; February 2008, P-61 available at www.gao.gov/highlights/d08320high.pdf (Last visited July 1, 2008)
97 See War Weapons List, Part B (as amended by the ninth regulation amending the War Weapons List of 26
February 1998, Federal Law Gazette I, p. 385) available at
http://www.bafa.de/bafa/en/export_control/legislation/export_control_cwc_p_war_weapons_list.pdf (Last visited
July 1, 2008)
98 See Bertrand Benoit, Mark Schieritz, Berlin looks to vet foreign fund deals, Financial Times, June 25, 2007
available at http://www.ft.com/cms/s/0/d25a3618-2342-11dc-9e7e-000b5df10621.html (Last visited July 1, 2008)
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“protection of public security and order.”99 Existing legislation does not completely cover all
types of industries that are important for Germany’s national security, there are only two types of
foreign investments that could be restricted by government. These restrictions are imposed on
those foreign investors that intend to purchase more than 25% of outstanding shares of German
company that operates in the arms industry or is an encryption manufacturer. Transactions stated
above are subject to review by the Federal Ministry of Economics and Technology (FME).100 For
broadening the area of foreign investments investigation, the government initiated new
legislation. One of the catalysts for the new initiative was the increasing number of investments
from foreign government controlled Sovereign Wealth Funds (SWF). The German government
is concerned by the fact that SWFs (total asset nearly 2.5 Trillion USD) might gain control on
various German companies.101 According to newly proposed amendment FME would be
authorized to review all foreign takeovers that would result in more than 25% shares by the
foreign acquirer in the German company. The government would review not only the
investments coming from SWFs, but all transactions that would involve non-residents of
Germany. Since the examination of the transaction, FME would have an option to take the
following decisions: 1) do not restrict the transaction and issue the permission for final
conclusion, 2) authorize the transaction in exchange to some preconditions, 3) restrict the
transaction due to the threat to “public security and order.”102 The advantage of the proposed
rules is that transaction reviews are not limited to certain industrial sectors. This opinion could
be backed by the sentence included in proposed draft of the amendment, such as “public security
and order.” In terms of public security and order it could be interpreted to mean all sectors of
German business industry, from the beginning of media and banking sectors until the entire
infrastructure and transport industry.103 There is a similarity between the United States FINSA
act and the recently proposed amendment in German legislation. Both of them are based on a
voluntary notification process which is dependant on the parties’ decision to notify respective 99 See Andrea Helfrich, Proposed Control of Foreign Investment in German Companies, McDerrmott Will & Emery,
February 2008, P-4 available at http://www.mwe.com/info/news/gu0208.pdf (Last visited July 1, 2008)
100 See Andrea Helfrich, Proposed Control of Foreign Investment in German Companies, McDerrmott Will &
Emery, February 2008, P-4 available at http://www.mwe.com/info/news/gu0208.pdf (Last visited July 1, 2008)
101 See Infrastructure: stronger restrictions on foreign investments in Germany, Freshfields Bruckhaus and Deringer,
December 2007, P-1, available at http://www.freshfields.com/publications/pdfs/2007/dec19/21133.pdf (Last visited
July 2, 2008)
102 See Andrea Helfrich, Proposed Control of Foreign Investment in German Companies, McDerrmott Will &
Emery, February 2008, P-4 available at http://www.mwe.com/info/news/gu0208.pdf (Last visited July 2, 2008)
103 See Infrastructure: stronger restrictions on foreign investments in Germany, Freshfields Bruckhaus and Deringer,
December 2007, P-1, available at http://www.freshfields.com/publications/pdfs/2007/dec19/21133.pdf (Last visited
July 2, 2008)
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authorities about a transaction. Under both regimes, it is important for the transaction
participants to notify German and Unites States governments about a planned takeover or
acquisition to avoid obstacles that might arise because of not informing government officials. If
German and foreign companies do not notify the government about a proposed transaction, FME
may initiate an investigation during the three month after the information about the deal would
be released or the acquisition contract signed. However, if the parties submit the necessary
notification documents about the deal, FME will discuss the transaction during a one month
period and make a decision whether to authorize or restrict the transaction. Until the review
process is concluded and the FME declares its final decision about the deal, the transaction
remains invalid. There are also certain conditions that need to be fulfilled for validating a
transaction. For example, FME has three months to react to announced acquisition information.
