April 11, 2008
What, Exactly, Can Foreign Sovereigns Purchase in America?
Posted by David Zaring

With the investments of sovereign wealth funds in the United States being big news, it is worth spending a little bit of time thinking about the processes that currently exist to keep those funds out. One principal means of doing so – it came up during the CNOOC-Unocal-Chevron mess, during the Dubai Ports World fiasco, and in the cratering of the Bain Capital/Hulawei merger with 3Com - is through the Committee on Foreign Investment in the United States, or CFIUS. CFIUS was created by executive order, and later blessed by Congress: it reviews acquisitions of American assets that raises national security implications. How does it work?  

CFIUS says that its protective mandate, the term “US national security” will be “interpreted broadly and without regard for particular industries,” its scope lying wholly “within the president's discretion.” Would be acquirers submit their deals for evaluation over a 30 day, and, if CFIUS is worried, a subsequent 45 day window. And CFIUS usually doesn't get in the way of foreign acquisitions. According to the Congressional Research Service (GAO-02-736) it has launched in-depth reviews of acquisitions in 25 of the over 1500 filings made to it since 1988. Of these 25 cases the mere announcement of intense review led to a withdrawal of the application, and presumably to an end to the acquisition, 13 times. In 12 other cases CFIUS submitted a letter to the president, leading to a modification of the transaction in some cases. Only once has the president denied clearance of a deal after CFIUS review: in the 1990 acquisition of the US aerospace manufacturer by a Chinese firm. 

I wanted to have a look at these matters to see if there were any opinions that could establish in more detail what criteria CFIUS used when evaluating foreign acquisitions. Unfortunately it is not to be. A Treasury Department employee told me that CFIUS does not publish anything, and interprets itself not to be subject to FOIA. 

This does not, of course, mean that CFIUS exists in a world outside of law. To the contrary, Washington firms have developed CFIUS practices, and because those practices involve the use of information that is not publicly available, I’m guessing that they could be prosperous ones. However, all the secrecy is not such good news for those who'd like to know what precisely the law of foreign acquisition is.  Maybe the pending  round of CFIUS regulations will help clarify that law.

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