National Security Implications on Foreign Investment in ... · 3 3 1. Introduction- national...

1

1

National Security Implications on Foreign Investment in the United States,

Europe and Asia

By Giorgi Khurodze [email protected]

July 11, 2008 This is a Bucerius/WHU MLB thesis

12.196 words (excluding footnotes)

Supervisor 1: James J. Hanks, Jr

Supervisor 2: William M. Jack

2

2

1. Introduction______________________________________________________3-5 2. Foreign investment review process in United State_________________________5-8

2.1. Main Functions of the CFIUS_________________________________________8-11

2.2. The CFIUS Review Process__________________________________________11-13

2.3. Procedural steps for the CFIUS notification______________________________13-14

2.4. Information Required from the “US Person“_______________________________14-15

2.5. Information Required from “Foreign Persons “______________________________12-13

3. FINSA and New Procedures___________________________________________15

3.1. Risk Mitigation ___________________________________________________16-17

3.2. Reports to Congress _______________________________________________17-19

4. Recently Proposed Regulation on CFIUS_________________________________19

4.1 “Control” by foreign person _________________________________________19-20

4.2. Additional Content In CFIUS Notification Letter________________________20-21

5. National Security and Foreign Investment in Germany______________________22

5.1. Law Governing Foreign Investment in Germany_________________________22-23

5.2 Foreign Investment Review Process in Germany__________________________23-26

6. National Security influence on Foreign Investment in France__________________27

6.1. The law regulating Foreign Direct Investment in France_____________________27-28

6.2. Foreign investment review process in France_______________________________29-32

7. Foreign Direct Investment and National Security Concerns in China_____________32-33

7.1. Laws Applicable For FDI Review Process in China____________________________33

7.1.1. MOFCOM Foreign Investment Regulation__________________________________33-34

7.1.2. Catalogue for the Guidance of Foreign Invested Enterprises_______________________34

7.1.3. Anti-Monopoly law____________________________________________________34-35

7.2. National Security and Foreign Investment Review Process in China_______________35-37

7.3. Negotiations between U.S. and China on Bilateral Investment Treaty______________37-38

8.Conclusion_____________________________________________________38-40

Bibliography_____________________________________________________41-44

Affirmation______________________________________________________45

3

3

1. Introduction- national security impact on foreign investment in United States, Germany,

France and China

In recent years many countries have implemented laws and regulations concerning the

implications of foreign investment on national security. Those laws and regulations are designed

to restrict certain types of investments that might negatively influence a country’s national

security. Approaches towards national security are different in each country but most laws have a

common opinion that foreign investments in the defense industry, energy sector and investment

by state controlled companies impairs the national security. This paper analyzes laws and

policies of the United States, France, Germany and China regarding how national security

impacts on foreign investment.

The United States with its broadly regulated and newly presented foreign investment policies

will be the core subject of the paper. A substantial part of the topic will be concentrated on legal

requirements and recently adopted changes implemented in the United States after controversies

relating to two foreign transactions in 2006. Those two transactions the acquisition effort of

United States Oil Company (Unocal) by China National Offshore Oil Company (“CNOOC”)

which was owned by Chinese government, and also Dubai Ports World substantially influenced

and triggered congressional and governmental oversight on foreign transactions.1 Despite the

scrutiny on foreign investment, the United States government tries to maintain a balance between

the open market policy and the country’s national security interest. There are certain rules and

regulations that foreign individuals and companies should follow in order to invest in the United

States.2 These legal requirements are mainly driven by national security concerns. The

interagency committee that deals with foreign takeovers and acquisition is the Committee on

Foreign Investment in the United States (CFIUS). Generally, transactions that impair the national

security of the United States are subject to CFIUS investigation. The CFIUS review process is

implemented under the Exon-Florio statute as amended by the Foreign Investment and National