If the FME leaves the transaction without investigating, the deal would automatically be valid. If
FME receives notification letter and do not restrict or approve investment within one month, deal
can not be restricted afterwards.104
There is a question how a government can intervene in transaction if the foreign person acquires
shares of a German company on the open market. The answer is stated in a draft version and is
the empowerment of FME with the authority that would enable its officials to force foreign
investors to sell an already acquired stake.105 Besides the governmental proposal, the party of
German chancellor Angela Merkel (Christian Democratic Union) underlined its position towards
this new amendment. Merkel’s position is slightly different from the amendment drafted by the
government. There are three distinctions, first it says that government should be allowed to block
a transaction merely for the protection of public security and critical infrastructure. Also in the
version initiated by the Chancellors party the term “public security” is changed by “public
policy.” The notion of this difference might be the intention to reduce the application of the law
to a comparably small number of transactions. Second it allows judicial review. Here it is
important to draw a line with the United States example where the transactions blocked by the
president are not subject of further judicial review. Third, secures the legal confidence by
positively approving transactions.106
104 See Infrastructure: stronger restrictions on foreign investments in Germany, Freshfields Bruckhaus and Deringer,
December 2007, P-2, available at http://www.freshfields.com/publications/pdfs/2007/dec19/21133.pdf (Last visited
July 2, 2008)
105 See Andrea Helfrich, Proposed Control of Foreign Investment in German Companies, McDerrmott Will &
Emery, February 2008, P-4 available at http://www.mwe.com/info/news/gu0208.pdf (Last visited July 2, 2008)
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There was a critical reaction in European Commission in regards to the new proposal. The
question was whether the German market policy was shifting from openness to protectionism. In
response to this concern, the Economics Ministry of Germany declared that “the proposals did
not limit action on a national level and it would continue with its draft bill.”107 Fear that the
image of a German open market would be changed for foreign investors is not only one that
might worry German government. As soon as the recently drafted amendment would be passed,
the new law might become a reason of tension between the European Commission (EC) and
Germany. The origins of controversy are already seen today because there is an opinion among
EU politicians that the drafted legislation is not in conformity with EU regulations. To be more
specific, it can contradict provision of the EC treaty, about free movement of capital. There are
some conditions when supporting of free capital movement is not applicable for a member state.
When there is a threat towards public security and order obligation not to restrict free capital
movement can be ignored. However, this is only permissible in rare circumstances, and should
only be based on an extremely threatening situation to public security. The European Court of
Justice (ECJ) declared its position what constitutes the threat towards public security. Based on
the Judgment of the European Court of Justice from the Case: Omega Spielhallen-und
Automatenaufstellungs-GmbH v Oberburgermeisterin der Bundesstadt Bonn, it should be
assumed that any derogation from the EC treaty provisions on the grounds of public security
would be allowed “only if there is a genuine and sufficiently serious threat to a fundamental
interest of society”108 Therefore, it can be supposed that a number of lawsuits will be filed in
the ECJ after the amendment would take affect. The German government might face some
difficulties while justifying their decision in reference to a restricted transaction. It would be hard
to prove that each case blocked by the government impaired a “threat to a fundamental interest
of society.”
106 See Infrastructure: stronger restrictions on foreign investments in Germany, Freshfields Bruckhaus and Deringer,
December 2007, P-2, available at http://www.freshfields.com/publications/pdfs/2007/dec19/21133.pdf (Last visited
July 2, 2008)
107 See European Commission recommends a common EU approach to sovereign wealth funds, Linklaters,
28 February 2008, available at
http://www.linklaters.com/newsanddeals/newsdetail.asp?newsid=3470&navigationid=205 (Last visited July 2,
2008)
108 See Infrastructure: stronger restrictions on foreign investments in Germany, Freshfields Bruckhaus and Deringer,
December 2007, P-2, available at http://www.freshfields.com/publications/pdfs/2007/dec19/21133.pdf (Last visited
July 2, 2008) See judgment of the Court of Justice in Case C-36/02 Omega Spielhallen- und
Automatenaufstellungs-GmbH v Oberburgermeisterin der Bundesstadt Bonn, 14 October 2004, available at
http://curia.europa.eu/en/actu/communiques/cp04/aff/cp040082en.pdf (Last visited July 2, 2008)
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6. National Security influence on Foreign Investment in France
Similar to Germany, the EC treaty is legally binding for France. Therefore any restriction
imposed on foreign investment must be backed by substantial reason. While Germany is drafting
its new bill today, France has already implemented changes in legislation. Companies
manufacturing crucial products and creating important technologies cannot be acquired by
foreign entities without consent of French government. Previously, when France adopted the
new law, the ECJ expressed its concern due to uncertainty that foreign investors would face
under French law. The Final verdict came when the ECJ declared on the decision of the French
government about restricting an English investment fund from investing in the Church of
Scientology of Paris. This raised a question whether the legislation existing at the time was clear
enough for foreign investors. According to an ECJ judgment, investors were confused because
the law did not specify which industrial sectors were the subject of governmental review.109
France quickly reacted on ECJ decision and tried to resolve the problem by issuing a decree.
This was not enough however, and for compliance with EC regulations, The French government
was forced to wholly amend the law which considered national security implications on foreign
investments.
6.1 The law regulating Foreign Direct Investment in France
The law that authorizes French government to examine foreign investments and consider its
implication on national security is French Monetary and Financial Code. The code that was
amended in 2005 lists some sectors came under the scrutiny of French government. The purpose
of the amendment is to protect French national security and public interest. The newly enacted
law authorized the French Ministry of Economy to review and take decisions on the approval of
the transaction. There are certain circumstances when it is necessary for prior approval of the
transaction, for example, if the foreign investment would jeopardize public order, negatively
influence public safety or may impair national defense interests automatically becomes subject
of governmental scrutiny.110 Also, if the foreign investor intends to acquire a French company
which is involved in research, development and production of, arms, munitions, or explosive
equipment the foreigner must file a notification in the French Ministry of Economy and get
109 See Controls on foreign investment in France and their recent reform, Support for strategic companies and
Protection of State interest, Jun 22, 2007 available at http://www.intelligence-
economique.gouv.fr/article.php3?id_article=277 (Last visited July 3, 2008)
110 Monetary and Financial Code, Article L. 151-3.
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approval for transaction.111 These categories in the current law are different from previous laws.
