CFIUS

May 13, 2013 By wpengine

Why Are Foreign Investments in Domestic Energy Projects Now Under CFIUS Scrutiny?

Stephen Heifetz and Michael Gershberg*

Until recently, the Committee on Foreign Investment in the United States (CFIUS or the Committee) rarely affected domestic energy projects. That has changed, and CFIUS now actively reviews and sometimes alters transactions that result in foreign control of U.S. energy companies. In just the past several months, CFIUS has blocked an acquisition of Oregon wind farm projects (the Ralls/Terna case),^{^[1]} reportedly imposed conditions on the acquisition of a large oil and gas company (the CNOOC/Nexen case),^{^[2]} and approved an acquisition of a high-tech battery manufacturer only after the deal was restructured to carve out its government contracting business (the Wanxiang/A123 case).^{^[3]}

There are three primary drivers behind this recent scrutiny. The first is the rise of China—on the one hand as a trading and investment partner, and on the other hand, as a perceived security threat. Each of the three CFIUS cases referenced above concerned Chinese investments in domestic energy projects.^{^[4]} The second driver is U.S. government concern about the vulnerability of U.S. infrastructure, particularly to a cyber attack on U.S. networked systems, such as energy grids and other energy-related assets. The third driver is a change in the balance among the agencies that comprise CFIUS. In particular, the Department of Defense has sought aggressively to use the Committee’s authority to keep potential foreign adversaries far away from U.S. security facilities, while the more trade-oriented agencies have been weakened in CFIUS deliberations.^{^[5]}

CFIUS Background

CFIUS is an interagency committee chaired by the Department of Treasury.^{^[6]} Its mandate is to review foreign investments in U.S. businesses to ensure that such investments do not adversely affect national security.^{^[7]} More specifically, CFIUS reviews transactions that result in foreign “control” of U.S. businesses where that foreign control may affect national security.^{^[8]}

Though the Committee often reviews more than one hundred cases per year,^{^[9]} it typically sees potential security implications in only a dozen or so.^{^[10]} In those cases, CFIUS generally protects against possible adverse effects by obtaining commitments from the foreign investor. These commitments, which take the form of a “risk mitigation agreement,” may include such requirements as the use of specified vetting procedures for key employees or restrictions on foreign access to sensitive technology or facilities.^{^[11]} When CFIUS cannot mitigate the risk presented by a transaction through an agreement, its recourse is to recommend that the President block the transaction.^{^[12]} The President is authorized to “take such action for such time as the President considers appropriate to suspend or prohibit any covered transaction that threatens to impair the national security of the United States.”^{^[13]} CFIUS recommendations to the President are very rare, usually no more than one or two per year.^{^[14]} In those rare cases, if the parties do not voluntarily withdraw the transaction, the President is likely to follow the Committee’s recommendations to preclude foreign control of the U.S. business. Transacting parties have forced a Presidential decision only twice in the Committee’s history, and in both cases the President exercised his authority to block the transaction.^{^[15]}

However, there is a significant benefit to undergoing CFIUS review from the perspective of the transacting parties. If CFIUS approves the deal, as it does in the vast majority of cases, then the deal is insulated from executive branch interference on national security grounds.^{^[16]}

The CFIUS process is nominally voluntary. There is no requirement that parties conducting transactions involving foreign entities notify CFIUS, even when those transactions result in foreign control or clearly involve assets relevant to national security.^{^[17]} However, the Committee monitors a wide range of transactions, primarily through open media sources. If a “non-notified transaction” is of interest to CFIUS, the Committee will offer the parties the opportunity to submit a notification.^{^[18]} In the event that transacting parties ignore the “voluntary” submission request, CFIUS has authority to initiate a review of a transaction on its own.^{^[19]} A notice filed by the parties will invariably put the transaction in a better light than if the parties refuse to submit a notice and the Committee undertakes a review on its own accord.

The Committee’s attention to non-notified transactions, which has grown over the last few years, incentivizes transacting parties to err on the side of voluntarily notifying CFIUS for several reasons. First, when CFIUS requests a notification in the absence of a voluntary notice, the parties begin the CFIUS process with an air of distrust. These transactions receive additional scrutiny—both because CFIUS already has decided that the transaction may raise national security concerns and because CFIUS generally is suspicious that the parties deliberately sought to avoid review. Second, because CFIUS generally requests notice only after the transaction has closed, there is greater commercial risk if CIFIUS rejects the deal or if it imposes burdensome conditions. There is no opportunity in such cases for the parties to restructure the transaction in a way that helps address the Committee’s concerns. Third, there is greater risk that CFIUS will reject a non-notified transaction or impose very burdensome conditions, because CFIUS often finds it more difficult to mitigate national security risks after a transaction has closed.