Security Act (FINSA) of 2007 and Executive Order 13,456.3

1 See Robert S. Larissa, Lisa Raisner and Thomas B. Wilner, NEW LAW HEIGHTENS SCRUTINY OF FOREIGN

ACQUISITIONS OF U.S. COMPANIES, NYU JOURNALOF LAW AND BUSINESS 31 MARCH 2008, P-289-290 available at http://www.law.nyu.edu/journals/lawbusiness/issues/uploads/4-1/nyb106.pdf (Last visited Jun. 18, 2008) 2 See Alan P. Larson, David M. Marchick, Foreign Investment and National Security Getting the Balance Right COUNCIL ON FOREIGN RELATIONS, 18, JULY 2006, P-3 available at

www.cfr.org/content/publications/attachments/CFIUSreport.pdf (Last visited Jun. 18, 2008)

4

4

Across Europe there is a debate among politicians in favor of open market and politicians who

think that it is necessary to set restrictions on foreign investments in those industries that are

crucial for national security and national interest. For example there was a strong reaction in

France when New York Stock Exchange declared its intention to takeover Euronext. President

Chirac was supporting a “Franco-German solution” and recommended a Deutsche Börse merger

with Euronext.4 In Germany there is a steadily growing concern about that acquisition of German

companies operating in sensitive sectors by sovereign wealth funds that are incorporated in Asia

and the Middle East. To monitor the acquisition of German companies by foreign state control

enterprises, German government has started to draft a bill that would give the possibility to

create an interagency committee similar to CFIUS.5

Since the Chinese CNOOC failed to acquire U.S. Unocal due to the U.S. national security

interests, the government of China implemented the reverse action by creating problems for the

US investment fund Carlyle Group in acquiring large stake in Xugong Group Construction

Machinery. The Carlyle transaction raised concerns because of the control that US investment

fund was gaining in Chinese the manufacturing industry. Major concern which was the big

foreign stake ownership in Xugong Group Construction has been resolved and the US

investment fund reduced its stake from 85% to 45% but still there is no final decision by Chinas’

Ministry of Commerce (MOFCOM) on approving the transaction.6 In 2006 China passed a new

Antimonopoly Law (AML) that authorizes the Chinese government to examine any transaction

that threatens China’s national security. The law will take effect in August of 2008.7

3 See “CONGRESS STRENGTHENS LAW TO PREVENT FOREIGN INVESTMENTS THAT COULD

THREATEN NATIONAL SECURITY”, ARNOLD & PORTER LLP Client Advisory available at

http://www.arnoldporter.com/resources/documents/A&PCA_CongressStrengthensLaw_080107.pdf (Last visited Jun

15, 2008)

4 See Chirac is against NYSE takeover of Euronext, available at

http://us.ft.com/ftgateway/superpage.ft?news_id=fto060620061502361920 (Last visited Jun 19, 2008)

5 See Bertrand Benoit, Tony Barber and George Parker, Germany plans for own Cfius deal watchdog, Financial

Times, available at http://www.ft.com/cms/s/0/48128c56-6c82-11dc-a0cf-0000779fd2ac.html (Last visited Jun 19,

2008)

6 See Clark, Harry L; Wang, Lisa W, Foreign Investment and National Security, The China Business Review,

January. 1. 2008, P-53, available at http://www.deweyleboeuf.com/files/News/5020bb98-6718-4337-97a6-

64667f03834d/Presentation/NewsAttachment/a3420492-97fd-4f45-9b4b-6800e36248eb/Clark.pdf (Last visited Jun.

20, 2008)

7 See Clark, Harry L; Wang, Lisa W, Foreign Investment and National Security, The China Business Review,

January. 1. 2008, P-51, available at http://www.deweyleboeuf.com/files/News/5020bb98-6718-4337-97a6-

64667f03834d/Presentation/NewsAttachment/a3420492-97fd-4f45-9b4b-6800e36248eb/Clark.pdf (Last visited Jun.

