The Exon-Florio National Security Test for Foreign Investment

The Exon-Florio National Security
Test for Foreign Investment
Updated April 8, 2008
James K. Jackson
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division

The Exon-Florio National Security Test for Foreign
Investment
Summary
The Exon-Florio provision grants the President the authority to block proposed
or pending foreign acquisitions of “persons engaged in interstate commerce in the
United States”that threaten to impair the national security. This provision came
under intense scrutiny with the proposed acquisitions in 2006 of major operations in
six major U.S. ports by Dubai Ports World and of Unocal by the China National
Offshore Oil Corporation (CNOOC). The debate that followed reignited long-
standing differences among Members of Congress and between the Congress and the
administration over the role foreign acquisitions play in U.S. national security. The
public debate underscored the differences between U.S. policy, which is to actively
promote internationally the national treatment of foreign firms, and the concerns of
some over the way this policy applies to companies that are owned by foreign
governments that have unlimited access to the Nation’s industrial base. Much of this
debate focuses on the activities of a relatively obscure committee, the Committee on
Foreign Investment in the United States (CFIUS) and the Exon-Florio provision,
which gives the President broad powers to block certain types of foreign investment.
In the first session of the 110^th Congress, Congresswoman Maloney introduced
H.R. 556, the National Security Foreign Investment Reform and Strengthened
Transparency Act of 2007, on January 18, 2007. The measure was approved by the
House Financial Services Committee on February 13, 2007 with amendments, and
was approved with amendments by the full House on February 28, 2007 by a vote of
423 to 0. On June 13, 2007, Senator Dodd introduced S. 1610, the Foreign
Investment and National Security Act of 2007. On June 29, 2007, the Senate adopted
S. 1610 in lieu of H.R. 556 by unanimous consent. On July 11, 2007, the House
accepted the Senate’s version of H.R. 556 by a vote of 370-45 and sent the measure
to the President, who signed it on July 26, 2007. It is designated as P.L. 110-49.
On January 23, 2008, President Bush issued Executive Order 13456
implementing the law. The Executive Order also establishes some caveats that may
affect the way in which the law is implemented. These caveats stipulate that the
President will provide information that is required under the law as long as it is
“consistent” with the President’s authority 1) to conduct the foreign affairs of the
United States; 2) withhold information that would impair the foreign relations, the
national security, the deliberative processes of the Executive, or the performance of
the Executive’s constitutional duties; or the President’s ability to supervise the
unitary executive branch. Despite the recent changes to the Exon-Florio process,
some Members are questioning the way in which the changes in the law are being
interpreted by the administration and the way in which the law is being used to
address cases involving foreign governments, particularly with the emergence of
direct investments through sovereign wealth funds (SWFs).
This report will be updated as warranted by events.

Contents
Background ......................................................1
The Exon-Florio Provision..........................................3
Treasury Department Regulations.....................................5
Transactions Not Subject to a Review..............................5
Control ......................................................6
National Security..............................................7
The “Byrd Amendment”............................................7
The Amended CFIUS Process........................................9
Critical Infrastructure..........................................11
Procedures ..................................................14
Factors for Consideration.......................................15
Confidentiality Requirements...................................17
Mitigation and Tracking........................................17
Congressional Oversight.......................................18
Caseload ........................................................19
Conclusions .....................................................21
List of Figures
Figure 1. Foreign Direct Investment in the United States and U.S. Direct Investment
Abroad, Annual Flows, 1990-2006................................2
List of Tables
Table 1. CFIUS Notifications and Investigations, 1988-2005..............20

The Exon-Florio National Security Test for
Foreign Investment
Background
According to the Department of Commerce,¹ foreigners invested $180 billion
in U.S. businesses and real estate in 2006, as indicated in Figure 1, which represents
an increase over the amount invested in 2005. This amount, however, is lower than
the $235 billion U.S. firms invested abroad in 2006 and below the record $321
billion foreigners invested in 2000. The fluctuation of foreign direct investment
flows, although particularly sharp for the United States, is not unique. According to
the United Nation’s World Investment Report, global foreign direct investment
inflows increased by 29% in 2005 after a slight increase in 2004 and three years of
declining flows prior to 2004 that arose from competitive international price
pressures leading to greater internationalization of production, rising commodity
prices, and increased international merger and acquisition activity in some areas.²
The cumulative amount, or stock, of foreign direct investment in the United
States on a historical cost basis³ increased by $180 billion in 2006 to about $1.8
trillion, still below the nearly $2.4 trillion U.S. firms have invested abroad. The
United States is both the largest recipient of foreign direct investment and the largest
overseas direct investor. The rise in the value of foreign direct investment includes
an upward valuation adjustment of existing investments and increased investment
spending that was driven by the stronger growth rate of the U.S. economy, the world-
wide resurgence in cross-border merger and acquisition activity, and investment in
the U.S. financial and insurance industries.⁴

¹ Lowe, Jeffrey H., Foreign Direct Investment in the United States. Survey of Current
Business, September 2007, p. 39.
² World Investment Report 2007: FDI From Developing and Transition Economies:
Implications for Development. New York, United Nations, 2007, p. 5.
³ The stock, or position, is the net book value of foreign direct investors’ equity in, and
outstanding loans to, their affiliates in the United States. A change in the position in a given
year consists of three components: equity and intercompany inflows, reinvested earnings
of incorporated affiliates, and valuation adjustments to account for changes in the value of
financial assets. The Commerce Department also publishes data on the foreign direct
investment position valued on a current-cost and market value bases. These estimates
indicate that foreign direct investment increased by $231 billion and $416billion in 2006,
respectively, to $2.1 and $3.2 trillion.
⁴ Ibarra, Marilyn and Jennifer Koncz, Direct Investment Positions for 2006: Country and
Industry Detail, Survey of Current Business, July 2007. p. 21.

Figure 1. Foreign Direct Investment in the United States and U.S.
Direct Investment Abroad, Annual Flows, 1990-2006
(in billions of dollars)

^$350Billions of dollars
^$300Foreign Direct Investment in
^$250the United States
^$200
^$150U.S. Direct InvestmentAbroad
^$100
^$50
^$0
^-^$50
¹⁹⁹⁰¹⁹⁹²¹⁹⁹⁴¹⁹⁹⁶¹⁹⁹⁸²⁰⁰⁰²⁰⁰²²⁰⁰⁴²⁰⁰⁶
Year
^S^o^u^rce:^C^R^S^f^r^om^U^.^S^.^D^e^p^a^rt^m^eⁿ^t^of^C^o^m^m^{erce d}^a^t^a
Note: the drop in U.S. direct investment abroad in 2005 reflects actions by U.S. parent
companies to take advantage of a one-time tax provision.
With over $282 billion invested in the United States, Great Britain is the largest
foreign direct investor. Japan has moved into the position as the second largest
foreign direct investor in the U.S. economy with over $190 billion in investments.
Following the Japanese are the Germans ($184 billion), the Dutch ($171 billion), and
the French ($143 billion).
In the first session of the 110^th Congress, Members approved, and the President
signed, a measure that is now designated as P.L. 110-49 that alters the national
security process authorized under the Exon-Florio provision. The changes in the
public law provide for greater oversight by Congress and increased reporting by the
Committee on its decisions. In addition, P.L. 110-49 ostensibly broadens the
definition of national security and requires greater scrutiny by the Committee on
Foreign Investment in the United States (CFIUS) of certain types of foreign direct
investments. The law demonstrates the concern that some Members have with the
way in which the Exon-Florio provision is being administered. They also are
concerned with the perceived lack of transparency in the reviews that are mandated
under the Exon-Florio provision that some Members believe has hampered
Congress’s ability to exercise its oversight responsibilities. Not all Members are
satisfied with the law. Some Members argue that the law is still deficient in
reviewing investment by foreign governments through sovereign wealth funds
(SWFs), an issue that was attracting little attention when the law was adopted.