The current state of affairs with regard to CFIUS regulation can be summarized as follows: CFIUS has significant power over foreign investments in U.S. companies, and provides strong incentives for transacting parties to voluntarily submit to a review. Considering this background, we can identify several factors that have driven recent Committee attention to domestic energy projects.^{^[20]}

The Rise of China

China’s emergence as a world power has been accompanied by concerns about Chinese espionage directed at the United States. For example, an October 2012 report by the U.S. House Permanent Select Committee on Intelligence alleged that investments by Chinese telecommunications equipment companies Huawei and ZTE presented significant national security risks.^{^[21]} A February 2013 report by the security company Mandiant Corporation alleged that the Chinese government sponsored cyber espionage.^{^[22]} In March 2013, the U.S. National Security Advisor alleged that Chinese entities are the sources of “sophisticated, targeted theft of confidential business information and proprietary technologies through cyber intrusions emanating from China on an unprecedented scale.”^{^[23]} In addition, the U.S. Government has recently accused the Chinese military of launching cyber attacks against U.S. government and private networks.^{^[24]}

At the same time, the flow of Chinese direct investment into the U.S.—one indicator of the U.S.-China economic relationship—has been growing rapidly, from $129 million in 2006, to $1.9 billion in 2009, to $6.5 billion in 2012.^{^[25]} This trend has resulted in more instances of Chinese investment in U.S. energy projects and companies. With China joining the United States as the world’s biggest consumers of energy,^{^[26]} the development of energy projects should be an arena for extensive investment and collaboration between the two world powers. In fact, in President Obama’s first year in office, the Administration announced multiple cooperative energy development measures with China and there have been regular follow-on efforts.^{^[27]}

Yet extensive collaboration also can give rise to conflict, leading the U.S. to view China as a strategic threat as well as a partner. This threat has led CFIUS to closely examine recent Chinese investment in U.S. energy projects. Such transactions present concerns such as U.S. energy security, China’s ability to infiltrate U.S. power systems, the transfer of key technology to China, and the proximity of foreign-controlled projects to sensitive military facilities.

Infrastructure Vulnerability

In recent years, the energy sector has become a focus of national security concerns, along with traditional security-related areas such as defense, telecommunications, and high technology. As the power grid is increasingly reliant on electronic systems, energy projects are now a main point of vulnerability to the United States. Other energy projects may present national security implications for reasons of energy independence or the valuable technology involved. Accordingly, the 2007 amendments to the CFIUS statute stressed the importance of the energy sector.^{^[28]} Among the list of factors CFIUS must consider in its proceedings are “the potential national security-related effects on United States critical infrastructure, including major energy assets,” and “the long-term projection of United States requirements for sources of energy and other critical resources and material.”^{^[29]}

The CFIUS cases referenced at the outset of this article—Ralls/Terna, CNOOC/Nexen, and Wanxiang/A123—all involved Chinese investments in energy companies that, from the perspective of CFIUS, represented potential national security vulnerabilities.^{^[30]} The acquisition by Chinese-owned Ralls Corp. of assets from Greek-owned Terna concerned wind farm projects that would connect to a regional electric grid and that were near a Department of Defense flight facility.^{^[31]} The CNOOC acquisition of Canadian energy company Nexen involved oil platforms in the Gulf of Mexico that the Department of Defense viewed as strategic locations.^{^[32]} Wanxiang’s purchase of A123, a high-tech battery manufacturer, stalled until the parties decided that Wanxiang would not acquire A123’s defense-related business.^{^[33]}

In other words, CFIUS viewed many of the assets at issue as potentially exploitable to the detriment of U.S. security. Coupled with U.S. concern about China as an espionage threat and source of cyber attacks, each case presented a combustible mixture. Fortunately, CFIUS ultimately approved the CNOOC/Nexen and Wanxiang/A123 cases in early 2013.^{^[34]} However, in both cases the parties reportedly had to undertake substantial commitments to ensure CFIUS approval. In CNOOC/Nexen, CNOOC apparently was obligated to agree to a broad range of security measures concerning Nexen’s oil platform assets in the Gulf of Mexico.^{^[35]} In Wanxiang/A123, Wanxiang agreed to carve out pieces of A123’s business that were of importance to the U.S. government.^{^[36]} On the other hand, the President blocked the Ralls/Terna deal in September 2012 because, due to the proximity to U.S. defense facilities, the President found that the Chinese owners “might take action that threatens to impair the national security of the United States.”^{^[37]}

Changing Balance Within CFIUS

CFIUS decisions ultimately are made by individual representatives from the separate agencies that comprise the Committee. These individuals—bright, dedicated, and committed to the national interest—discuss each CFIUS case among themselves.^{^[38]} They gather in person at least once each week and continue their dialog through emails and by phone. These individuals each bring to bear their own experiences, knowledge, and interests. They also are obligated to represent the views of their agencies, and act consistently with their agencies’ missions, while serving on CFIUS.^{^[39]}

For example, a cyber attack that shuts down a city’s power would concern personnel at the Department of Homeland Security more than personnel at the Office of the United States Trade Representative (USTR). Conversely, if the United States enters into a counterproductive trade dispute, it would directly affect personnel at USTR much more than at the Department of Homeland Security. In addition, the relevant personnel are held accountable by pressure and potential fallout—from inside their agencies, Congress, and the press—if their areas of expertise lead to a compromise of national security. That is not to say that concerns are strictly limited in this way, but it is a rough approximation of how representatives from each of the agencies behave. An additional layer of complexity results from the varied views on an issue shaped by Committee members’ personal experience and the agency positions for which they advocate.

Accordingly, representatives from the more security-focused agencies—the Departments of Homeland Security, Justice, and Defense—typically are more hawkish in Committee deliberations than are representatives from other agencies. On the other hand, representatives from the Departments of State and Commerce and USTR are often focused on commercial, trade, and diplomatic interests. In the past, this latter group generally defended these interests strongly. In CFIUS deliberations they argued in favor of approving deals that the hawkish agencies sought to scuttle or burden with conditions. In their view, the trade or diplomatic benefits of international commercial transactions and an open investment environment outweighed many concerns raised by the security agencies.