20, 2008)

5

5

After summarizing the main objectives of this research paper, here will be outlined how the

paper is structured. It is divided on 8 Sections. Section 2 addresses the foreign investment review

process in United States it discusses the main functions of the CFIUS, its review process and

procedural steps that transactions should undergo for the CFIUS notification. Section 2 also

covers information requirements for “US Persons” and “Foreign Persons” while filing a

notification at the CFIUS. Section 3 outlines newly established requirements since FINSA

amended the Exon-Florio, such as negotiation of CFIUS with transaction parties for mitigating

the risk that impairs US national security and monitoring power of the Congress that has been

extended after FINSA enactment. Section 4 will provide an analysis of United States. regulations

recently proposed by Department of Treasury that reforms national security reviews on foreign

investment. Section 5 will be about Germany and its legal requirement on foreign transactions. It

will discuss the relevant law that governs foreign direct investment in Germany under the 2004

Amendment to 1961 Foreign Trade and Payments Act and regulations issued by the Federal

Ministry of Economics and Technology that specifies foreign transactions that might be the

subject of review due to national security concerns.8 Section 6 will discuss France. This Section

addresses the tension between the European Commission and France due to the decision that was

taken by France authorities on including foreign investments in gambling and casino industries

as one of the subjects of governmental reviews. Another issue that is also included in this chapter

is the case when France restricted transfer of foreign funds to the French Church of Scientology,

because French public security was under the risk.9 Section 7 analyzes the foreign transaction

review process in China and new anti-monopoly law that includes article 31 of the chapter IV

about examining foreign acquisitions raising national security concerns.10 Section 8 concludes

the research paper.

2. Foreign investment review process in United States

The United States is the country that catalyzed worldwide foreign investment review processes

in regards to national security. Since the increased scrutiny on foreign investment in sensitive

sectors, countries like Germany, France and China followed the U.S. and extended their

8 See FOREIGN INVESTMENT Laws and policies Regulating Foreign Investment in 10 countries, United State Government Accountability Office; February 2008, P-61 available at www.gao.gov/highlights/d08320high.pdf

(Last visited Jun. 22, 2008)

9 See FOREIGN INVESTMENT Laws and policies Regulating Foreign Investment in 10 countries, United State

Government Accountability Office; February 2008, P-54 available at www.gao.gov/highlights/d08320high.pdf


10 Anti-Monopoly Law, ch. IV, art. 31 (Concentratino of Undertakings).

6

6

oversight on foreign investments. This section would make an analysis on how government of

the United States deals with foreign transaction that threatens national security.

In the introduction of the paper it is mentioned that an inter agency committee that reviews

foreign investments impacts on national security is the Committee on Foreign Investment in the

United States (CFIUS) which was established in 1975 by President Ford and its’ function is to

monitor and analyze foreign transactions that might impair U.S. national security. The CFIUS

members are the secretaries of different federal departments and because of the involvement of

nearly all major US Secretaries it is called an “interagency body”.11 The following secretaries are

the members of CFIUS: Treasury; Homeland Security; Commerce; Defense; State; Labor and

Energy, the Attorney General of the United States and the Director of National Intelligence.12

The Head of the Committee is the Secretary of Treasury who delegates the authority to Lead

Agency. The Lead Agency can be any member of the Committee that should act on behalf of

CFIUS. The task of the Lead Agency is to examine all relevant transactions and to find out if

these transactions are in accordance with FINSA and report the results of the investigation to the

Committee.13 Executive order 13,456 gives additional authority to other departments and heads of

the agencies.14 For example, National Security threats are considered by those experienced

individual officials who are authorized by each member of the Committee and who have

discretion in analyzing transactions that might be dangerous for national security. Additionally

official representatives from the Office of the Secretary of Defense for Industrial Policy makes

an analysis for the Department of Defense and another official from the Office of foreign

Financial and Investment Issues makes an analysis for the Department of Homeland Security15.

Besides the Dubai Ports World and Unocal cases, other transactions that where examined by

CFIUS include the purchase of Texas Gulf, Inc, by Elf Aquitaine, the French company which

11 See Joseph D. West, Judith A. Lee, Christine K. Brennan, Dave M. Wharwood, and Patrick F. Speice, Jr,

NATIONAL SECURITY IMPLICATIONS OF FOREIGN INVESTMENT IN U.S. GOVERNMENT

CONTRACTORS, BRIEFING PAPERS second series, October 2007, P-3, available at

http://www.gibsondunn.com/publications/Documents/West-NatlSecImplicationsOfForeignInvestment.pdf (Last

visited Jun. 15, 2008)

12 50 U.S.C.A app. § 2170 (Sec 3) (2).