Members of Congress intended to have P.L. 110-49 address six perceived
problems with the current statutes that Members had identified: 1) the principal
members of the interagency Committee on Foreign Investment in the United States
(CFIUS) at times seemed not to be well informed concerning the outcomes of
reviews and investigations regarding proposed or pending investment transactions;
2) CFIUS had interpreted incorrectly the requirements under current statutes for
investigations of transactions that involve firms that are owned or controlled by a
foreign government; 3) reporting requirements under current statutes had not
provided Congress with enough information about the operations and actions of
CFIUS for Members to fulfill their oversight responsibilities; 4) CFIUS had exercised
too much discretion in choosing which transactions it investigated; 5) the definition
of national security used by CFIUS was no longer adequate in a post-September 11^th
world; and 6) deadlines placed on CFIUS to complete reviews and investigations of
investment transactions did not provide adequate time in some instances for the
Committee to complete its reviews and investigations.
The Exon-Florio Provision
In 1988, amid concerns over foreign acquisition of certain types of U.S. firms,
particularly by Japanese firms, Congress passed and President Reagan signed the⁵
Omnibus Trade and Competitiveness Act of 1988. The Exon-Florio provision,
which was included as Section 5021 of that act, fundamentally transformed CFIUS.
This statute grants the President the authority to block proposed or pending foreign
“mergers, acquisitions, or takeovers” of “persons engaged in interstate commerce in
the United States” that threaten to impair the national security. Congress directed,
however, that before this authority can be invoked the President must conclude that
other U.S. laws are inadequate or inappropriate to protect the national security, and
that he must have “credible evidence” that the foreign investment will impair the
national security. This same standard was maintained in P.L. 110-49.
Part of Congress’s motivation in adopting the Exon-Florio provision apparently
arose from concerns that foreign takeovers of U.S. firms could not be stopped unless
the President declared a national emergency or regulators invoked federal antitrust,
environmental, or securities laws. Through the Exon-Florio provision, Congress
attempted to strengthen the President’s hand in conducting foreign investment policy,
while limiting its own role as a means of emphasizing that, as much as possible, the
commercial nature of investment transactions should be free from political
considerations. Congress also attempted to balance public concerns about the
economic impact of certain types of foreign investment with the nation’s long-
standing international commitment to maintaining an environment that is open and
receptive to foreign investment.
Furthermore, Congress did not intend to have the Exon-Florio provision alter
the generally open foreign investment climate of the country or to have it inhibit
foreign direct investments in industries that could not be considered to be of national
security interest. At the time, some analysts believed the provision could potentially

⁵ P.L. 100-418, title V, Subtitle A, Part II, or 50 U.S.C. app 2170.

widen the scope of industries that fell under the national security rubric. CFIUS,
however, is not free to establish an independent approach to reviewing foreign
investment transactions, but operates under the authority of the President and reflects
his attitudes and policies. As a result, the discretion CFIUS uses to review and to
investigate foreign investment cases reflects policy guidance from the President.
Foreign investors are also constrained by legislation that bars foreign direct
investment in such industries as maritime, aircraft, banking, resources and power.⁶
Generally, these sectors were closed to foreign investors prior to passage of the Exon-
Florio provision in order to prevent public services and public interest activities from
falling under foreign control, primarily for national defense purposes.
During consideration of the Exon-Florio proposal debate focused on three issues
that generated a clash of views: a) what constitutes foreign control of a U.S. firm?;
b) how should national security be defined?; and c) which types of economic
activities should be targeted for a CFIUS review? Of these issues, the most
controversial and the most far-reaching was the lack of a definition of national
security. As originally drafted, the provision would have considered investments
which affected the "national security and essential commerce" of the United States.
The term, "essential commerce," was the focus of intense debate between the
Congress and the Administration.
The Treasury Department, headed by Secretary James Baker, objected to the
Exon-Florio provision and the Administration vetoed the first version of the
Omnibus Trade legislation, in part due to its objections to the language in the
measure regarding "national security and essential commerce." The Reagan
Administration argued that the language would broaden the definition of national
security beyond the traditional concept of military/defense to one which included a
strong economic component. Administration witnesses argued against this aspect of
the proposal and eventually succeeded in prodding Congress to remove the term
“essential commerce” from the measure and in narrowing substantially the factors the
President must consider in his determination. According to one participant, Congress
placed the Exon-Florio provision in the statutes under Title VII of the Defense
Production Act to indicate that the provision should be interpreted “as dealing with
the broad industrial base issues addressed by that statute not the more narrow national⁷
security controls dealt with in export control measures.”
Through Executive Order 12661, President Reagan implemented provisions of
the Omnibus Trade Act. In the Executive Order, President Reagan delegated his⁸
authority to administer the Exon-Florio provision to CFIUS, particularly to conduct
reviews, to undertake investigations, and to make recommendations, although the
statute itself does not specifically mention CFIUS. As a result of President Reagan’s
action, CFIUS was transformed from a purely administrative body with limited
authority to review and analyze data on foreign investment to one with a broad

⁶ CRS Report RL33103, Foreign Investment in the United States: Major Federal
Restrictions, by Michael V. Seitzinger.
⁷ Ibid.
⁸ Executive Order 12661 of December 27, 1988, 54 F.R. 779.