Recently, however, the trade-oriented agencies have been more muted in CFIUS deliberations. This change may be a function of the particular individuals involved in the deliberations (since the cast of individuals changes over time), or a function of policy concerns at their agencies. The State Department, for example, recently has been playing a critical role on U.S. policy vis-à-vis Iran. That may make some bureaucracies within the State Department more hawkish, which may in turn create different incentives for the State Department’s CFIUS representatives. By many accounts, the representatives from the trade-oriented agencies recently appear less inclined to challenge their security-focused counterparts.

The Department of Energy plays a unique role in CFIUS because it has an interest in security, trade, and the promotion of renewable energy. Yet in recent cases involving Chinese investments in U.S. energy projects—where the Department of Energy could potentially play a leading role—its trade and environmental interests were insufficient for it actively to challenge the security-focused agencies.

At the same time, the Department of Defense, in particular, has leveraged CFIUS authority as a way to keep potential foreign adversaries away from U.S. government security facilities.^{^[40]} Defense representatives on the Committee have argued aggressively that any advantage that a potential foreign adversary might gain from U.S. investment—for example, by acquiring a company with access to an important network that could be used for a cyber attack—must be nullified. The result is occasionally the scuttling of the deal entirely, either voluntarily by the parties or by Presidential order as in the Ralls/Terna case.^{^[41]}

Conclusion

With counter-arguments from trade-oriented agencies now muted or absent, the hawkish agencies are determining CFIUS outcomes in cases where there are security concerns. The rise of China has brought increased Chinese investment in the United States, including energy-related investments. With this investment, however, have come security concerns, particularly regarding Chinese espionage. Coupled with concerns about infrastructure vulnerability, these dynamics have given rise to an increased number of difficult CFIUS cases that have involved domestic energy projects.

Preferred citation: Stephen Heifetz & Michael Gershberg, Why Are Foreign Investments in Domestic Energy Projects Now Under CFIUS Scrutiny?, 3 Harv. Bus. L. Rev. Online 203 (2013), https://www.hblr.org//?p=3356.

* Stephen Heifetz and Michael Gershberg are members of Steptoe & Johnson LLP’s International Regulation and Compliance Practice in Washington, D.C. Mr. Heifetz represented the Department of Homeland Security on CFIUS from 2006–10. This Article draws from the authors’ personal experience with CFIUS.

[1] See Regarding the Acquisition of Four U.S. Wind Farm Project Companies by Ralls Corporation, 77 Fed. Reg. 60,281 (Oct. 3, 2012).

[2] Roberta Rampton & Scott Haggett, CNOOC-Nexen Deal Wins U.S. Approval, Its Last Hurdle, Reuters, Feb. 12, 2013, available at http://www.reuters.com/article/2013/02/12/us-nexen-cnooc-idUSBRE91B0SU20130212. CFIUS proceedings are related documents are kept strictly confidential pursuant to statutory requirement. See 50 U.S.C. app. § 2170(c) (2012). Therefore, with few exceptions, there is no official public information on the results of CFIUS proceedings. However, details of newsworthy cases are often reported in the press.

[3] Michael Bathon, Wanxiang Wins U.S. Approval to Buy Battery Maker A123, Bloomberg (Jan. 30, 2013), http://www.bloomberg.com/news/2013-01-29/wanxiang-wins-cfius-approval-to-buy-bankrupt-battery-maker-a123.html.

[4] See Andrew Zajac, Ralls Sues to Void U.S. Wind-Farm Purchase Obama Blocked, Bloomberg (Jan. 29, 2013), http://www.bloomberg.com/news/2013-01-29/ralls-sues-to-void-u-s-wind-farm-purchase-obama-blocked.html; Rampton & Haggett, supra note 2; Bathon, supra note 3.

[5] The authors’ discussion of the Committee’s changing balance draws from personal experience.

[6] See 50 U.S.C. app. § 2170(k). The agencies statutorily charged with CFIUS obligations are the Departments of Treasury, Homeland Security, Commerce, Defense, State, Justice, Energy, Labor (as a non-voting member), and the Office of the Director of National Intelligence (also a non-voting member). Id. In addition, by executive order, the Office of the United States Trade Representative (USTR) and the Office of Science and Technology Policy both regularly participate in the Committee. See Exec. Order No. 13,456 § 3(b), 73 Fed. Reg. 4677, 4677 (Jan. 23, 2008).

[7] See 50 U.S.C. app. § 2170(k).

[8] CFIUS regulations define “control” of a U.S. business quite loosely—virtually any foreign ability to cause a company to act (or not to act) in a particular manner constitutes foreign control. See 31 C.F.R. § 800.204 (2012). However, at least “control” is defined. Whether a transaction may affect national security, though subject to a statutory “factors test,” is virtually indefinable. See 50 U.S.C. app. § 2170(f). The amorphous quality of the national security inquiry is underscored by the last statutory factor: “such other factors as the President or the Committee may determine to be appropriate.” Id. § 2170(f)(11).