13 50 U.S.C.A app. § 2170 (Sec 3) (5).

14Executive order 13,456 of January 23, 2008.






7

7

was two-thirds owned by the government of France. The takeover of Santa Fe International

Corporation, and Fujitsus’ proposed acquisition of a majority stake in the Fairchild

Semiconductor Corporation. The number notifications that CFIUS received between 1988 and

2003 was 1,460, however only twenty-one were investigated by CFIUS and presented to the

President. Nine of the twenty-one companies fear that their transactions would have been

blocked by the president and withdrew their investment decisions. From those investment offers

that remained, The President did not prohibit any of them, except in one case, China National

Aero-Technology Import and Export Corporation and MAMCO. In that case, the United States

President concluded that there was necessity of divestiture. 16 One of the unique aspects of Exon-

Florio is that the transaction blocked by the President can not be reviewed by the courts.17

In recent years, certain CFIUS matters have attracted the public’s attention. Especially

acquisitions of United States telecommunication companies by foreign investors were in the

center of publics’ attention. CFIUS expressed its’ concerns in two telecom cases: 1) The

purchase of controlling stake by America Movil, S.A. de C. V. (a Mexican company) in

Telecomunicaciones de Puerto Rico, Inc. (TELPRI) which was wholly owned by Verizon

Communications, Inc.18 and 2) the merger of French company Alcatel and Lucent Technology.19

CIFUS security agreement in regards to TELPRI transaction states reasons why the acquisition

of TELPRI by a foreign purchaser threatens the United States national security. According to the

security agreement, United States government considers the communication sector crucial to

maintaining public safety and protecting the country’s national security. On the other hand the

security agreement states that the government is obliged to protect confidentiality of its citizens

by ensuring that U.S. communication information will not be spread. Another issue identified by

CFIUS and outlined in the TELPRI security agreement is TELPRIS’ subsidiary in Puerto Rico,

which is a government contractor and provides services in telecommunication. Contrary to the

acquisition proposal, on behalf of U.S. government, CFIUS declared why the transaction

threatened United States national security. CFIUS was concerned about calls and information

16

See J. Eugene Marans, John H. Shenefield, Joseph E Pattison, John T Byam, Manual of Foreign Investment in the

United States, 3 edition, 2004, P-588

17 See Thomas E. Crocker, WHAT BANKS NEED TO KNOW ABOUT THE COMING DEBATE OVER CFIUS,

FOREIGN DIRECTINVESTMENT, AND SOVEREIGN WEALTH FUNDS, Banking Law Journal, May 2008, P-

458-459

18 See “Verizon to Sell Caribbean and Latin American Telecom Operations in Three Transactions Valued at $3.7

Billion,” Verizon Press Release (Apr. 3, 2006) available at

http://investor.verizon.com/news/view.aspx?NewsID=731 (Last visited Jun. 23, 2008)

19 See Keith Regan, Alcatel, Lucent Make Merger Plans Official, 04.03.2006 available at

http://www.ecommercetimes.com/story/49724.html (Last visited Jun. 23, 2008)

8

8

about U.S. telecom users being disclosed to foreign governments. CFIUS was also concerned

with foreigners getting access to classified information related to United States law enforcement

activities.20

The merger of Alcatel and Lucent Technology was carried out more smoothly. The United States

government reached a deal with Lucent Technologies and Alcatel. According to the deal, both

companies had to execute a National Security Agreement and a Special Security Agreement. In

exchange to this agreement, CFIUS recommended to the President, that merger could be

approved. Based on CFIUS recommendation, the President gave merger approval.21

2.1 Main Functions of the CFIUS

When the CFIUS was first established in 1975 its prime role was to monitor and coordinate

United States foreign investment policy. By passing the Exon-Florio Amendment to the Defense

Production Act in 1988, Congress extended CFIUS’ capacity by giving formal approval to the

President to examining the impacts of foreign mergers and acquisitions on national security. The

