Foreign Investment in the U.S.: Proposed Regulations

Excerpt from North American Free Trade & Investment Report
published by WorldTrade Executive, Inc.

By David J. Laing and Mark D. Menefee (Baker & McKenzie)

On April 21, 2008, the U.S. Department of Treasury issued proposed regulations which would implement the Foreign Investment and National Security Act of 2007 (“FINSA”). FINSA was enacted in July 2007 in response to what some members of Congress perceived as a failure of CFIUS to investigate thoroughly some investments into the United States. These are proposed regulations to implement FINSA, and these proposed regulations are subject to public comment before final implementation.

The focal point for the government’s review of foreign acquisitions will continue to be the inter-agency Committee on Foreign Investment in the U.S. (“CFIUS”), which is chaired by the Department of Treasury and which has been expanded to include additional agencies. CFIUS is authorized to investigate any foreign investments resulting in “control” of a U.S. entity by a foreign entity.

The proposed regulations would not fundamentally change the general U.S. policy of openness to foreign investments. The proposed regulations clarify what transactions would be subject to review and investigation by CFIUS, and set forth new procedures for notifying CFIUS of proposed transactions. However, FINSA and the proposed regulations confirm that future investments in U.S. entities by foreign entities will receive significantly increased scrutiny by CFIUS.

The regulations also would create important new requirements for the parties who submit voluntary notifications to the government concerning proposed transactions, or who enter into “mitigation agreements” with the U.S. government to reduce specific risks to the national security identified by CFIUS.

Given these proposed regulations, as well as CFIUS’s recent shift toward undertaking much more detailed reviews of transactions, we believe the key to a successful foreign investment in or acquisition of a U.S. company will be to use enhanced due diligence measures to (1) determine promptly if the transaction is covered by the regulations and if it involves critical technologies or infrastructure; (2) voluntarily notify and consult with CFIUS to identify any possible concerns by the government; and (3) if CFIUS expresses particular concerns, be prepared to modify the transaction and/or implement specific compliance procedures.

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