[9] See Comm. on Foreign Inv. in the U.S., Annual Report to Congress CY 2011 2 (Dec. 2012), http://www.treasury.gov/resource-center/international/foreign-investment/Documents/2012%20CFIUS%20Annual%20Report%20PUBLIC.pdf.

[10] See id. at 18 (“From 2009 through 2011, 22 cases (eight percent) resulted in the use of legally binding mitigation measures.”).

[11] These commitments are embodied in risk mitigation agreements between the government and the acquiring parties. See 50 U.S.C. app. § 2170(l)(1) (authorizing mitigation agreements).

[12] See Exec. Order No. 13,456 § 6(c), 73 Fed. Reg. 4677, 4678–79 (Jan. 23, 2008).

[13] 50 U.S.C. app. § 2170(d)(1).

[14] See generally Comm. on Foreign Inv. in the U.S., supra note 9, at 3 (indicating that “there were no transactions that resulted in a Presidential decision”).

[15] In October 2012, the President blocked Ralls’ acquisition of Oregon wind farm projects. See Regarding the Acquisition of Four U.S. Wind Farm Project Companies by Ralls Corporation, 77 Fed. Reg. 60,281 (Oct. 3, 2012). In February 1990, the President blocked China National Aero-Technology Import and Export Corporation’s acquisition of aircraft parts manufacturer MAMCO Manufacturing, Inc. See Order Pursuant to Section 721 of the Defense Production Act of 1950, 55 Fed. Reg. 3935 (Feb. 6, 1990).

[16] See 50 U.S.C. app. § 2170(b)(1)(D). See also Edward M. Graham & David M. Marchick, U.S. National Security and Foreign Direct Investment 33–58 (2006).

[17] A “notice” to CFIUS initiates the CFIUS review process. See 31 C.F.R. § 800.401 (2012). Notices are virtually always submitted jointly by the parties to the transaction that is subject to CFIUS review because the regulations require submission of information related to both parties.

[18] Id. § 800.401(b).

[19] Id. § 800.401(c).

[20] While the Committee’s attention to domestic energy projects has been limited until recently, one notable exception was the Chinese National Offshore Oil Corporation’s (CNOOC) proposed acquisition of Unocal Oil Company in 2005. See Francesco Guerrera, CNOOC at Odds with Congress over Unocal Deal, Fin. Times (July 26, 2005), http://www.ft.com/intl/cms/s/0/07ca91da-fdfc-11d9-a289-00000e2511c8.html. CNOOC withdrew its bid for Unocal, as well as its CFIUS notice, amid U.S. political pressure. See Ben White, Chinese Drop Bid To Buy U.S. Oil Firm, Wash. Post (Aug. 3, 2005), http://www.washingtonpost.com/wp-dyn/content/article/2005/08/02/AR2005080200404.html. The House of Representatives enacted a non-binding resolution opposing the transaction and stating that CNOOC’s planned acquisition of Unocal “would threaten to impair the national security of the United States.” See H.R. Res. 344, 109th Cong. (2005). A bill was introduced in the Senate to prohibit the sale and the House passed an amendment to an appropriations bill that would have prohibited CFIUS from approving the deal. See S. Res. 1412, 109th Cong. (2005); H.R. Res. 3058, 109th Cong. (2005).

[21] See U.S. House of Representatives Permanent Select Comm. on Intelligence, 112th Cong., Investigative Report on the U.S. National Security Issues Posed by Chinese Telecommunications Companies Huawei and ZTE 44–46 (Oct. 8, 2012), available at http://intelligence.house.gov/sites/intelligence.house.gov/files/documents/Huawei-ZTE%20Investigative%20Report%20%28FINAL%29.pdf.

[22] Mandiant, APT1: Exposing One of China’s Cyber Espionage Units (Feb. 2013), http://intelreport.mandiant.com/Mandiant_APT1_Report.pdf.

[23] Thomas Donilon, Nat’l Sec. Advisor to President Obama, The United States and the Asia-Pacific in 2013 (Mar. 11, 2013) (transcript available at http://asiasociety.org/new-york/complete-transcript-thomas-donilon-asia-society-new-york).

[24] David E. Sanger, U.S. Blames China’s Military Directly for Cyberattacks, N.Y. Times (May 6, 2013) http://www.nytimes.com/2013/05/07/world/asia/us-accuses-chinas-military-in-cyberattacks.html?pagewanted=all&_r=0 (citing U.S. Department of Defense report on Military and Security Developments Involving the People’s Republic of China).

[25] See Chinese Investment Monitor, Rhodium Group, http://rhg.com/interactive/china-investment-monitor (last visited Apr. 20, 2013).

[26] Spencer Swartz & Shai Oster, China Tops U.S. in Energy Use, Wall St. J. (July 18, 2010), http://online.wsj.com/article/SB10001424052748703720504575376712353150310.html.

[27] See, e.g., U.S. Dep’t of Energy, U.S.-China Clean Energy Cooperation (Jan. 2011), available at http://energy.gov/sites/prod/files/USChinaCleanEnergy_0.PDF.

[28] Foreign Investment and National Security Act of 2007, Pub. L. No. 110-49, 121 Stat. 246 (2007).

[29] Id. § 4.

[30] See Zajac, supra note 4; Rampton & Haggett, supra note 2; Bathon, supra note 3.