President is authorized to ban or suspend a transaction if it contains a threat to United States

national security. Generally, CFIUS closely scrutinizes transactions that involve22 Foreign

government, foreign interest, foreign nationals and foreign person. 23 CFIUS defines foreign

government quite broadly and includes governmental bodies, agencies and departments other

than the United States and also the enterprises which are controlled and owned by a foreign

government.24 According to subsections (a)(4) of the Section 721 of the Defense Production

Act, in order to mitigate the risk that could “result in the control of any person engaged in

interstate commerce in the United States by Foreign government,” all transactions managed by a

20 See Warren G. Lavey TELECOM GLOBALIZATION AND DEREGULATION ENCOUNTER U.S.

NATIONAL SECURITY AND LABOR CONCERNS, Program on Information Resources Policy, Harvard

University, June 2007, P-9 available at http://pirp.harvard.edu/pubs_pdf/lavey/lavey-p07-2.pdf (Last visited Jun.

23, 2008)

21 See The White House Release “Statement on CFIUS Recommendation Regarding Proposed Merger of Lucent

Technologies, Inc., and Alcatel” November 17, 2006 available at

http://www.whitehouse.gov/news/releases/2006/11/20061117-13.html (Last visited Jun. 23, 2008)

22 The New Law Governing CFIUS National Security Review of Foreign Investment, MILLER & CHEVALIER

LLP, Volume 14, Issue 6/October 11, 2007; P-1 http://www.milchev.com/files/Publication/498011d8-27cb-49d1-

9947-0071cc3938ba/Presentation/PublicationAttachment/4e5c8c4f-cfc2-4807-b67e-

018a54ddfc51/International%20Alert%20%5BNew%20Law%20Governing%20CFIUS)%20October%2011%20200

7.pdf (Last visited Jun. 15, 2008)

23 31 C.F.R. § 800.210-800.213.

24 31 C.F.R. § 800.210.

9

9

foreign government require mandatory investigation.25 Since the Exon-Florio provision was

amended in 1992 those transactions that are connected with foreign governments or foreign

government controlled entities need a 45-day review process. According to the 1992

Amendment, United State companies performing highly classified work for the Department of

Energy or Department of Defense are not allowed to be acquired by entities affiliated with a

foreign government.26 Additionally, government contractors having more than $500 million in

contracts under national security or defense programs may not be purchased by the companies

controlled by a foreign government.27 However, under the FINSA amendment, CFIUS will not

require investigation if the Secretary of Treasury and the lead Agency state that the transaction

involving the foreign government does not threaten the national security of the United States. 28

”Foreign interest” refers to persons and governments of foreign countries.29 All the natural

persons that are not citizens of the United States are regarded as “foreign nationals.”30

Corporations governed by foreign interests can be defined as “Foreign persons.”31 While

describing a foreign person, it is necessary to understand that the location of the business unit is

not important. It is more significant whether the individual or entity is controlled by a foreign

interest.32

One of the most important functions of the CFIUS is to verify if a particular transaction contains

a threat to National Security. “National Security” is not defined in Exon-Florio or in FINSA. The

Committee relies on case-by-case examples of national security and stated that “transactions that

involve products, services, and technologies that are important to U.S. national defense

requirements will usually be deemed significant with respect to the national security.”33 The

25

50 U.S.C.A app. §2170 (Sec2)(a4)

26 The Exon-Florio process, KAYE SCHOLER LLP, January 2007,

http://www.abanet.org/buslaw/newsletter/0059/materials/pp6.pdf ( Last visited, Jun. 15, 2008)

27 The Exon-Florio process, KAYE SCHOLER LLP January 2007,

http://www.abanet.org/buslaw/newsletter/0059/materials/pp6.pdf ( Last visited, Jun. 15, 2008)

28See FOREIGN INVESTMENT; Laws and policies Regulating Foreign Investment in 10 countries United State

Government Accountability Office; February 2008; available at www.gao.gov/highlights/d08320high.pdf (Last


29 31 C.F.R § 800.211.

30 31 C.F.R. § 800.212.

31 31 C.F.R. § 800.213.

32 31 C.F.R § 800.222.