mandate and significant authority to advise the President on foreign investment
transactions and to recommend that some transactions be blocked.
Treasury Department Regulations
After extensive public comment, the Treasury Department issued its final⁹
regulations in November 1991 implementing the Exon-Florio provision. Although
these procedures were amended through P.L. 110-49, they continue to serve as the
basis for the Exon-Florio review and investigation. These regulations created an
essentially voluntary system of notification by the parties to an acquisition and they
allowed for notices of acquisitions by agencies that are members of CFIUS. Despite
the voluntary nature of the notification, firms largely comply with the provision,
because the regulations stipulate that foreign acquisitions that are governed by the
Exon-Florio review process that do not notify the Committee remain subject
indefinitely to divestment or other appropriate actions by the President. The
regulations make it clear that the President alone determines “whether a transaction
threatens national security.” Also, the regulations state that the Exon-Florio
provision will not be interpreted narrowly in a way that might preclude the ability of
CFIUS to review any transaction for its impact on national security. Treasury
Department, however, as the lead agency, indicated in the regulations that it would
judge transactions to have “significant” importance for national security if they
“involve products, services, and technologies that are important to U.S. national¹⁰
defense security requirements.” The regulations also indicate that notifications
provided to the Committee are considered to be confidential and the information is
not released by the Committee to the press or commented on publicly.
Transactions Not Subject to a Review
Another aspect of the regulations that has come under increased scrutiny due to
the sharp runup in investments through sovereign wealth funds (SWFs) are the types
of transactions that CFIUS generally will not subject to a national security review.
According to Treasury Department regulations, investment transactions that are not
considered transactions under the Exon-Florio provision and, therefore, not subject
to a CFIUS review are:
1) An acquisition of voting securities pursuant to a stock split or pro rata stock
dividend which does not involve a change in control.
2) An acquisition in which the parent of the entity making the acquisition is the
same as the parent of the entity being acquired.

3) An acquisition of convertible voting securities that does not involve control.

⁹ Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons. 31
C.F.R. Part 800.
¹⁰ 31 CFR 800 Discussion of Final Rule.

4) A purchase of voting securities or comparable interests “solely for the purpose
of investment, ” or an investment in which the foreign investor has “no intention
of determining or directing the basic business decisions of the issuer.” In
addition, investments that are solely for investment purposes are defined as
those: 1) in which the transaction does not involve owning more than 10% of the
voting securities of the firm; or 2) those investments that are undertaken directly
by a bank, trust company, insurance company, investment company, pension
fund, employee benefit plan, mutual fund, finance company, or brokerage¹¹
company “in the ordinary course of business for its own account.”
Foreign investors representing SWFs invested heavily in the mid to late 2007s
in U.S. financial institutions ranging from NASDAQ to Morgan Stanley, Merrill
Lynch, and Citigroup as a number of these financial institutions experienced a drop
in the value of assets associated with the sub-prime mortgage crisis. In some cases,
the foreign investment has accounted for less than 10% of the voting securities of the
firm and were classified as investments only for the purpose of investment apparently
to avoid a CFIUS review or investigation.
Control
A key factor in the Exon-Florio process is applying the term “control” to
evaluating the role of a foreign investor in any proposed transaction. While the
statute does not provide a definition of this term, a definition is included in the
Treasury Department’s regulations. According to those regulations, control is not
defined as a numerical benchmark,¹² but instead focuses on a functional definition
of the term, or a definition that is governed by the influence the level of ownership
permits the foreign entity to affect certain decisions by the firm. According to the
Treasury Department’s regulations:
The term control means the power, direct or indirect, whether or not exercised,
and whether or not exercised or exercisable through the ownership of a majority
or a dominant minority of the total outstanding voting securities of an issuer, or
by proxy voting, contractual arrangements or other means, to determine, direct
or decide matters affecting an entity; in particular, but without limitation, to
determine, direct, take, reach or cause decisions regarding:
(1) The sale, lease, mortgage, pledge or other transfer of any or all of the
principal assets of the entity, whether or not in the ordinary course of business;
(2) The dissolution of the entity;

¹¹ 31 CFR 800.302.
¹² There are other statutes that do use numerical benchmarks. According to section 13(d)
of the Securities Exchange Act of 1934 (15 U.S.C. Sec. 78m(d) any person who acquires 5%
or more of the publicly traded securities of a U.S. firm must report the acquisition of the
shares to the Securities and Exchange Commission. For statistical purposes, the United
States defines foreign direct investment as the ownership or control, directly or indirectly,
by one foreign person (individual, branch, partnership, association, government, etc.) of
10% or more of the voting securities of an incorporated U.S. business enterprise or an
equivalent interest in an unincorporated U.S. business enterprise 15 CFR § 806.15 (a)(1).
This level of ownership requires foreign owners to file quarterly and longer annual reports
with the Department of Commerce as part of the quarterly and annual reports on the balance
of payments and gross domestic product (GDP).

(3) The closing and/or relocation of the production or research and development
facilities of the entity;
(4) The termination or non-fulfillment of contracts of the entity; or
(5) The amendment of the Articles of Incorporation or constituent agreement of
the entity with respect to the matters described at paragraph (a) (1) through (4)
of this section.
National Security
Neither Congress nor the Administration have attempted to define the term
national security as it appears in the Exon-Florio statute. Treasury Department
officials have indicated, however, that during a review or investigation each member
of CFIUS is expected to apply that definition of national security that is consistent
with the representative agency’s specific legislative mandate.¹³ The concept of
national security was broadened by P.L. 110-49 to include, “those issues relating to
'homeland security,' including its application to critical infrastructure,” and “critical
technologies.”
The Treasury Department provides some guidance through its regulations to
firms that are deciding whether they should notify CFIUS of a proposed or pending
merger, acquisition, or takeover. The guidance states that proposed acquisitions that
need to notify CFIUS are those that involve “products or key technologies essential
to the U.S. defense industrial base.” This notice is not intended for firms that
produce goods or services with no special relation to national security, especially toys
and games, food products, hotels and restaurants, or legal services. CFIUS has
indicated that in order to assure an unimpeded inflow of foreign investment it would
implement the statute “only insofar as necessary to protect the national security,” and
“in a manner fully consistent with the international obligations of the United¹⁴
States.”
The “Byrd Amendment”
In 1992, Congress amended the Exon-Florio statute through Section 837(a) of
the National Defense Authorization Act for Fiscal Year 1993 (P.L. 102-484). Known
as the “Byrd” amendment after the amendment’s sponsor, the provision requires
CFIUS to investigate proposed mergers, acquisitions, or takeovers in cases where two
criterion are met:
(1) the acquirer is controlled by or acting on behalf of a foreign government; and
(2) the acquisition results in control of a person engaged in interstate commerce¹⁵

in the United States that could affect the national security of the United States.
¹³ Senate Armed Services Committee, Briefing on the Dubai Ports World Ports Deal,
February 23, 2006.
¹⁴ Ibid.
¹⁵ P.L. 102-484, October 23, 1992.