[31] See Helene Cooper, Obama Orders Chinese Company to End Investment at Sites Near Drone Base, N.Y. Times, Sept. 29, 2012, at A16, available at http://www.nytimes.com/2012/09/29/us/politics/chinese-company-ordered-to-give-up-stake-in-wind-farms-near-navy-base.html.

[32] See Sara Forden & Rebecca Penty, Nexen Rigs Near U.S. Military Base May be Issue in CNOOC Review, Fin. Post (Dec. 12, 2006), http://business.financialpost.com/2012/12/06/nexen-rigs-near-u-s-military-base-may-be-issue-in-cnooc-review/?__lsa=a706-0039.

[33] Erin Ailworth, A123 Deal Hangs on Secretive Federal Panel, Bos. Globe (Jan. 9, 2013), http://www.bostonglobe.com/business/2013/01/09/deal-hangs-secretive-federal-panel/92R7hEpT6Jrgdsod9txw8M/story.html.

[34] See Rampton & Haggett, supra note 2; Bathon, supra note 3.

[35] See Rebecca Penty & Sara Forden, CNOOC Said to Cede Control of Nexen’s U.S. Gulf Assets, Bloomberg (Mar. 1, 2013), http://www.bloomberg.com/news/2013-03-01/cnooc-said-to-cede-control-of-nexen-s-u-s-gulf-assets.html.

[36] See Bathon, supra note 3.

[37] Regarding the Acquisition of Four U.S. Wind Farm Project Companies by Ralls Corporation, 77 Fed. Reg. 60,281, 60,281 (Oct. 3, 2012).

[38] The authors’ discussion of the Committee’s changing balance draws from practical experience.

[39] While the day-to-day CFIUS participants represent the views of their agencies, certain actions require the approval of high-level political appointees. See 50 U.S.C. app. § 2170(b)(1)(F), (b)(2)(D)(ii), (b)(3)(C)(iv)(II).

[40] See, e.g., Memorandum from Davis Graham & Stubbs LLP & Reed Smith LLP to Nw. Non-Ferrous Int’l Co. & Firstgold Corp. (Dec. 14, 2009), available at http://graphics8.nytimes.com/packages/images/nytint/docs/memo-regarding-the-sale-of-firstgold-corp/original.pdf.

[41] Regarding the Acquisition of Four U.S. Wind Farm Project Companies by Ralls Corporation, 77 Fed. Reg. at 60,281.

April 18, 2013 By wpengine

Unreasonable Delays: CFIUS Reviews of Energy Transactions

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Joshua C. Zive*

I. Introduction

The role of foreign investment in the U.S. energy sector has changed significantly in recent years. The development of domestic oil and gas resources has resulted in a significant increase in foreign interest in the U.S. as a target for investment in the wide range of industries connected to domestic oil and gas production, transportation, and use.^{^[1]} Such investment is important to the continued growth and success of the U.S. energy sector and, in order to facilitate these ventures, the regulatory process surrounding energy transaction investment should not impose unreasonable delays. Unfortunately, delays and burdens associated with the Committee on Foreign Investment in the Unites States (CFIUS) are playing an increasingly significant and frustrating role in energy transactions.

This Article is not intended to discuss the wide range of substantive issues involved in a CFIUS review of energy transactions, but instead to call attention to timing concerns that have received little attention. As a result of legal and regulatory changes, CFIUS reviews of energy transactions are confronting lengthy delays that introduce needless uncertainty and costs into the investment climate. These delays frustrate the intended role of CFIUS review and make it unnecessarily difficult for energy transactions to be designed and executed in an efficient manner.

II. Living in the Now: CFIUS after FINSA

The U.S. has long struggled with efforts to balance concerns about the national security implications of foreign investment with the economic benefits of encouraging foreign investment in the U.S. CFIUS, an interagency committee chaired by the Department of the Treasury and charged with reviewing foreign acquisitions of U.S. businesses, was created as the tool to help find this balance.^{^[2]} CFIUS was created by Executive Order in 1975 and given limited jurisdiction and power to review foreign investment in the U.S., although CFIUS jurisdiction and powers were expanded in 1988 when Congress adopted the Exon-Florio amendment to section 721 of the Defense Production Act.^{^[3]} Since 1988, CFIUS has had significant discretion to review foreign investment in the U.S. with almost complete confidentiality and protection from judicial review, providing the public and the investing community with virtually no precedent that can be used to predict CFIUS behavior.^{^[4]}

Although the Exon-Florio regime provided CFIUS with broad powers, its process has had a rather narrow substantive scope. These limits resulted from a desire to prevent CFIUS from unduly interfering with foreign investment, and regulations at the time focused on transactions involving “products, services, and technologies that are important to U.S. national defense requirements.”^{^[5]}

In addition to having a narrow scope, the review process under Exon-Florio was fairly simple and predictable. Parties would file a notice voluntarily (or CFIUS would require that a notice be filed), and CFIUS would conduct an initial review within 30 days.^{^[6]} If CFIUS identified a need for further investigation, the committee could use an additional 45 days to conduct an investigation, and ultimately conclude the investigation with a recommendation for Presidential action.^{^[7]} This recommendation was required to be taken or rejected within 15 days of being sent to the President.^{^[8]} The CFIUS regulations establishing this process were vague in many respects, but in practice parties to most energy transactions that were unrelated to defense could plan around the CFIUS process knowing that benign transactions would generally be cleared by CFIUS after the initial 30-day review, which began when the parties submitted a formal voluntary notice.^{^[9]}