10

10

following are the conditions that the President of the United States weigh while determining the

issue of national security in connection with a specific transaction:

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 United States to meet the requirements of national security,

4) the potential effects of the proposed or pending transaction on sales of military goods,

equipment, or technology to any country

5) the potential effects of the proposed or pending transaction on United States international

technological leadership in areas affecting United States national security.”34

Recently there is a new function for CFIUS created by growing number of investments from

Sovereign Wealth Funds (“SWFs”) in United States business sectors. Despite that CFIUS has not

banned any SWFs investments, politicians have expressed concerns.35 A SWFs investment that

recently triggered attention related to the 7.5$ billion equity infusion in Citigroup by an Abu

Dhabi state-owned investment authority that resulted in 4.9 percent foreign ownership in

Citigroup. Another controversial SWF investment was $3 billion injection in Blackstone by a

Chinese private equity firm.36 The reason for concern is that SWFs are private equity firms

established and backed by the governments like Russia, Qatar, China, Dubai, Abu Dhabi,

Norway, Kuwait, and Singapore. Therefore, United States officials think that instead of investing

solely in business activities, the money generated in the SWFs may be invested in sensitive

sectors for United States national security and used for political purposes by foreign

33

See Joseph D. West, Judith A. Lee, Christine K. Brennan, Dave M. Wharwood, and Patrick F. Speice, Jr,





34 50 U.S.C.A. app. § 2170 (f) available at

http://www.law.cornell.edu/uscode/html/uscode50a/usc_sec_50a_00002170----000-.html (Last visited Jun. 15,

2008)

35 See Thomas E. Crocker, WHAT BANKS NEED TO KNOW ABOUT THE COMING DEBATE OVER CFIUS,

FOREIGN DIRECTINVESTMENT, AND SOVEREIGN WEALTH FUNDS, Banking Law Journal, May 2008, P-

463

36 See Mark Gordon, Mark F.Veblen, Sovereign Wealth Fund Investment intheU.S.–Just Warming Up? P-1

available at www.heritage.org/Research/TradeandForeignAid/upload/hl_1063.pdf (Last visited Jun 24, 2008)

11

11

governments.37 Besides the worries that United States government expresses towards SWFs,

some government officials and scholars acknowledge that it is important not to block SWFs

transactions or “adopt protectionist investment policies”38 An example that illustrates United

States government effort for attracting the foreign investors is agreement that was reached by the

United States Department of Treasury with the governments of Singapore and Abu Dhabi.39 The

agreement describes principles that SWFs should use as a reference point when investing in the

United States. It can be useful for the process of creating best practices for SWFs that is

currently under implementation in the International Monetary Fund (IMF) and the Organization

for Economic Cooperation and Development (OECD). Provisions of the agreement specify that

SWF investment should only have business interests, rather than long-term political intentions of

the controlling government. On the other hand, a SWF should disclose the information about its

goals for the investment and in financial statements. The agreement also states that competition

between the SWF and private sector should be fair and recommends particular policies for

countries receiving investments from SWFs. 40

2.2 The CFIUS Review Process

On June 26, 2007 the President signed the Foreign Investment and National Security act of

2007(FINSA).41 This modification extended CFIUS power in reviewing foreign transactions that

might impact national security. Under the new law, CFIUS should consider some additional

relevant consequences of the foreign transaction involving acquisition of the United States

“critical infrastructure” including “major energy assets.” FINSA defines “critical infrastructure”

42 “as 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

37 See Mark Gordon, Mark F.Veblen, Sovereign Wealth Fund Investment in the U.S.–Just Warming Up? P-2

available at www.heritage.org/Research/TradeandForeignAid/upload/hl_1063.pdf (Last visited Jun 24, 2008)

38 See Daniella Makheim, Sovereign Wealth Funds and U.S. National Security, Published by the Heritage

Foundation, March 6, 2008, P-4, available at

http://www.heritage.org/Research/TradeandForeignAid/upload/hl_1063.pdf (Last visited Jun 24, 2008)

39 See Treasury Reaches Agreement on Principles for Sovereign Wealth Fund Investment with Singapore and Abu

Dhabi, March 20, 2008, available at http://www.treas.gov/press/releases/hp881.htm (Last visited Jun 24, 2008)

40 See Treasury Reaches Agreement on Principles for Sovereign Wealth Fund Investment with Singapore and Abu

Dhabi, March 20, 2008, available at http://www.treas.gov/press/releases/hp881.htm (Last visited Jun 24, 2008)

41 NISPOM ¶¶2-300 to 2-310.

42 50 U.S.C.A app. §2170 (a) (7).