Transactions in Public health sectors which were included before the amendment took place,
does not require governmental approval any more. On the other hand, the amended law is
broader and includes a spectrum of industries which are crucial for national defense interests.112
On December 31, 2005 France adopted Decree No. 2005-1739. Even after adoption of the
Decree, tension between the French government and the EC was not resolved. Inclusion of
gambling activities as the one of the subject of governmental reviews was one issue of
disagreement. The French government argued that it was indispensable to include these
industries in the list, because foreign investors could have used French gambling sector as a
means for money laundering. Another feature of the new Decree which deepened the tension is
the difference in the foreign investment review process. Specifically, under French law
investments from EU member states and from third countries are not subject to same procedural
review. The European Commission expressed its concern for discriminating characteristic of
Decree.113 However, the French government justified its decision and declared that WTO
regulations and article 57 of EC treaty allows them to implement double standards in terms of
treating different investments from third countries and from European Union.114 Companies
incorporated in third countries and involved in three types of investments are required to get
prior approval. Article R 153-1 of the Monetary and Financial code specifies these three types of
transaction: 1) Investments that would give 33.33 % ownership in French company, 2) If the
foreign company directly or indirectly acquires part or total assets of French company, 3) or if
the takeover will fall under the Article L 233-3 of the French Code of Commerce. On the other
hand, investments flowing from EU countries are subject to approval if the assets of French
company are totally or partially purchased 115
111 Article L. 151-3.
112 Reform of French Foreign Investment Regulations, Fried Frank Harris Shriver & Jacobson LLP, January 26,
2005, P-4 available at
http://www.ffhsj.com/siteFiles/Publications/C1A6ABC45D5AD7EA5D7A003DED3EBA22.pdf (Last visited July
2, 2008)
113 See United State Government Accountability Office; FOREIGN INVESTMENT; Laws and policies Regulating
Foreign Investment in 10 countries, February 2008, P-54 available at www.gao.gov/highlights/d08320high.pdf (Last visited July 1, 2008)
114 See Controls on foreign investment in France and their recent reform, Support for strategic companies and
Protection of State interest, Jun 22, 2007 available at http://www.intelligence-
economique.gouv.fr/article.php3?id_article=277 (Last visited July 4, 2008)
115 See Regulation of Foreign Investment in France, Euro-American Lawyers Group, November 2006, P-3 available
at http://www.ealg.com/doc/Legal%20Framework/REGULATION%20OF%20FOREIGN%20INVESTMENTS%20-%20France.doc (Last visited July 4, 2008)
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6.2 foreign investment review process in France
The Ministry of Economy is the French governmental authority and reviews foreign investments
that could threaten national security.116 The Ministry basis its decision on information received
from other governmental agencies. There is a distinction between United States, German and
French review processes. In United States and in Germany transactions that have not been
notified, the government can only block the transaction and no further penalties will be imposed
on transaction parties. In France however, certain criminal and civil punishments if the parties
would fail to submit a notification letter.117 The Decree creates flexibility for investors who are
uncertain whether the following transaction in sensitive sectors for French national security
should be reviewed and approved by the government. A Parties’ uncertainty is resolved by
allowing them to approach the Ministry of Economy and to get information on whether the
transaction has to be reviewed by the government. However if the Ministry will not respond
within a two month time period, it means that transaction has been automatically approved.
Parties should take into consideration that if they continue transaction without getting
authorization from Ministry that there is no need for further review, the government might
punish them by imposing a penalty which could exceed a double amount of already spent money
in a completed investment.118 This part of the Decree somehow resembles the newly proposed
rules issued by U.S. Department of Treasury, both regulations encourage transaction parties to
contact respective authorities (CFIUS in U.S. and Ministry of Economy in France) prior to filling
there notification letters.
The Decree permits the Ministry of Economy to block transactions that would result in the
removal of certain R&D activities from France. Also the portfolio of the French companies that
are comprised from only small part of sensitive technologies can be divested. By the meaning of
divestiture foreign acquirer would be allowed to purchase a big part of entity that does not
116 Article L. 151-3.
117 See 31 C.F.R. §§ 800.401-.402. See Infrastructure: stronger restrictions on foreign investments in Germany,
Freshfields Bruckhaus and Deringer, December 2007, P-2, available at
http://www.freshfields.com/publications/pdfs/2007/dec19/21133.pdf (Last visited July 5, 2008) See FOREIGN
INVESTMENT Laws and policies Regulating Foreign Investment in 10 countries United State Government
Accountability Office; February 2008, P-55 available at www.gao.gov/highlights/d08320high.pdf (Last visited July
1, 2008)
118 See Pierre Servan-Schreibe, Stephane Heliot, The International Comparative Legal Guide to: Mergers &
Acquisitions 2007, A practical insight to cross-border Mergers & Acquisitions, Chapter13, P-75 available at
http://www.iclg.co.uk/khadmin/Publications/pdf/1156.pdf
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include sensitive sectors since divestiture.119 The divestiture requirement is similar the risk
mitigation procedure established in the U.S. Similarity is in the main idea of both procedural
requirements. By engaging in negotiations with transaction parties French and U.S. governments
intend to lessen risks of national security impairment.