However, for companies involved in the energy sector, CFIUS procedure was fundamentally changed by the controversy surrounding the acquisition of the port management business of Peninsular and Oriental Steam Navigation Company (P&O) by Dubai Ports World (DP World), an entity ultimately owned by the government of the United Arab Emirates.^{^[10]} DP World’s acquisition of P&O included a transfer of leases for management of six major U.S. ports.^{^[11]} Although CFIUS cleared the DP World transaction, it sparked significant controversy and scrutiny of the CFIUS process that ultimately resulted in DP World selling all of the assets in question to U.S. entities in order to defuse the controversy.^{^[12]} In the wake of the DP World transaction, the legal foundation for CFIUS reviews of foreign investment in the U.S. was overhauled by the enactment of the Foreign Investment and National Security Act of 2007 (FINSA)^{^[13]} and the promulgation of new regulations by CFIUS in 2008.^{^[14]}

FINSA and subsequent regulations made a variety of significant changes to the nature and process of CFIUS review. This Article will discuss the following aspects of the CFIUS review process:

Broadening the definition of national security to explicitly include “issues relating to ‘homeland security’, including its application to critical infrastructure” and noting that this review includes “major energy assets.”^{^[15]}
Creating a three-tiered pre-notice, review, and investigation process that includes an initial pre-notice submission, a 30-day review of a formal notice (either filed voluntarily by parties or required to be filed by CFIUS), followed by a 45-day investigation if certain conditions are met.^{^[16]}
The creation of a presumption that foreign acquisitions involving critical infrastructure and acquisitions by government-owned investors require a 45-day investigation phase, unless senior CFIUS officials sign off that no investigation is needed.^{^[17]}

III. New Delays: International Energy Transactions Under FINSA

A. The Unlimited Definition of Critical Infrastructure

Prior to FINSA, determining whether a transaction fell under CFIUS jurisdiction was a simpler task for energy transactions. If the transaction resulted in a foreign-owned or controlled entity obtaining control over an existing U.S. business, and that business was involved with products or services that had a particular relationship to national security, such as materials essential to national defense, then submission to CFIUS review was prudent. CFIUS would review the notice submitted by the parties to the transaction and, if national security issues were identified, a 45-day review could be added to the initial 30-day review period. In the context of most energy transactions, those not involving energy assets connected to the U.S. military or occupying a dominant market share position in a particular energy sector, it was normal to abstain from submitting a transaction for CFIUS review because no national security issues could be identified, and those transactions that were submitted for review were often cleared by CFIUS within the first 30-day review period. The confidentiality of the CIFUS process has made reliable data difficult to obtain, but in 2006 the Congressional Research Service (relying on research conducted by outside sources) reported that CFIUS reviewed approximately 1,500 transactions from 1988 until 2005, with only twenty-five of those transactions being subjected to a full investigation.^{^[18]}

Determining how an energy-related notice will be treated by CFIUS is a more complex endeavor now because of FINSA’s treatment of “critical infrastructure.”^{^[19]} Critical infrastructure is defined as “systems and assets . . . so vital to the United States that the incapacity or destruction of such systems or assets would have a debilitating impact on national security.”^{^[20]} This term is important because FINSA added a new provision to the law requiring that CFIUS take into account “the potential national security-related effects on United States critical infrastructure, including major energy assets” when conducting a review of a transaction.^{^[21]}

While it is clear that these changes expand the scope of CFIUS review, it is less clear where that expansion ends. In particular, questions remain as to what sorts of infrastructure are included in the critical infrastructure category, other than “major energy assets,” and what exactly makes an energy asset “major.”^{^[22]} These questions remain unanswered, as CFIUS has refused to provide examples of infrastructure that might be considered critical infrastructure in their regulations.^{^[23]}

The FINSA language governing critical infrastructure has left the energy sector in the unfortunate position of being the only industry sector mentioned specifically as an example of critical infrastructure, with no indication of the types of energy assets that are considered neither major nor critical.^{^[24]} This direct reference to the energy sector is important because, in the author’s experience, spotlighting energy assets has both compelled more parties involved in international energy transactions to file CFIUS notices in order to contain the risk of subsequent CFIUS review of those transactions and has resulted in those notices facing longer delays as a result of the FINSA provisions discussed below.

B. The New “Pre-Notice” Notice

During the Exon-Florio era of CFIUS, parties could prepare a voluntary notice pursuant to CFIUS regulations and, as long as that notice included all of the information listed in the regulations, the 30-day review period would begin upon filing notice.^{^[25]} However, that process has changed substantially in the wake of FINSA.