This amendment came under intense scrutiny by the 109^th Congress as a result
of the DP World transaction. Many Members of Congress and others believed that
this amendment required CFIUS to undertake a full 45-day investigation of the
transaction because DP World was “controlled by or acting on behalf of a foreign
government.” The DP World acquisition, however, exposed a sharp rift between
what some Members apparently believed the amendment directed CFIUS to do and
how the members of CFIUS are interpreting the amendment. In particular, some
Members of Congress apparently interpreted the amendment to direct CFIUS to
conduct a mandatory 45-day investigation if the foreign firm involved in a transaction
is owned or controlled by a foreign government. Representatives of CFIUS have
argued that they interpret the amendment to mean that a 45-day investigation is
discretionary and not mandatory. In the case of the DP World acquisition, CFIUS
representatives argued that they had concluded as a result of an extensive review of
the proposed acquisition prior to the case being formally filed with CFIUS and during
the 30-day review that the DP World case did not warrant a full 45-day investigation.
They conceded that the case met the first criterion under the Byrd amendment,
because DP World was controlled by a foreign government, but that it did not meet
the second part of the requirement, because CFIUS had concluded during the 30-day
review that the transaction “could not affect the national security.”¹⁶
The intense public and congressional reaction that arose from the proposed
Dubai Ports World acquisition spurred the Bush Administration in late 2006 to make
an important administrative change in the way CFIUS reviews foreign investment
transactions. CFIUS and President Bush approved the acquisition of Lucent
Technologies, Inc. by the French-based Alcatel SA, which was completed on
December 1, 2006. Before the transaction was approved by CFIUS, however,
Alcatel-Lucent was required to agree to a national security arrangement, known as
a Special Security Arrangement, or SSA, that restricts Alcatel's access to sensitive
work done by Lucent's research arm, Bell Labs, and the communications
infrastructure in the United States.
The most controversial feature of this arrangement is that it allows CFIUS to
reopen a review of the deal and to overturn its approval at any time if CFIUS believes
the companies “materially fail to comply” with the terms of the arrangement. This
marks a significant change in the CFIUS process. Prior to this transaction, CFIUS
reviews and investigations had been portrayed, and had been considered, to be final.
As a result, firms were willing to subject themselves voluntarily to a CFIUS review,
because they believed that once an investment transaction was scrutinized and
approved by the members of CFIUS the firms could be assured that the investment
transaction would be exempt from any future reviews or actions. This administrative
change, however, means that a CFIUS determination may no longer be a final
decision and it adds a new level of uncertainty to foreign investors seeking to acquire
U.S. firms. A broad range of U.S. and international business groups are objecting to
this change in the Administration's policy.¹⁷

¹⁶ Briefing on the Dubai Ports World Deal before the Senate Armed Services Committee,
February 23, 2006.
¹⁷ Kirchgaessner, Stephanie, US Threat to Reopen Terms of Lucent and Alcatel Deal
(continued...)

The Amended CFIUS Process
In the first session of the 110^th Congress, Congresswoman Maloney introduced
H.R. 556, the National Security Foreign Investment Reform and Strengthened
Transparency Act of 2007, on January 18, 2007. The measure was approved by the
House Financial Services Committee on February 13, 2007 with amendments, and
was approved with additional amendments by the full House on February 28, 2007
by a vote of 423 to 0. On June 13, 2007, Senator Dodd introduced S. 1610, the
Foreign Investment and National Security Act of 2007. On June 29, 2007, the Senate
adopted S. 1610 in lieu of H.R. 556 by unanimous consent. On July 11, 2007, the
House accepted the Senate’s version of H.R. 556 by a vote of 370-45 and sent the
measure to the President, who signed it on July 26, 2007. It is designated as P.L.
110-49. On January 23, 2008, President Bush issued Executive Order 13456
implementing the law. The Executive Order makes a number of substantive changes
to the law. This report incorporates the changes made by this statute and by the
Executive Order.
P.L. 110-49 establishes CFIUS by statutory authority and has the Secretary of
the Treasury serve as the Chairman of CFIUS. The measure follows the same pattern
that was set by Executive Order by allotting the Committee 30 days to conduct a
review, 45 days to conduct an investigation, and 15 days for the President to make
his determination. The President retains his authority as the only officer with the
authority to suspend or prohibit mergers, acquisitions, and takeovers, and the
measure places additional requirements on firms that resubmitted a filing after
previously withdrawing a filing before a full review could be completed.
Over time, the three step Exon-Florio process apparently has evolved to include
an informal stage of unspecified length of time that consists of an unofficial CFIUS
determination prior to the formal filing with CFIUS. This type of informal review
has developed because it likely serves the interests of both CFIUS and the firms that
are involved in an investment transaction. According to Treasury Department
officials, this informal contact enables “CFIUS staff to identify potential issues
before the review process formally begins.”¹⁸ This informal process is likely to
continue under the provisions of P.L. 110-49.
Firms that are party to an investment transaction apparently have benefitted
from this informal review in a number of ways. For one, it allowed firms additional
time to work out any national security concerns privately with individual CFIUS
members. Secondly, and perhaps more importantly, it provided a process for firms
to avoid risking potential negative publicity that could arise if a transaction were to
be blocked or otherwise labeled as impairing U.S. national security interests. For

¹⁷ (...continued)
Mergers, Financial Times, December 1, 2006. P. 19; Pelofsky, Jeremy, Businesses Object
to US move on foreign Investment, Reuters News, December 5, 2006.
¹⁸ Testimony of Robert Kimmett, Briefing on the Dubai Ports World Deal Before the Senate
Armed Services Committee, February 23, 2006.

some firms, public knowledge of a CFIUS investigation has had a negative effect on
the value of the firm’s stock price.
After a lengthy review by CFIUS in 2000 of Verio, Inc., a U.S. firm that
operates websites for businesses and provides internet services, was acquired by NTT
Communications of Japan. Verio’s stock price reportedly fell during the CFIUS
investigation as a result of uncertainty in the market about prospects for the
transaction. The CFIUS review was instigated by the FBI, which had expressed
concerns during the initial review stage that the majority interest of the Japanese
government in NTT could give it access to information regarding wiretaps that were
being conducted on email and other Web-based traffic crossing Verio’s computer
system. After completing its investigation, however, CFIUS did not recommend that
President Clinton block the transaction.
The potentially negative publicity that can be associated with a CFIUS
investigation of a transaction apparently has had a major impact on the transactions
CFIUS has investigated. Since 1990, nearly half of the transactions CFIUS
investigated were terminated by the firms involved, because the firms decided to
withdraw from the transactions rather than face a negative determination by CFIUS.
In 2006, for instance, the prospects of a CFIUS investigation apparently was the
major reason the Israeli firm Check Point Software Technologies decided to call off
its proposed $225 million acquisition of Sourcefire, a U.S. firm specializing in
security appliances for protecting a corporation’s internal computer networks. In
addition, the decision by the China National Offshore Oil Company (CNOOC) to
drop its proposed acquisition of Unocal oil company in 2005 was partly due to
concerns by CNOOC about an impending CFIUS investigation of the transaction.
For CFIUS members, the informal process has been beneficial because it has
given them as much time as they have felt was necessary to review a transaction
without facing the time constraints that arise under the formal CFIUS review process.
This informal review likely has also given the CFIUS members added time to
negotiate with the firms involved in a transaction to restructure the transaction in
ways that have addressed any potential security concerns or to develop other types
of conditions that members feel are appropriate in order to remove security concerns.
On January 23, 2008, President Bush issued Executive Order 13456, which
implemented P.L. 110-49 and made various changes to the law. Presently, the
Committee consists of nine members, including the Secretaries of State, the Treasury,
Defense, Homeland Security, and Commerce; Energy; the Attorney General, the
United States Trade Representative, and the Director of the Office of Science and
Technology.¹⁹ The Secretary of Labor and the Director of National Intelligence serve
as ex officio members of the Committee.²⁰ The Executive Order 13456 also added