12

12

security.” One of the most important changes in the amendment is the new regulation addressing

the issue of mitigation agreements.43

Exon-Florio does not require parties to notify CFIUS about foreign transactions, notification

remains voluntary. Mergers or acquisitions that are undergone without notifying CFIUS,

however, can always be challenged by members of the CFIUS. Additionally, the President has

the authority to order reexamination of a completed transaction.44 Those transactions that have

not been reviewed by CFIUS, can not be investigated again except under the circumstances when

the first review process was inaccurate or based on fraudulent information. In cases where

CFIUS is concerned about national security matters, parties often submit notification and avoid

the risk of involuntary review.45

Upon a party’s notification, CFIUS will judge the facts presented in the notification statement

and have 30 days to decide whether a transaction needs to be fully investigated.46 Usually, based

on the documentation that is presented to the Committee, CFIUS concludes that a full

investigation is not essential and the review is finished.47 If CFIUS determines that a transaction

should be investigated, members of the Committee must present their findings to the President

within 45 days.48 After CFIUS submits its decision to the president, the president has 15 days to

decide if the given transaction threatens to impair the national security of the United States and

suspend or prohibit any covered transaction.49 According to a Government Accountability office

(GAO) report, if the committee is unable to judge and identify National Security concerns in the

fixed 30 day period, CFIUS frequently gives permission to the parties to withdraw the

notification and resubmit it since the National Security risk mitigates. Risk mitigation is usually

the result of negotiation between the foreign companies and CFIUS.50 One of the most important

43 50 U.S.C.A app. §2170 (f) (6)

44 31 C.F.R. §§ 800.401-.402.

45 50 U.S.C.A app § 2170 (b) (1) (ii) (iii).

46 50 U.S.C.A app § 2170 (b) (1) (E).

47 31 C.F.R. § 800.502 (a).

48 50 U.S.C.A app § 2170 (b) (2) (C).

49 50 U.S.C.A app § 2170 (d) Sec. 6.


Government Accountability Office; February 2008, P-35 available at www.gao.gov/highlights/d08320high.pdf (Last visited Jun. 22, 2008)

13

13

steps for the CFIUS review process is the designation of the “lead agency.” The lead agency is

designated for every single case by the Secretary of Treasury. Its role is to negotiate with

transaction parties and mitigate the risks of national security.51 Functions of the lead agency and

the risk mitigation process would be described in more detail in the sections below.

2.3 Procedural steps for the CFIUS notification.

Parties should make notification to CFIUS by submitting thirteen copies of the required

information to the staff Chairman of the Committee, also one signed copy and one electronic

Adobe Acrobat (PDF) or Microsoft Word format copy by e-mail.52 Voluntary notice information

can also be submitted jointly by the transaction parties, but it must be accurate and signed by all

parties.53 All information should characterize the main essentials of the transaction and define

the acquisition: Merger; consolidation, the purchase of voting securities or otherwise.54 The

Acquiring “foreign person” and the acquired “U.S. person” should submit information about

their names, working addresses and the principal places of business.55 CFIUS also needs the

contact information about any parent company of the foreign person making the acquisition and

also who will have actual influence and control over the acquired company. It is important that a

notification letter contained indicate the date when the transaction is supposed to be finished or

the date of an already concluded transaction.56 It should be clear from the notification whether

the US person intends to conclude an asset deal or share deal.57

2.4 Information Required from the “US Person“

A US parent company is obliged to present all the relevant information about its businesses. If

the companies’ subsidiary is part of the transaction, notification must also contain the data on

subsidiaries business activities. CFIUS will focus its attention on whether the United States

51 Noel J. Francisco and Bevin Newman, Congress Reforms CFIUS Review Process, available at

http://www.mondaq.com/article.asp?articleid=51466 (Last visited Jun. 27, 2008)

52 31 C.F.R § 800.401 (1).