Although FINSA made no mention of any pre-notice consultations, CFIUS promulgated regulations in which pre-notice consultations assumed a new and formal role in the CFIUS process. The language included in the post-FINSA CFIUS regulations provides that parties to transactions are “encouraged to consult” with CFIUS in advance of filing a notice and to file a draft notice in “appropriate cases.”^{^[26]} The regulatory language further states that all pre-notice materials must be provided to CFIUS “at least five business days before the filing of a voluntary notice.”^{^[27]}

The pre-notice process has been described by CFIUS as a tool to help CFIUS “understand the transaction and to suggest information that the parties may wish to include in their notice to assist [CFIUS] in addressing any national security considerations as efficiently as possible.”^{^[28]} While this objective seems reasonable, in practice the pre-notice period has become a functionally mandatory process that introduces new and unpredictable delays into the CFIUS review process. Although the CFIUS regulations indicate that a draft notice should be filed when appropriate, the reality is that CFIUS expects a draft notice in all cases. Once CFIUS receives the draft notice, CFIUS will often call for explanations or information beyond that required by regulations,^{^[29]} and it has become common practice for CFIUS to require early submission of the Personal Identifier Information (PII).^{^[30]} CFIUS has made it clear to filers that notices found to be insufficiently clear or complete will be rejected^{^[31]}, and in practice this has meant that only after CFIUS deems a pre-notice sufficiently clear and complete will CFIUS recommend that a formal voluntary notice be filed. If parties were to act without such a recommendation, they risk having the formal notice rejected by CFIUS as incomplete, meaning that the formal review process would never begin.^{^[32]}

The creation of a technically voluntary, but functionally mandatory, pre-notice process has added a significant amount of time to the CFIUS approval process, particularly for complex energy transactions. Not accounting for the time required to prepare the initial draft notice, the pre-notice consultation process can often drag on for weeks as parties scramble to collect all the individual bits of data requested by CFIUS. For complex energy transactions that involve multiple international parties, a variety of subsidiaries, and complex, geographically dispersed assets, the pre-notice process often involves scores of request and fact-finding missions at the behest of CFIUS. During this entire period, there is no clock running on the CFIUS pre-notice process and the formal review clock is not yet started. For energy transactions that operate under tight timelines as a result of tax periods or other exogenous factors, these weeks can sometimes make the difference between a transaction being viable or not.

C. Mandatory 45-day Investigation for Critical Infrastructure

The virtually unlimited definition of critical infrastructure may capture any substantial energy asset, and it creates an additional layer of delays during CFIUS reviews of energy transactions in the post-FINSA world.^{^[33]}

The normal period of review for a non-controversial transaction prior to the adoption of FINSA was 30 days.^{^[34]} By regulation, a CFIUS review only moves to an additional 45-day investigation if CFIUS finds that national security risks necessitate the additional investigation.^{^[35]} However, FINSA altered those procedures because Congress included a requirement in FINSA that a 45-day investigation be conducted for any transaction that “would result in control of any critical infrastructure of or within the United States by or on behalf of any foreign person” if that transaction could “impair national security.”^{^[36]}

This aspect of CFIUS has had direct consequences on the timing of CFIUS reviews of energy transactions. As discussed, under the broad and ambiguous definition in FINSA, which CFIUS has declined to narrow, virtually any energy-related asset can be considered critical infrastructure, the destruction of which could arguably impair national security in some manner, however small.^{^[37]} Accordingly, CFIUS is able to use this provision to justify adding an additional 45 days to the review of practically any notice concerning energy assets, meaning that the formal review period is actually a minimum of 75 days for most energy related transactions. As such, the notion that CFIUS is bound to a 30-day review period is simply not the case for most energy transactions.

IV. Conclusions

Although the energy sector was not the focus of the DP World controversy or FINSA, many benign energy transactions are confronting the type of CFIUS delays that one would expect to be associated only with uniquely sensitive assets such as cutting-edge technology or defense equipment. Changes in timing and cost expectations can often make the difference between success or failure in complex international energy deals and, even under the best of conditions, negotiating and closing energy transactions is a difficult and time-consuming endeavor. While the role of foreign investment in the U.S. energy sector is increasingly important, the changes FINSA made to the CFIUS process have introduced delays and unnecessary uncertainty for foreign investors and U.S. energy companies.

While every transaction poses unique substantive and analytical issues related to CFIUS, there are common problems faced by most international energy transactions that trigger CFIUS jurisdiction. As a result of the breadth of the term “critical infrastructure,” the creation of a new pre-notice mandate, and the statutory imposition of an additional 45-day investigation period for transactions involving critical infrastructure, many parties must simultaneously struggle to escape CFIUS review and plan for a review period that has become as long 90 days when the pre-notice period is included. Given that the ability to provide details necessary for a formal notice means parties cannot file until they have agreed to the details of a transaction,^{^[38]} and that CFIUS informs counsel that they prefer that notice is filed prior to closing,^{^[39]} many energy transactions are required to wait in limbo for up to three months pending CFIUS review.^{^[40]}

The unnecessary delays faced by energy transactions can discourage important foreign investment and create unexpected problems that result in aborted transactions as result of events that occur during the long CFIUS review period. As such, there is risk going forward that an increasing number of parties might consider choosing to avoid these delays by not filing a voluntary notice, which leaves a lingering risk of a transaction being reviewed and potentially unwound by CFIUS after it has closed.

Decisions regarding whether to file a voluntary notice with CFIUS should be motivated by reasonable evaluations of national security issues and risks and not by the costs associated with delays. If parties choose not to file notices due to concerns about delays, it is likely that some transactions that may raise real or perceived national security issues will be not be reviewed by CFIUS before closing. When the media later reports on either the actual or alleged risks of these transactions, the risk of more controversies like DP World becomes more pronounced. Such controversies undermine the confidence that foreign investors have in the U.S., harming the economy and the energy sector. Furthermore, it is possible that some of the transactions that seek to avoid CFIUS review, in order to avoid delays, may pose actual national security risks if those transactions result in substantive—and not merely hypothetical—security vulnerabilities.