¹⁹ The United States Trade Representative and the Director of the Office of Science and
Technology were added through E.O. 13456, issued January 23, 2008.
²⁰ Executive Order 11858 of May 7, 1975, 40 F.R. 20263 established the Committee with
six members: the Secretaries of State, the Treasury, Defense, Commerce, and the Assistant
to the President for Economic Affairs, and the Executive Director of the Council on
(continued...)

five more members to CFIUS in order to “observe and, as appropriate, participate in
and report to the President:” These members include the Director of the Office of
Management and Budget, the Chairman of the Council of Economic Advisors, The
Assistant to the President for National Security Affairs, the Assistant to the President
for Economic Policy, and the Assistant to the President for Homeland Security and
Counterterrorism. The President can also appoint temporary members to the
Committee as he determines.
The law now requires CFIUS to review all “covered” foreign investment
transactions to determine: 1) whether a transaction threatens to impair the national
security; 2) the foreign entity is controlled by a foreign government; or 3) the
transaction would result in control of any “critical infrastructure that could impair the
national security.” A covered foreign investment transaction is defined as any
merger, acquisition, or takeover which results in “foreign control of any person
engaged in interstate commerce in the United States.” As previously indicated, the
Treasury Department’s regulations exclude certain types of transactions from being
classified as covered transactions and, therefore, not subject to a CFIUS review.
Such transaction are specified as those that are undertaken “solely for the purpose of
investment, ” or an investment in which the foreign investor has “no intention of
determining or directing the basic business decisions of the issuer.”
Critical Infrastructure
A new element to the Exon-Florio process that was added by P.L. 110-49 is the
addition of “critical industries” and “homeland security” as broad categories of
economic activity that could be subject to a CFIUS national security review.
Arguably, the events of September 11, 2001 reshaped Congressional attitudes toward
the Exon-Florio provision. This change became apparent in 2006 following the
public disclosure that Dubai Ports World²¹ was attempting to purchase the British-

²⁰ (...continued)
International Economic Policy. Executive Order 12188, January 2, 1980, 45 F.R. 969,
added the United States Trade Representative and substituted the Chairman of the Council
of Economic Advisors for the Executive Director of the Council on International Economic
Policy. Executive Order 12661, December 27, 1988, 54 F.R. 779, added the Attorney
General and the Director of the Office of Management and Budget. Executive Order 12860,
September 3, 1993, 58 F.R. 47201, added the Director of the Office of Science and
Technology Policy, the Assistant to the President for National Security Affairs, and the
Assistant to the President for Economic Policy. Executive Order 13286, Section 57,
February 28, 2003 added the Secretary of Homeland Security. P.L. 110-49 reduced the
membership of CFIUS to six Cabinet members and the Attorney General, it added the
Secretary of Labor and the Director of National Security as ex officio members, and
removed seven White House appointees.
²¹ Dubai Ports World was created in November 2005 by integrating Dubai Ports Authority
and Dubai Ports International. It is one of the largest commercial port operators in the world
with operations in the Middle East, India, Europe, Asia, Latin America, the Carribean, and
North America.

owned P&O Ports,²² with operations in various U.S. ports. After the September 11^th
terrorist attacks Congress passed and President Bush signed the USA PATRIOT Act
of 2001 (Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism).²³ In this act, Congress provided for
special support for “critical industries,” which it defined as:
systems and assets, whether physical or virtual, so vital to the United States that
the incapacity or destruction of such systems and assets would have a debilitating
impact on security, national economic security, national public health or safety,²⁴
or any combination of those matters.
This broad definition is enhanced to some degree by other provisions of the act,
which identify certain sectors of the economy that are likely candidates for
consideration as components of the national critical infrastructure. These sectors
include telecommunications, energy, financial services, water, transportation
sectors,²⁵ and the “cyber and physical infrastructure services critical to maintaining
the national defense, continuity of government, economic prosperity, and quality of
life in the United States.”²⁶ The following year, Congress adopted the language in²⁷
the Patriot Act on critical infrastructure into The Homeland Security Act of 2002.
By adopting the terms “critical infrastructure” and “homeland security,”
following the events of September 11, 2001, Congress demonstrated that the attacks
had fundamentally altered the way many in Congress view the concept of national
security. As a result, some policymakers in Congress and elsewhere have concluded
that economic activities are a separately identifiable component of national security
and, therefore, should be protected from foreign investment that transfers control to
foreigners or shifts technological leadership aborad. This viewpoint, however, has
not been shared by some policymakers within the administration, who argue that
including critical infrastructure and homeland security in P.L. 110-49 has not altered
the overriding focus of the Exon-Florio provision on investments that directly affect
U.S. national defense security. As a result, Congress and the Administration have
sparred at times over transactions that CFIUS has approved over the objections of
various Members of Congress. Some of these cases include the following:
In May 2007, GE and Saudi Basic Industries Corporation (SABIC) announced
that SABIC would acquire GE Plastics for $11.6 billion. GE intended to use the
proceeds from the sale to buy back a large amount of its own stock to finance
other projects and to improve its stock price. SABIC, which is 70% owned by
the Saudi Government, is the largest public company in the Middle East and one

²² Peninsular and Oriental Steam Company is a leading ports operator and transport
company with operations in ports, ferries, and property development. It operates container
terminals and logistics operations in over 100 ports and has a presence in 18 countries.
²³ P.L. 107-56, title X, Sec. 1014, October 26, 2001; 42 U.S.C. Sec. 5195c(e).
²⁴ Ibid.
²⁵ 42 U.S.C. Sec. 5195c(b)(2).
²⁶ 42 U.S.C. Sec. 5195c(b)(3).
²⁷ 6 U.S.C. Sec. 101(4).