Similar to U.S. regulatory requirements, France considers whether the foreign transaction in a
sensitive sector would change control of the company. The decree sets review requirements in
regards to investments flowing from third countries to sensitive sectors. If the foreign buyer
gains control over the company that is headquarted in France the acquisition in this case would
be the subject of review.120
The decree identifies 11 sensitive sectors that are important for national security and might be
scrutinized by the government: 1) gambling 2) private security services; 3) research and
development or products that can be illegally used in terrorist activities such as pathogens and
toxins; 4) equipment for intercepting wire tapping 5) monitoring and approving correctness of
information technology systems and products; 6) goods or services for ensuring safety of critical
infrastructure; 7) Dual-use items and technology; 8) cryptology services; 9) Contractors of the
French government in the defense sector that possesses classified information about French
national defense; 10) production of weapons, munitions and other explosive equipment that are
manufactured for military purposes; and 11) when company is a contractor or subcontractor of
Ministry of Defense and is engaged in business activities in terms of designing and supplying
military arms for the Ministry.121
There is also a distinction in the treatment of investments from EU and from non-EU countries.
For example, sectors 8 to 11 are applicable to all countries without. Whereas investment reviews
in first seven sectors we strict for companies incorporated in non-EU countries.122
119 See Pierre Servan-Schreibe, Stephane Heliot, The International Comparative Legal Guide to: Mergers &
Acquisitions 2007, A practical insight to cross-border Mergers & Acquisitions, Chapter13, P-75 available at
http://www.iclg.co.uk/khadmin/Publications/pdf/1156.pdf
120 See FOREIGN INVESTMENT Laws and policies Regulating Foreign Investment in 10 countries United State
Government Accountability Office; February 2008, P-54 available at www.gao.gov/highlights/d08320high.pdf (Last visited July 1, 2008)
121 See R 153-2 Monetary and Financial Code, See Pierre Servan-Schreibe, Stephane Heliot, The International
Comparative Legal Guide to: Mergers & Acquisitions 2007, A practical insight to cross-border Mergers &
Acquisitions, Chapter13, P-75 available at http://www.iclg.co.uk/khadmin/Publications/pdf/1156.pdf
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The decree specifies information required from investors when submitting documents for
transaction review. The following documentation should be submitted: The place where the
company is incorporated; information on legal or private persons that control the investing
company; details on major shareholders whose ownership in the company exceeds five percent
of overall outstanding shares or voting rights; The names and addresses of the members of
boards of directors; If the foreign entity is an investments fund, detailed information about the
fund; Business activity of a French company that is intended to be acquired; what was the
revenue of the targeted French company during last fiscal year; the ownership structure of the
company before completion of the transaction and after its conclusion.123
Again, transaction parties are encouraged to contact the Ministry of Economy and get advice on
what additional information would be required for a review. There resemble between prefailing
and postfailing processes. For example in prefailing situation if the ministry does not respond to
the questions within two month, transaction is automatically completed, the same rule applies
when parties submit all required documents for approval and ministry does not conclude
transaction review in two month. However if the ministry would require more information for
the review conclusion, time can be prolonged.124
The investment review processes in European countries (Germany; France) is softer compared to
the United States. Individuals or companies investing in these countries might have an interest
whether they can appeal transactions blocked by reviewing authorities. The main factor that
distinguishes United States policies from German and French approaches is the enormous power
granted to the United States President when deciding to approve or block a transaction. A
decision taken by the United States President cannot be appealed in a court. However,
transactions restricted in France are subject to judicial review. Also newly presented ideas by
122 See Regulation of Foreign Investment in France, Euro-American Lawyers Group, November 2006, P-4 available at http://www.ealg.com/doc/Legal%20Framework/REGULATION%20OF%20FOREIGN%20INVESTMENTS%20-%20France.doc (Last visited July 5, 2008)
123 See FOREIGN INVESTMENT Laws and policies Regulating Foreign Investment in 10 countries, United State
Government Accountability Office; February 2008, P-57 available at www.gao.gov/highlights/d08320high.pdf (Last visited July 1, 2008)
124 See Pierre Servan-Schreibe, Stephane Heliot, The International Comparative Legal Guide to: Mergers &
Acquisitions 2007, A practical insight to cross-border Mergers & Acquisitions, Chapter13, P-75 available at
http://www.iclg.co.uk/khadmin/Publications/pdf/1156.pdf (Last visited July 6, 2008) See FOREIGN
INVESTMENT Laws and policies Regulating Foreign Investment in 10 countries, United State Government
Accountability Office; February 2008, P-57 available at www.gao.gov/highlights/d08320high.pdf (Last visited July
1, 2008)
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Chancellor Merkel’s party state that any prohibited transaction in Germany can be challenged
and parties should have a right to file a law suit in a court and appeal a governmental decision.125
An Unapproved transaction in Germany and France can be appealed not only in national courts,
but also in European Court of Justice. An appeal in the European Court of Justice will be
accepted if the countries have violated the EC Treaty.
