October 31, 2007

Treasury Seeks Comments on New CFIUS Regulations and Procedures

October 24 marked the effective date of the Foreign Investment and National Security Act of 2007 ("FINSA") (P.L. 110-49). As we reported in a Client Alert on July 26, the date the law was enacted, the new legislation effects numerous changes in the process by which the President and the multi-agency Committee on Foreign Investment in the United States ("CFIUS") conduct national security reviews of foreign acquisitions. Among other things, FINSA expressly provides for investigation of acquisitions that "would result in control of any critical infrastructure" if CFIUS determines (1) that the transaction "could impair national security" and (2) that such impairment "has not been mitigated by assurances provided or renewed with the approval of the Committee ..." The term "critical infrastructure" is defined in the law to mean "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 security."

As chair of CFIUS, the Secretary of the Department of Treasury is responsible for writing the regulations that will implement the statute. In a recent meeting in Washington, Treasury officials said that, among other things, they are concerned with the definition of "control," as the omnibus triggering event for acquisition reviews – versus the definition of "government control," which could trigger mandatory investigations. They also expressed concern about the definition of "critical infrastructure." There is no question, for example, that critical infrastructure includes U.S. ports and transportation systems – but does it extend to the agrichemical industry? The answer remains to be seen. Acquisitions of defense and national security contractors have always been subject to CFIUS review, but the FINSA amendments make clear that every transaction that touches transportation, communications, and information systems should be evaluated early on in the acquisition process – and security issues addressed – in anticipation of CFIUS review.

To help answer these and other questions, Treasury is soliciting public comment. The comment period extends through December 7, 2007.

In particular, Treasury is seeking comment on the following questions, among others:

  • procedural issues relating to the CFIUS review process, including pre-filing, filing of voluntary notice, unilateral initiation of review by CFIUS, withdrawal of notice, refiling of notice, and notice to filers of the results of a review or investigation;
  • definitions, including "control," "foreign person," "person engaged in interstate commerce in the United States," "critical infrastructure," and "critical technologies";
  • mitigation agreements, including determinations of the need for risk mitigation, scope of provisions, compliance monitoring, modification, and enforcement, including civil penalties and other remedies for breach;
  • confidentiality issues;
  • collection of information from filers, including personal identifier information and information to aid CFIUS in determining jurisdiction and whether the transaction raises national security considerations; and
  • emerging trends in international investment and their relevance to the CFIUS process, including legal structures for effecting acquisitions of U.S. businesses.

"Mitigation agreements" merit especial attention. It is fair to say that Kaye Scholer has shepherded more investors through the CFIUS process than any other law firm. Time and again, success has depended on rigorous mitigation programs – corporate governance guarantees that, among other things, ensure U.S. control of corporate management. FINSA expressly acknowledges the role of mitigation agreements for the first time, and instructs CFIUS (1) to develop "methods for evaluating compliance with any agreement," and (2) to "provide for the imposition of civil penalties for ... violation of ... any mitigation agreement entered into or conditions imposed [in connection with the approval of a transaction]." Treasury also hopes that the comment period will help inform the civil penalty process.

Investors looking for "bright lines" in the CFIUS regulations are unlikely to find them. CFIUS has pointedly refused to adopt bright line standards in the past, and the new regulations are unlikely to change that policy. The CFIUS process has always been and remains a fluid process. U.S. policy continues to encourage foreign direct investment, and investors are justified in expecting the regulations to provide meaningful guidance for understanding the rules they are expected to follow – both during and after CFIUS review.

Kaye Scholer will address these and other issues in a foreign investment seminar to be held in London, England on November 7. For details, or to obtain a copy of our July 26 client alert, the new public law, or the Federal Register notice announcing the comment period, please contact one of the Kaye Scholer attorneys listed below.

For more information, please contact Farhad Jalinous at +1 202 682 3581 or, Karalyn Meany at +1 202 682 3547 or, Keith Schomig at +1 202 682 3522 or, or Norman Pashoian at +1 202 682 3562 or


Copyright ©2007 by Kaye Scholer LLP. All Rights Reserved. This publication is intended as a general guide only. It does not contain a general legal analysis or constitute an opinion of Kaye Scholer LLP or any member of the firm on the legal issues described. It is recommended that readers not rely on this general guide but that professional advice be sought in connection with individual matters. References herein to "Kaye Scholer LLP & Affiliates," "Kaye Scholer," "Kaye Scholer LLP," "the firm" and terms of similar import refer to Kaye Scholer LLP and its affiliates operating in various jurisdictions.

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