U.S. national security, the U.S. energy sector, and the larger U.S. economy would be well served if CFIUS would treat energy transactions in a more rational manner. CFIUS should promulgate guidance regarding the types of energy assets that are likely to be considered critical infrastructure and should be willing to terminate reviews after the initial 30-day review for assets that are outside of the defined scope of critical infrastructure. Additionally, the pre-notice process should be more clearly defined and should not include requests for information outside of what is required by CFIUS regulations. If these changes were made, it would allow CFIUS to focus their resources on transactions that raise legitimate national security risks and would allow parties involved in most energy transactions to submit a notice to CFIUS with confidence that the review could be completed in a reasonable timeframe.

Preferred citation: Joshua C. Zive, Unreasonable Delays: CFIUS Reviews of Energy Transactions, 3 Harv. Bus. L. Rev. Online 169 (2013), https://www.hblr.org//?p=3271.

* Senior Counsel, Bracewell & Giuliani LLP.

[1] See, e.g., Foreign Investors Play Large Role in U.S. Shale Industry, U.S Energy Info. Admin. (Apr. 8, 2013), http://www.eia.gov/todayinenergy/detail.cfm?id=10711.

[2] See 50 U.S.C. app. § 2170(k) (2012).

[3] See generally Stephen K. Pudner, Moving Forward from Dubai Ports World—The Foreign Investment and National Security Act of 2007, 59 Ala. L. Rev. 1277, 1278–81 (2008); James F.F. Carroll, Back to the Future: Redefining the Foreign Investment and National Security Act’s Conception of National Security, 23 Emory Int’l L. Rev. 167, 167–68 (2009) (describing historical origins of CFIUS regulatory mandate).

[4] See Pudner, supra note 3, at 1281; 50 U.S.C. app. § 2170(e).

[5] Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons, 56 Fed. Reg. 58,774, 58,775 (Nov. 21, 1991) (to be codified at 31 C.F.R. pt. 800).

[6] Id. at 58,786.

[7] Id.

[8] Id. at 58,787.

[9] Id. at 58,784–87.

[10] See Deborah M. Mostaghel, Dubai Ports World Under Exon-Florio: A Threat to National Security or a Tempest in a Seaport?, 70 Alb. L. Rev. 583, 583 (2007).

[11] See id. at 606.

[12] See id. at 607.

[13] Foreign Investment and National Security Act of 2007, Pub. L. No. 110-49, 121 Stat. 246 (2007).

[14] Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons, 73 Fed. Reg. 70,702 (Nov. 21, 2008) (to be codified at 31 C.F.R. pt. 800).

[15] 50 U.S.C. app. § 2170(a)(5), (f)(6) (2012).

[16] Id. § 2170(b).

[17] Id.

[18] James K. Jackson, Cong. Research Serv., RS22197, The Exon-Florio National Security Test for Foreign Investment 4 (2006).

[19] 50 U.S.C. app. § 2170(a)(6).

[20] Id.

[21] Id. § 2170(f)(6) (emphasis added).

[22] Id.

[23] See 31 C.F.R. § 800.208 (2012)

[24] 50 U.S.C. app. § 2170(f)(6).

[25] See Mostaghel, supra note 10, at 595.

[26] 31 C.F.R. § 800.401(f) (2012).

[27] Id.

[28] Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons, 73 Fed. Reg. 70,702, 70,711 (Nov. 21, 2008) (to be codified at 31 C.F.R. pt. 800).

[29] 31 C.F.R. § 800.402 (2012).

[30] Id. § 800.402(c)(6)(vi).

[31] See Filing Instructions, U.S. Dep’t of Treasury, http://www.treasury.gov/resource-center/international/foreign-investment/Pages/cfius-filing-instructions.aspx (last visited April 12, 2013).

[32] See Committee on Foreign Investment in U.S. (CFIUS), U.S. Dep’t of Treasury, http://www.treasury.gov/resource-center/faqs/CFIUS/Pages/default.aspx (last visited April 12, 2013) (“The time that it takes for the Staff Chairperson to determine that the notice complies with §800.402 after it has been submitted by the parties depends upon a variety of factors, including the notice itself and whether parties have submitted a draft notice before submitting the formal notice.”).

[33] See U.S.C. app. § 2170(a)(6) (2012).

[34] See Mostaghel, supra note 10, at 595.

[35] See 31 C.F.R. § 800.501(a)(2) (2012).

[36] 50 U.S.C. app. § 2170(b)(2)(B).

[37] See id. § 2170(a)(6).

[38] See 31 C.F.R. § 800.402 (2012) (listing all of the information regarding a transaction required for a complete notice).

[39] This practice is not reflected in any formal regulations or guidance, but in the author’s experience CFIUS treats post-closing filings with more skepticism, and will require a fulsome explanation of why the notice was not filed prior to closing.

[40] While the specifics of all such transactions are confidential, one need only to review the recent acquisition of Nexen Inc. by CNOOC to see an example where CFIUS approval took over six months. See Roberta Rampton & Scott Haggett, CNOOC-Nexen Deal Wins U.S. Approval, Its Last Hurdle, Reuters, Feb. 12, 2013, available at http://www.reuters.com/article/2013/02/12/us-nexen-cnooc-idUSBRE91B0SU20130212.

CFIUS

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