of the 10 largest petrochemical manufacturers in the world. Some in Congress
objected to the acquisition because GE Plastics produces products that have
important defense applications, including such bullet resistant and bomb blast
shielding products as Armorgard, Suregard and Lexgard laminates. After a
CFIUS review yielded no opposition to the transaction, the acquisition was
completed.
On November 27, 2007, Citigroup Inc. and the Abu Dhabi Investment Company
(ADIC) announced that ADIC would acquire 4.9% of Citigroup's shares for an
investment of $7.5 billion. The Abu Dhabi-Citigroup investment transaction
involves a complex exchange of cash and stock. For $7.5 billion, Citigroup will
sell ADIA between 201 million and 235 million shares of Citigroup stock,
depending on the value of Citigroup's stock at the predesignated time periods, at
an interest rate of 11.00% on a complex hybrid security that is comprised of
mandatory convertible shares, which consist of a contract to purchase stock at
different purchase dates, and the payment of interest on each series of preferred
securities and a payment on the purchase contracts. The Abu Dhabi investment
entity has stated that its interests are purely economic and that it will have no role
in the management or the governance of Citigroup nor any presence on its²⁸
board.
On September 28, 2007, 3Com Corporation announced that it had agreed to be
acquired by Bain Capital Partners for $2.2 billion, or $5.30 per share. Bain
Capital, is a privately-held asset management and investment firm, and Huawei
Technologies is the largest networking and telecommunications equipment
supplier in China. 3Com is a publicly held company that specializes in
networking equipment and in the Tipping Point network intrusion prevention
software. Such software is used by various U.S. defense firms to prevent outside
groups from accessing their confidential databases. In 2003, 3Com formed a
joint venture with Huawei Technologies, known as Huawei-3Com, to
manufacture routers and switches for internet and broadband uses. In November
2006, 3Com acquired the half of Huawei-3Com that it did not own for $822
million. As part of the most recent transaction, affiliates of Huawei Technologies
would have acquired a minority interest in 3Com and would have become a
commercial and strategic partner of 3Com. On February 20, 2008, Bain Capital
and Huawei Technologies withdrew their offer to acquire 3Com, due to an
inability to successfully negotiate a mitigation agreement with members of
CFIUS. Bain Capaital and Huawei reportedly will restructure the deal and²⁹
resubmit it at a later date in 2008.
Some policymakers also perceive greater risks to the economy rising from
foreign investments in which the foreign investor is owned or controlled by foreign
governments as a result of the terrorist attacks. The Dubai Ports World case, in
particular, demonstrated that there was a difference between the post-September 11
expectations held by many in Congress about the role of foreign investment in the
economy and of economic infrastructure issues as a component of national security.
For some Members of Congress, CFIUS seems to be out of touch with the post-

²⁸ Timmons, Heather, and Julia Werdigier, For Abu Dhabi and Citi, Credit Crisis Drove
Deal, The New York Times, November 28, 2007.
²⁹ US Insiders Point to Bain Errors Over 3Com, The Financial Times Limited, march 3,

2008.

September 11, 2001 view of national security, because it remains founded in the late
1980s orientation of the Exon-Florio provision, which views national security
primarily in terms of national defense and downplays or even excludes a broader
notion of economic national security.
Procedures
According to the amended Exon-Florio provision, the President or any member
of CFIUS can initiate a review of an investment transaction in addition to a review
that is initiated by the parties to a transaction providing a formal notification. As
amended, CFIUS has 30 days to review a transaction to decide after it receives the
initial formal notification by the parties to a merger, acquisition, or a takeover,
whether to investigate a case as a result of its determination that the investment
“threatens to impair the national security of the United States.” National security also
includes, “those issues relating to 'homeland security,' including its application to
critical infrastructure,” and “critical technologies.” In addition, CFIUS is required
to conduct an investigation of a transaction if the Committee determines that the
transaction would result in foreign control of any person engaged in interstate
commerce in the United States. During such a review, the members of CFIUS are
also required to consider the twelve factors that Congress has authored as a basis for
assessing the impact of the investment. If during this 30 day period all of the
members of CFIUS conclude that the investment does not threaten to impair the
national security, the review is terminated. If, however, at least one member of the
Committee determines that the investment does threaten to impair the national
security, CFIUS can proceed to a 45-day investigation.
During the 30-day review stage, the Director of National Intelligence, although
not a member of CFIUS, is required to carry out a thorough analysis of “any threat
to the national security of the United States” of any merger, acquisition, or takeover.
This analysis is required to be completed “within 20 days” of the receipt of a
notification by CFIUS, but the statute directs that the DNI must be given “adequate
time,” presumably if this national security review cannot be completed with the 20
day requirement This analysis would include a request for information from the
Department of the Treasury's Director of the Office of Foreign Assets Control and
the Director of the Financial Crimes Enforcement Network. In addition, the Director
of National Intelligence is required to seek and to incorporate the views of “all
affected or appropriate” intelligence agencies.
CFIUS is also required to review “covered” investment transactions in which
the foreign entity is owned or controlled by a foreign government, but the law
provides an exception to this requirement. A review is exempted if the Secretary of
the Treasury and certain other specified officials determine that the transaction in
question will not impair the national security. It is somewhat unclear, however, how
this requirement is meshing with the established process. The measure does not
amend or alter the current statute in the area that has been the source of differences
between CFIUS and Congress. In particular, the current statute states that the
President, and through him CFIUS, can use the Exon-Florio process “only if” he
finds that there is “credible evidence” that a foreign investment will impair national
security. As a result, if CFIUS determines, as was the case in the Dubai Ports
transaction, that it does not have credible evidence that an investment will impair the

national security then it argues that it is not required to undertake a full 45-day
investigation, even if the foreign entity is owned or controlled by a foreign
government.
As a result of a CFIUS review, the President, acting through CFIUS, is also
required to conduct a National Security investigation and to take any “necessary”
actions as part of the 45-day investigation if the review indicates that at least one of
three conditions exists. These three conditions are: 1) as a result of a review of the
transaction, CFIUS determines that the transactions threaten to impair the national
security of the United States and that the threat had not been mitigated during or prior
to a review of the transaction, or 2) the foreign person is controlled by a foreign
government; 3) the transactions would result in the control of any critical
infrastructure by a foreign person, the transactions could impair the national security,
and that such impairment had not been mitigated. At the conclusion of the
investigation or the 45-day review period, whichever comes first, the Committee can
decide to offer no recommendation or it can recommend that the President suspend
or prohibit the investment. The President is under no obligation to follow the
recommendation of the Committee to suspend or prohibit an investment.
During a review or an investigation, CFIUS and a designated lead agency have
the authority to negotiate, impose, or enforce any agreement or condition with the
parties to a transaction in order to mitigate any threat to the national security of the
United States. Such agreements are to be based on a “risk-based analysis” of the
threat posed by the transaction. Also, if a notification of a transaction is withdrawn
before any review or investigation by CFIUS can be completed, the amended law
grants the Committee the authority to take a number of actions. In particular, the
Committee could develop (1) interim protections to address specific concerns about
the transaction pending a re-submission of a notice by the parties; (2) specific time
frames for re-submitting the notice; and (3) a process for tracking any actions taken
by any parties to the transaction.
Factors for Consideration
The Exon-Florio provision includes a list of twelve factors the President must
consider in deciding to block a foreign acquisition. These factors are also considered
by the individual members of CFIUS as part of their own review process to determine
if a particular transaction threatens to impair the national security. This list includes
the following elements:
(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 U.S. to meet the requirements of
national security;