France not only regulates foreign investments in strategically sensitive sectors but also in some
business transactions that do not fall under the list of critically important transactions for national
security. For example, foreign companies planning an acquisition of a French financial
Institution or Insurance Company would be subject of different review procedures. In the case if
French financial institution, the acquirer must notify the Head of the French National Bank.
Notification should be made eight days prior to submitting an application to the French Financial
Markets Authority (AMF). The Consent of the National Bank is required if the acquisition would
result is ownership transfer in the following percentage amount: 33.33%, 20% and 10%. Also it
is helpful to notify French insurance regulator if an individual plans to purchase certain
percentage (50%, 33.33%, 20% or 10%) of a French insurance company.126
7. Foreign Direct Investment and National Security Concerns in China
Chinas’ approach towards foreign investments is somehow similar to the policies adopted in the
United States. This paper already discussed the United States attempt to maintain a balance
between national security interests and increasing the number of foreign investments. The same
is true for China. The Chinese government encourages foreign business activity and at the same
time sets strict regulations for foreign investors.127 However, China’s foreign investment rules
and regulations are much more complicated than the United States, Germany and France. There
is no single adopted law or regulation that foreigners should take into consideration when
investing in China. Unlike the countries discussed above China does not have a single
125 See Infrastructure: stronger restrictions on foreign investments in Germany, Freshfields Bruckhaus and Deringer,
December 2007, P-2, available at http://www.freshfields.com/publications/pdfs/2007/dec19/21133.pdf (Last visited
July 2, 2008) See Alan P. Larson, David M. Marchick, Foreign Investment and National Security Getting the
Balance Right COUNCIL ON FOREIGN RELATIONS, 18, JULY 2006, P-3 available at
www.cfr.org/content/publications/attachments/CFIUSreport.pdf (Last visited Jun. 18, 2008) See FOREIGN
INVESTMENT; Laws and policies Regulating Foreign Investment in 10 countries, United State Government
Accountability Office; February 2008, P-58 available at www.gao.gov/highlights/d08320high.pdf (Last visited July
1, 2008)
126 See Pierre Servan-Schreibe, Stephane Heliot, The International Comparative Legal Guide to: Mergers &
Acquisitions 2007, A practical insight to cross-border Mergers & Acquisitions, Chapter13, P-75 available at
http://www.iclg.co.uk/khadmin/Publications/pdf/1156.pdf (Last visited July 6, 2008)
127 See Stanley Lubman, LOOKING FOR LAW IN CHINA, Columbia Journal of Asian Law, Fall 2006, P-17
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governmental authority that would review national security impacts of foreign investment.
Instead there are several governmental agencies involved in review processes. The acquisition
of State owned Enterprises might require investment review on provincial or state level,
generally this kind of reviews are conducted by the special departments that are established
locally and provincially. The so called “department in Charge” that has an authority to review
particular investment and can approve transaction, but not all transaction can be approved by
these departments. If the acquisition involves nationally important enterprises, review and
approval might be required from Ministry of Commerce (MOFCOM).128
7.1 Laws Applicable For FDI Review Process in China
The China conducts foreign investment review in compliance with three main regulations. Those
are: 1) Regulation adopted by MOFCOM on foreign investment; 2) Catalog for the Guidance of
Foreign Invested Enterprises that has been revised in 2007 and 3) Newly passed Anti-Monopoly
law.
7.1.1 MOFCOM Foreign Investment Regulation
Since MOFCOM “Promulgated the Provisional Provisions on the Merger and Acquisition of
Domestic Enterprises by Foreign Investors”, it became difficult for foreign purchasers to acquire
Chinese companies.129 New regulation requires MOFCOM approval if the transaction would
have a negative affect on “national economic security”, would transfer Chinese famous brand
name to foreign acquirer or if the acquisition involves the “Key Industry” for China.130
However like the Unite States FINSA act does not completely define term “national security”
and gives full discretion to CFIUS to determine national security based on individual cases, the
same approach is in MOFCOMs’ regulation, it does not determine what composes threat towards
“national economic security” or which industries are regarded as major ones.131 The United
128 See Stanley Lubman, LOOKING FOR LAW IN CHINA, Columbia Journal of Asian Law, Fall 2006, P-18
129 See Provisions for Foreign Investors to Merge Domestic Enterprises available at
http://english.mofcom.gov.cn/aarticle/policyrelease/gazettee/200610/20061003378460.html (Last visited July 7,
2008)
130 Eileen Francis Schneider, BE CAREFUL WHAT YOU WISH FOR: CHINA’S PROTECTIONIST
REGULATIONS OF FOREIGN DIRECT INVESTMENT IMPLEMENTED IN THE MONTHS BEFORE
COMPLETING WTO ACCESSION, Brooklyn Journal of Corporate, Financial & Commercial Law, Fall 2007,
P-280
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States and Chinas tricky decision to leave the question open and not to clarify what constitutes
“national security,” “national economic security” or “Key industry” gives both countries an
option to verify its decision not on the basis of strictly limited scopes but instead they are free in
their choice.
