Originally published July 14, 2005
If you represent a non-US client considering acquiring a US company, or a US company being considered for such an acquisition, be aware of the closer scrutiny that these transactions may experience in the current political climate.
The 1988 Exon-Florio amendment to Section 721 of the Defense Production Act of 1950 authorizes the President to prohibit "any merger, acquisition or takeover" of a US company by a foreign entity if "there is credible evidence that the foreign entity exercising control might take action that threatens national security."
Since September 11, 2001, heightened national security concerns have intensified scrutiny under Exon-Florio. With the creation of the Department of Homeland Security, issues regarding the impact of a proposed acquisition on "critical infrastructure" such as telecommunications have come to the forefront.
Furthermore, growing protectionist sentiments in Congress also contribute to the likelihood that scrutiny under Exon-Florio will not soon abate.
Acquisitions by Chinese investors are now being subject to particular scrutiny, as evidenced by the rejection of the acquisition by Hutchison-Whampoa of Global Crossing, the contentious approval of the acquisition by Lenovo of IBM’s PC unit, and the pending debate over the proposed acquisition by CNOOC of Unocal.
What Prudent Investors Can Do
To avoid running afoul of Exon-Florio, prudent investors have availed themselves of a voluntary process whereby notice of a proposed acquisition is provided to the Committee on Foreign Investment (CIFIUS), an inter-agency group, chaired by the Department of Treasury, that includes USTR, and the Departments of Commerce, State, Defense, Justice, and Homeland Security.
When CIFIUS receives notice of a proposed acquisition, it has 30 days to decide whether to undertake an investigation. If an investigation is undertaken, CIFIUS must make its formal report to the President within 45 days. The President then has 15 days to render a decision.
The great majority of proposed acquisitions do not proceed to the investigation phase. The value of providing voluntary notice is that a CIFIUS decision to forego an investigation generally insulates a transaction from subsequent action under Exon-Florio. Acquisitions that may engender debate within the CIFIUS require a comprehensive plan to anticipate agency concerns and reach out to CIFIUS members to address these concerns.
This article is intended to provide information on recent legal developments. It should not be construed as legal advice or legal opinion on specific facts. Pursuant to applicable Rules of Professional Conduct, it may constitute advertising.