(4) the potential effects of the transactions on the sales of military goods,
equipment, or technology to a country that supports terrorism or proliferates
missile technology or chemical and biological weapons; and transactions
identified by the Secretary of Defense as “posing a regional military threat” to
the interests of the United States;
(5) the potential effects of the transaction on U.S. technological leadership in
areas affecting U.S. national security;
(6) whether the transaction has a security-related impact on critical infrastructure
in the United States:
(7) the potential effects on United States critical infrastructure, including major
energy assets;
(8) the potential effects on United States critical technologies;
(9) whether the transaction is a foreign government-controlled transaction;
(10) in those cases involving a government-controlled transaction, a review of
(A) the adherence of the foreign country to nonproliferation control regimes, (B)
the foreign country's record on cooperating in counter0terrorism efforts, (C) the
potential for transshipment or diversion of technologies with military
applications,;
(11) the long-term projection of the United States requirements for sources of
energy and other critical resources and materials; and
(12) such other factors as the President or the Committee determine to be³⁰
appropriate.
Factors 6-12 were added through P.L.-110-49 and potentially broaden
significantly the scope of CFIUS’ reviews and investigations. Previously, CFIUS had
been directed by Treasury Department regulations to focus its activities primarily
around investments that had an impact on U.S. national defense security. The
additional factors, however, incorporate economic considerations into the Exon-
Florio process in a way that was specifically rejected when the measure initially was
adopted and refocuses CFIUS’s reviews and investigations to consider the broader
rubric of economic security. In particular, CFIUS is now required to consider the
impact of an investment on critical infrastructure as a factor for considering
recommending that the President block or postpone a transaction. Critical
infrastructure is defined in broad terms within the measure as: “any systems and
assets, whether physical or cyber-based, so vital to the United States that the
degradation or destruction of such systems or assets would have a debilitating impact
on national security, including national economic security and national public health
or safety.”
As originally drafted, the Exon-Florio provision also would have applied to joint
ventures and licensing agreements in addition to mergers, acquisitions, and takeovers.

³⁰ The last requirement under factor 4 and factors 6-12 were added by P.L. 110-49.

Joint ventures and licensing agreements subsequently were dropped from the
proposal because the Reagan Administration and various industry groups argued at
the time that such business practices were deemed to be beneficial arrangements for
U.S. companies. In addition, they argued that any potential threat to national security
could be addressed by the Export Administration Act³¹ and the Arms Control Export
Act.³²
Confidentiality Requirements
The Exon-Florio provision also codified confidentiality requirements that are
similar to those that appeared in Executive Order 11858 by stating that any
information or documentary material filed under the provision may not be made
public “except as may be relevant to any administrative or judicial action or
proceeding.”³³ The provision does state, however, that this confidentiality provision
“shall not be construed to prevent disclosure to either House of Congress or to any
duly authorized committee or subcommittee of the Congress.” The provision
provides for the release of proprietary information “which can be associated with a
particular party” to committees only with assurances that the information will remain
confidential. Members of Congress and their staff members will be accountable
under current provisions of law governing the release of certain types of information.
The Exon-Florio provision requires the President to provide a written report to the
Secretary of the Senate and the Clerk of the House detailing his decision and his
actions relevant to any transaction that was subject to a 45-day investigation.³⁴
Mitigation and Tracking
Following the implementation of the Exon-Florio provision in the 1980s, CFIUS
had developed several informal practices that likely were not envisioned when the
statute was drafted. In particular, members of CFIUS on occasion had negotiated
conditions with firms to mitigate or to remove business arrangement that raised
national security concerns among the members of CFIUS. Such agreements often
were informal arrangements that had an uncertain basis in statute and had not been
tested in court. These arrangements often were negotiated during the formal 30-day
review period, or even during an informal process prior to the formal filing of a
notice of an investment transaction.
Presently, CFIUS must designate a lead agency to negotiate, modify, monitor,
and enforce agreements in order to mitigate any threat to national security. Such
agreements are required to be based on a “risk-based analysis” of the threat posed by
the transaction. CFIUS is also required to develop a method for evaluating the
compliance of firms that have entered into a mitigation agreement or condition that
was imposed as a requirement for approval of the investment transaction. Such
measures, however, are required to be developed in such a way that they allow

³¹ 50 U.S.C. App. Sec. 2401, as amended.
³² 22 U.S.C. App. 2778 et seq.
³³ 50 U.S.C. Appendix Sec. 2170(c)
³⁴ 50 U.S.C. Appendix Sec. 2170(g).

CFIUS to determine that compliance is taking place without also: 1) “unnecessarily
diverting” CFIUS resources from assessing any new covered transaction for which
a written notice had been filed; and 2) placing “unnecessary” burdens on a party to
a investment transaction.
If a notification of a transaction is withdrawn before any review or investigation
by CFIUS can be completed, CFIUS can take a number of actions, including 1)
interim protections to address specific concerns about the transaction pending a re-
submission of a notice by the parties; 2) specific time frames for re-submitting the
notice; and 3) a process for tracking any actions taken by any party to the transaction.
Also, any federal entity or entities that are involved in any mitigation agreement to
report to CFIUS if there is any modification that is made to any agreement or
condition that had been imposed and to ensure that “any significant” modification is
reported to the Director of National Intelligence and to any other federal department
or agency that “may have a material interest in such modification.” Such reports are
required to be filed with the Attorney General.
Congressional Oversight
P.L. 110-49 significantly increases the types and number of reports that CFIUS
is required to send to certain specified Members of Congress. In particular, CFIUS
is required to brief certain congressional leaders if they request such a briefing and
to report annually to Congress on any reviews or investigations that it had conducted
during the prior year. Each report must include a list of all reviews and
investigations that had been conducted, information on the nature of the business
activities of the parties involved in an investment transaction, information about the
status of the review or investigation, and information on any withdrawal from the
process, any roll call votes by the Committee, any extension of time for any
investigation, and any presidential decision or action taken under the Exon-Florio
provision. In addition, CFIUS is required to report on trend information on the
number of filings, investigations, withdrawals, and presidential decisions or actions
that were taken. The report must include cumulative information on the business
sectors involved in filings and the countries from which the investments originated;
information on the status of the investments of companies that withdrew notices and
the types of security arrangements and conditions CFIUS used to mitigate national
security concerns; the methods the Committee used to determine that firms were
complying with mitigation agreements or conditions; and a detailed discussion of all
perceived adverse effects of investment transactions on the national security or
critical infrastructure of the United States.
The Secretary of the Treasury, in consultation with the Secretary of State and
the Secretary of Commerce, is required to conduct a study on investment in the
United States, particularly in critical infrastructure and industries affecting national
security by: 1) foreign governments, entities controlled by or acting on behalf of a
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 persons of foreign countries which do not ban organizations
designated by the Secretary of State as foreign terrorist organizations. In addition,
CFIUS is required to provide an annual evaluation of any credible evidence of a
coordinated strategy by one or more countries or companies to acquire U.S.