7.1.2 Catalog for the Guidance of Foreign Invested Enterprises
Catalog for foreign investment industrial guidance was first adopted in June 1995. Since 1995 it
has been amended for few times, the last changes were undertaken in 2007. National
Development and Reform Commission that is one of the governmental agencies that reviews
foreign investments, implemented changes in main regulatory principals of the Catalog. These
principals split foreign investments in three categories such as "encouraged," "restricted" and
"prohibited." The provisions embodied in Catalog do not exclusively regulate foreign
investments impairment on national security, it is rather concentrated on regular business
transactions.132
7.1.3 Anti-Monopoly law
The new anti-monopoly law that China passed in 2006 will take affect on 1st of August 2008.
Before law was passed, its’ drafted version was a reason of long debates during a decade. It is
clear that Anti-Monopoly law will have a huge effect on Mergers and Acquisitions in China.
Until the August 30, 2007 when the law was adopted, the country with one of the largest
economy in the world did not have substantial anti monopoly regulation.133 This paragraph of the
paper will be concentrated only on article 31 of chapter IV of the anti-monopoly law, which
addresses national security threats imposed by acquisition of Chinese enterprises by foreign
investors. Article 31 states the following: “Where national security is involved in the case of
131 See Joseph D. West, Judith A. Lee, Christine K. Brennan, Dave M. Wharwood, and Patrick F. Speice, Jr,
NATIONAL SECURITY IMPLICATIONS OF FOREIGN INVESTMENT IN U.S. GOVERNMENT
CONTRACTORS, BRIEFING PAPERS second series, October 2007, P-5, available at
http://www.gibsondunn.com/publications/Documents/West-NatlSecImplicationsOfForeignInvestment.pdf (Last
visited Jun. 15, 2008) See Venessa Wong, China’s new M&A regulations may make some aspects of acquisitions
easier for foreign investors, but overall reflect a move by the central government to retain control over key business
sectors, November 2007, P-17 available at
http://www.venessawwong.com/INSIGHT%20Cover_Story%20M&A.pdf (Last visited July 7, 2008)
132 See Steve Dickinson, China Changes Foreign Investment (FDI) Rules, November 12, 2007 available at
http://www.chinalawblog.com/2007/11/breaking_news_china_changes_fo.html (Last visited July 7, 2008)
133 See CARL W. HITTINGER AND JOHN D. HUH, THE PEOPLE’S REPUBLIC OF CHINA ENACTS ITS
FIRST COMPREHENSIVE ANTITRUST LAW: TRYING TO PREDICT THE UNPREDICTABLE, NYU
JOURNAL OF LAW AND BUSINESS, March 31, 2008, P-246
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acquisition of domestic enterprises by foreign capital or the participation by foreign capital in the
concentration of undertakings by other means, in addition to a review on the concentration in
accordance with this Law, a review on national security shall also be conducted in accordance
with the relevant laws and regulations.”134 The article has raised some concerns among foreign
and Chinese businessmen who are engaged in investment transactions in China. The reason why
the transaction parties are not comfortable with this article is unclear situation on conducting
national security review. To be more specific it is difficult to understand for them which
governmental agency is responsible to review transactions and where they should file necessary
documentation for review. However based on a notion that is incorporated in the article which
states that “national security shall be conducted in accordance with the relevant laws and
regulations” it should be assumed that new law authorizes agencies that has been previously
working on national security matters to review foreign investments containing a threat and
impairments towards national security. Those kind of transactions can be examined based on
some facts and considerations that it will be determine by the agencies themselves.135
7.2 National Security and Foreign Investment Review Process in China
In the beginning of the chapter it was discussed the acquisition and review process of state
owned enterprises by special departments. However here would be discussed review procedure
in regards to acquisition of private business companies. Certain steps exist while filing necessary
documentation for approval of the transaction. Mostly transaction review process is conducted
on provincial level. Review on provincial level is supervised by local Ministry of Commerce and
in case if local MOFCOM finds something suspicious towards national security it transmits the
case for approval to national MOFCOM, afterwards MOFCOM investigates national security
threats and approves or blocks transaction. On the other hand transactions that might involve
sensitive sectors for the national security should have to be reviewed and approved by national
MOFCOM.136 The transaction parties are often unsure where they should submit necessary
134 See The Anti-Monopoly Law of the People’s Republic of China, translated by DLA Piper (2007) Chapter IV
article 31 available at http://www.dlapiper.com/files/upload/China_AML_Translation_Alert_.html#ch4 (Last
visited July 8, 2008)
135 See CARL W. HITTINGER AND, JOHN D. HUH, THE PEOPLE’S REPUBLIC OF CHINA ENACTS ITS
FIRST COMPREHENSIVE ANTITRUST LAW: TRYING TO PREDICT THE UNPREDICTABLE, NYU
JOURNAL OF LAW AND BUSINESS, March 31, 2008, P-266
136 See FOREIGN INVESTMENT Laws and policies Regulating Foreign Investment in 10 countries United State
Government Accountability Office, February 2008, P-47 available at www.gao.gov/highlights/d08320high.pdf (Last visited July 8, 2008)
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documentation for review. If the both Chinese and foreign person think that investment
somehow includes sensitive sector for Chinese national security it would be better for them to
submit notification documents directly to national level MOFCOM and avoid further
prolongation of review. Chen Laingyu who was the secretary of Shanghai’s Communist Party
was dismissed from his position, Beijing stated that the reason for his dismissal was related to
pension scandal, however unofficially this removal is regarded as a sign for the Shanghai’s local
government officials that that Beijing will not allow to approve transactions locally if it involves
sensitive sectors for Chinese national interest. Shanghai as one of the largest financial centers in
China is highly attractive for investors, currently more than 120 foreign companies operate in
Shanghai and that is why foreign investments carried out in Shanghai is under scrutiny of
national government.137
Moreover the approval process that transaction parties should undergo on local or national level
of MOFCOM, China has additional governmental circle for foreign investment reviews. National
Development and Reform Commission (NDRS) has an influence over macroeconomic policy of
china and also is involved in examining foreign transactions. In 2004 NDRS implemented
procedures on administration of foreign investment reviews. According to this rules foreign
investors should submit the so called "application report to the NDRC with information on the
project's operation, construction scale, location, natural resources requirement and environmental
impact.”138 After receiving an application NDRC should complete review within 20 days.
Additional requirement of NDRS review process makes whole system more complicated.
Usually foreign investments and capital changes in Chinese non manufacturing companies where
subject of MOFCOM approval but new rule broadened administrative function of NDRS and
increased number of investment projects that requires NDRS examination. The rule created
unclear and confusing situation for investors. The current M&A regulations require transaction
approval on local or national MOFCOM level, however new regulation also obliges parties to go
through NDRS review process and obtain its consent.139 In 2006 NDRS declared creation of new
policy that would lead to better control of foreign investment in China. The plan that was created
by NDRS addresses tension between national security and open foreign investment policy, it
137 See CARL W. HITTINGER AND, JOHN D. HUH, THE PEOPLE’S REPUBLIC OF CHINA ENACTS ITS
FIRST COMPREHENSIVE ANTITRUST LAW: TRYING TO PREDICT THE UNPREDICTABLE, NYU
JOURNAL OF LAW AND BUSINESS, March 31, 2008, P-273
138 See Stanley Lubman, LOOKING FOR LAW IN CHINA, Columbia Journal of Asian Law, Fall 2006, P-20
139 See Stanley Lubman, LOOKING FOR LAW IN CHINA, Columbia Journal of Asian Law, Fall 2006, P-20
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formulates an approach that China should support foreign investment inflows, except under the
circumstances when investment is painful for national security.140 Foreign investment summary
that was published by US china business council reviews NDRS new plan. According to the
summary, NDRS states that “foreign capital should be directed toward high-tech industries,
modern service industries, high-end manufacturing, infrastructure development, and ecological
and environmental protection.”141
Chinese domestic companies can highly influence foreign acquisition process of local
enterprises. Foreign investment regulation that MOFCOM introduced in 2006 states that foreign
investment can be challenged by local companies on the grounds of anti-trust issues. By creating
negative view about transaction, competitors can indirectly increase pressure on the government
and this could have an affect when taken decision. In the introduction of the paper it was
discussed purchase of 85 percent stake by the US investment fund Carlyle Group in Xugong
Group Machinery, one of the reason why transaction was suspended by the government was the
CEO of competitor Chinese company who opposed investments and declared that it was not
beneficial for countries national interest. Apparently the CEO of the rival company worked
actively to disturb completion of the transaction.142
7.3. Negotiations between U.S. and China on Bilateral Investment Treaty
As the United States and China are both subjects of the research paper it would be interesting to
discuss recently started negotiations between these two countries on adopting bilateral
investment treaty. The treaty will be created on the fundamental investment principals such as
the promotion of open market, fair and transparent treatment of all the investments carried out
between United States and China, also completion of transaction based on a rule of law.143 The
United States government official stated that: "The United States and China have agreed to
140 See Foreign Investment in China, THE US-CHINA BUSINESS COUNCIL publishes February 2007, available
at http://www.uschina.org/info/forecast/2007/foreign-investment.html (Last visited July 9, 2008)
141 See Foreign Investment in China, THE US-CHINA BUSINESS COUNCIL publishes February 2007, available
at http://www.uschina.org/info/forecast/2007/foreign-investment.html (Last visited July 9, 2008)
142 See United State Government Accountability Office; FOREIGN INVESTMENT; Laws and policies Regulating
Foreign Investment in 10 countries, February 2008, P-48 available at www.gao.gov/highlights/d08320high.pdf (Last visited July 8, 2008)
143 See US, China agree to launch talks for key investment accord available at
http://www.channelnewsasia.com/stories/afp_asiapacific_business/view/354973/1/.html (Last visited July 9, 2008)
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launch negotiations for a bilateral investment treaty," which would be based on "high standard of
investor protection." It has been more than one year that Washington and Beijing have been
actively cooperating about importance to start negotiations on creation of bilateral investment
treaty. The treaty would be beneficial for investors operating in both states. It will guarantee
open door policy for the investments flowing between these states. United States corporations
raised concern in terms of new changes in Chinese investment policy, they are worried about
protectionist approaches towards foreign investors which are in favor of local domestic
companies and discriminates investments of foreign enterprises. The main reason why the United
States companies think that Chinese open investment climate has been changed is the adoption
of new anti-monopoly law that results tough treatment of foreign companies compared to
Chinese firms.144 However not only the Chinese investment policy raises some concerning
issues, but also there is a growing dissatisfaction among Chinese investors about CFIUS foreign
investment reviews process. Washington justifies its position by the increasing number of
foreign investments that are threatening for the U.S. national security. The President of U.S.-
China business council declared that: “A bilateral investment treaty would provide additional
protections to investors from each country and the other country and goes beyond what was in
the World Trade Organization entry agreement, and It can provide additional protection to the
Chinese investors in the US and at the same time could also deal with some of the issues facing