companies involved in research, development, or production of critical technologies
in which the United States is a leading producer. The report must include an
evaluation of possible industrial espionage activities directed or directly assisted by
foreign governments against private U.S. companies aimed at obtaining commercial
secrets related to critical technologies.
The Inspector General of the Department of the Treasury is required to
investigate any failure of CFIUS to comply with requirements for reporting that were
imposed prior to the passage of P.L. 110-49 and to report the findings of this report
to the Congress. In particular, the report must be sent to the chairman and ranking
member of each committee of the House and the Senate with jurisdiction over any
aspect of the report, including the Committee on International Relations, the
Committee on Financial Services, and the Committee on Energy and Commerce of
the House.
The chief executive officer of any party to a merger, acquisition, or takeover is
required to certify in writing that the information contained in the written notification
to CFIUS fully complies with the requirements of the Exon-Florio provision and that
the information is accurate and complete. This written notification would also
include any mitigation agreement or condition that was part of a CFIUS approval.
Caseload
As a consequence of the confidential nature of the CFIUS review of any
proposed transaction, there are few public sources of information concerning the
Committee’s work to date. For the most part, information concerning individual
transactions that have been reviewed by CFIUS or any final recommendations that
have been issued by CFIUS have come from announcements made by the companies
involved in a transaction and not by CFIUS. Therefore, public information
concerning the outcome of CFIUS’s reviews is incomplete. As indicated in Table
1, CFIUS has received more than 1,500 notifications, of which it conducted a full
investigation of 25 cases. Of these 25 cases, thirteen transactions were withdrawn
upon notice that CFIUS would conduct a full review and twelve of the remaining
transactions cases were sent to the President. Of these twelve transactions, one was
prohibited.³⁵
The one transaction that was prohibited by the President involved the
acquisition in 1990 of Mamco Manufacturing Company by the China National Aero-
Technology Import and Export Corporation (CATIC). Mamco was an aerospace
parts manufacturer. CATIC, which is owned by the Government of the People’s
Republic of China, acted as the purchasing agent for the Chinese Ministry of
Defense. President Reagan ordered CATIC to divest itself of Mamco under the
authority of the Exon-Florio provision because of concerns that CATIC might gain
access to technology through Mamco that it would otherwise have to obtain under an

³⁵ Auerbach, Stuart. “President Tells China to Sell Seattle Firm.” The Washington Post,
February 3, 1990. p. A1; and Benham, Barbara. “Blocked Takeover Fuels Foreign Policy
Flap.” Investor’s Daily, February 8, 1990. p. 1.

export license.³⁶ One recent case that involved a Chinese firm that was reviewed by
CFIUS and approved was the proposed acquisition of IBM’s Personal Computing
Division to Lenovo Group Limited, a Chinese manufacturing company. Apparently,
CFIUS has approved any number of proposed transactions if the parties involved
agreed to certain conditions.
Table 1. CFIUS Notifications and Investigations, 1988-2005
Notif i cations Investigations Notices Presidential
w i t hdraw n deci si on
198814101
1989204523
1990295624
1991152101
1992106211
199382000
199469000
199581000
199655000
199762000
199865220
199979000
200072101
200155110
200243000
200341211
200453220
200565220
T otal 1,593 25 13 12
Source: Graham, Edward M., and David M. Marchick, US National Security and
Foreign Direct Investment. p. 57.

³⁶ Auerbach, Stuart. “President Tells China to Sell Seattle Firm.” The Washington Post,
February 8, 1990, p. A1; and Benham, Barbara. “Blocked Takeover Fuels Foreign Policy
Flap.” Investor’s Daily, February 8, 1990. p. 1.

Conclusions
When Congress adopted P.L. 110-49, the Foreign Investment and National
Security Act of 2007, Members were concerned about six issues: 1) the seemingly
lack of participation by principal members of CFIUS; 2) CFIUS’s interpretation of
requirements that it investigate transactions involving firms that are owned or
controlled by a foreign government; 3) reporting requirements that have not provided
Congress with enough information for Members to fulfill their oversight
responsibilities; 4) the discretion CFIUS exercises in choosing which transactions it
investigates; 5) CFIUS’s definition of national security; and 6) CFIUS’s deadlines
for completing reviews and investigations. All of these issues were addressed to
varying degrees in the law, but it likely will take some time and experience with the
new provisions for Members to determine if the changes to the Exon-Florio process
satisfy their concerns.
Since Congress passed P.L. 110-49, concerns among the public and Members
of Congress have risen sharply about firms that are controlled by foreign
governments investing in economic activities that some judge to be detrimental to the
Nation’s homeland security and critical infrastructure. Although P.L. 110-49
broadened the concept of national security to include homeland security and critical
infrastructure, it remains unclear how these concepts are being incorporated into the
Exon-Florio process and if those who administer the process have altered their views
to reflect the broadened concept of national security as it is specified in the statute.
At times, Members of Congress and officials within the administration have been at
odds over the way CFIUS has reviewed and approved of certain investments. These
differences reflect a disparity in political and philosophical viewpoints over the role
of foreign investment in the economy and over the nature of the risks the investments
pose to the national economic security. The occasional sparring over foreign
investment between Congress and the administration reflect the fact that neither
Congress nor the administration has been able thus far to define clearly the national
security implications of foreign direct investment.
The DP World transaction revealed that the September 11, 2001 terrorist attacks
may have fundamentally altered the viewpoint of some Members of Congress
regarding the role of foreign investment in the economy and over the impact of such
investment on the national security framework. If this assessment is correct, then the
change in attitude will require a reassessment of the role of foreign investment in the
economy and of the implications of corporate ownership of activities that fall under
the rubric of critical infrastructure. In addition, the DP World transaction focused
attention on long-unresolved issues concerning the role of foreign investment in the
nation’s overall security framework and the methods that are being used to assess the
impact of foreign investment on the nation’s defense industrial base and homeland
security.
Most economists agree that there is little economic evidence to conclude that
foreign ownership, whether by a private entity or by an entity that is owned or
controlled by a foreign government, has a measurable impact on the U.S. economy
as a whole. Others may argue on non-economic grounds that such firms pose a risk
to national security or to homeland security.

Similar issues concerning corporate ownership were raised during the late 1980s
and early 1990s when foreign investment in the U.S. economy increased rapidly.
There are little new data, however, to alter the conclusion reached at that time that
there is no definitive way to assess the economic impact of foreign ownership or of
foreign investment on the economy. Although some observers have expressed
concerns about foreign investors who are owned or controlled by foreign
governments acquiring U.S. firms, there is little confirmed evidence that such a
distinction in corporate ownership has any measurable effect on the economy as
whole.
For most economists, the distinction between domestic- and foreign-owned
firms, whether the foreign firms are privately owned or controlled by a foreign
government, is sufficiently small that they would argue that it does not warrant
placing restrictions on the inflow of foreign investment. Nevertheless, foreign direct
investment does entail various economic costs and benefits. On the benefit side, such
investments bring added capital into the economy and potentially could add to
productivity growth and innovation. Such investment also represents one
repercussion of the U.S. trade deficit. The deficit transfers dollar-denominated assets
to foreign investors, who then decide how to hold those assets by choosing among
various investment vehicles, including direct investment. Foreign investment also
removes a stream of monetary benefits from the economy in the form of repatriated
capital and profits that reduces the total amount of capital in the economy. Such
costs and benefits likely occur whether the foreign owner is a private entity or a
foreign government.