US companies that invest in China as well.”145
8. Conclusion
The paper summarized policies and regulations of the United States, Germany, France and China
in regards to foreign investment and its implications on national security. Despite some
differences that the countries have related to foreign investment regulations and review
processes, they all share an opinion that foreign control over the national companies that are
operating in sensitive sectors and industries somehow impairs national interest and national
security. Each country has a different review system but on some level they look like each other,
all four states are in favor of open market policy and are trying to persuade foreign companies to
invest in their markets, but as soon as the investment will raise the concern of national security it
automatically falls under the oversight of the government. The United States FINSA act and
144 See US, China agree to launch talks for key investment accord available at
http://www.channelnewsasia.com/stories/afp_asiapacific_business/view/354973/1/.html (Last visited July 9, 2008)
145 See US, China agree to launch talks for key investment accord available at
http://www.channelnewsasia.com/stories/afp_asiapacific_business/view/354973/1/.html (Last visited July 9, 2008)
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newly proposed German legislation resembles each other, none of them requires mandatory
notification of foreign investment, transaction parties are free in their choice and they can decide
whether to notify or not. However France has completely different approach towards notification
process, it sets certain criminal and civil sanctions in case if the parties would not submit
notification letter. The most important distinction that differentiates foreign investment review
processes among United States, Germany and France is in the post review process. Transactions
blocked by the United States president can not be reviewed by the courts, on the other hand
unapproved investments in France are subject of judicial review. Also the position asserted by
Chancellor Angela Merkels’ party underlines the idea that transaction parties should have a right
to file a law suit in a court and appeal governmentally blocked investment. Chinas FDI laws is
completely different from all other three States but there is one important likeness among
Chinese, German and U.S. regulations. For example in China MOFCOM approval is required if
transaction impairs “national economic security”, and “Key Industry”, In the U.S. foreign
investment is subject of CFIUS review if the “national security” is under the high risk, and newly
drafted law of Germany includes investigation of transaction in case it threatens “public security
and order.” However none of these regulations defines what constitutes “national security,”
“national economic security” or “public security and order.” This is not a mistake that these
states made when the laws were drafted. For ensuring that they will not be limited in their
actions when the state interest is endangered they did not define these issues intentionally.
The paper discusses one interesting feature of the French Decree that looks like CFIUS risk
mitigation process. Decree 2005-1739 state that before transaction parties submit necessary
documents for review, the Ministry of Economy of France may be engaged in prior negotiations
with transaction parties. The main reason for these negotiations is to oversee whether the
transaction would transfer sensitive sectors of French national security in the control of foreign
company. If the Ministry concludes that transfer is not in the best interest for the countries
national security, they may request divestiture of targeted French company. By the meaning of
divestiture foreign acquirer would be allowed to purchase a part French company only after
Ministry of Economy concludes that there is no further risk that transaction might contain to
national security. The divestiture requirement is very similar to the risk mitigation procedure that
has been recently established in the United States, resemblance is in the main idea on how to
lessen the threat towards the national security, before the parties submit required documents for
the approval of the transaction. By cooperating with transaction parties the United States and
France governments aim to mitigate risks that can endanger national security. However it seems
that the United States risk mitigation procedure is more proficient than of French. In the United
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State FINSA empowers the Lead Agency to negotiate with the United States and Foreign person
and to mitigate the risks that might negatively influence on countries national security, Also
FINSA requires Lead Agency to repot CFIUS about the mitigation agreements that it has
concluded with transaction parties, on the other hand if the one of the transaction parties will
deviate from the mitigation agreement they should notify to CFIUS. However France does not
have an inter agency committee like CFIUS that would designate the Lead Agency for risk
mitigation procedures. Instead the Ministry of Economy is directly engaged in negotiations for
lessening the risk of the transaction.
In the end it should be mentioned that foreign investment and its implication on national security
is a long debating issue between the foreign investors and the governments of the United States,
Germany, France and China. However the foreign companies investing in these countries should
take into consideration States national security interests. On the other hand it is important to
maintain an open market policy and override unnecessary restrictions of foreign investments.
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