53 31 C.F.R § 800.402 (a).

54 31 C.F.R § 800.402 (1) (i) (ii).

55 31 C.F.R § 800.402 (1) (iii).

56 31 C.F.R § 800.402 (1) (v) (vi) (vii).

57 31 C.F.R § 800.402 (2) (3).

14

14

parent or its subsidiary manufactures classified or unclassified products and if either of them is a

contractor with a United States governmental agency that has a responsibility relating to national

defense. Therefore, notification documents must identify all the government contracts that are

valid during the transaction period or during five years before the deal. A US Person should

disclose whether it was a prime contractor or a first tier-subcontractor of any agencies of

Department of Defense and whether it supplied technologies that have a military application.58 It

is also important to provide the relevant Commodity Control List number and describe technical

data if the US person produces products that are subject to the U.S. Export Administration

Regulations and International Traffic in Arms Regulations.59

2.5 Information Required from “Foreign Persons “

Like the US person, the acquiring foreign person should also describe its own business and the

business of its parent company in the same way as it is shown in its annual reports.60 CFIUS

needs information from the foreign person about its future plans with respect to reducing,

eliminating or selling research and development facilities and if they are planning changes or

revocation of classified DOD contracts affecting national security. Business plans of the foreign

person often contain intentions about selling product lines or technologies and changing quality

of the product. In certain circumstances, foreign investors need to shut down or move offshore

the facilities that are in the United States. This kind of modification in core business activities of

the acquired US Company might impair national security and should therefore it be reported to

the Committee.61 One of the most important issues is whether the foreign person is acting as an

agent or representative of a foreign government and if after the acquisition whether the foreign

government will gain the power to determine, direct or decide matters affecting an entity.62 This

power might be dissolution of the company; the sale of all principal assets of the company,

moving of research and development facilities to another location; the ability of making changes

in the articles of association and termination or non-fulfillment of contracts of the entity.63

Information also has to cover legal documentation that describes if the above mentioned rights

58 31 C.F.R § 800.402 (v) (A) (B).

59 31 C.F.R § 800.402 (4) (i).

60 31 C.F.R § 800.402 (5) (i).

61 31 C.F.R § 800.402 (5) (ii) (A) (B) (C) (D) (E).

62 31 C.F.R § 800.402 (5) (iii) (iv).

63 31 C.F.R § 800.204 (1) (2) (3) (4) (5).

15

15

are exercised based on a shareholders agreement, statute, contract or regulation. If the foreign

government holds convertible or voting securities in an acquiring company, it should be disclose

the percentage and the amount of such securities. The notification letter must state if the entities

principal officers or the members of the board of directors are appointed by a foreign

government.64

3. FINSA and New Procedures

Prior the amendments taking affect, the only cases when the “45-day review” process was

applicable were those transactions which were backed by the foreign governments and could

impair national security.65 However, the new amended legislation requires a 45-day investigation

of all transactions that shows foreign government interest in an acquiring company except when

the Secretary of the Treasury and the Lead Agency conclude that no further investigation is

required.66 The second reason for a mandatory 45-day review is when the acquisition involves

“critical infrastructure” by a foreign person that might present the risk to national security.

CFIUS can override the 45-day review process if the national security impairments are mitigated

during the 30-day review period.67

Parties often avoid the 45-day investigation by withdrawing their notification letters. To prevent

such actions, CFIUS adopted another new procedure under FINSA. If a notice is withdrawn, the

Committee should track any actions taken by the parties in connection with the transaction prior

to resubmission of the notice, set a specific time frame and establish interim protections to

address concerns with respect to the transactions.68

According to FINSA, it is required that business transactions such as mergers, acquisitions and

takeovers be certified by the chief executive officer of any party. The Certification must state the

that CFIUS notification letter fully complies with Exon-Florio requirements and also should

certify accurateness of information.69

64 31 C.F.R § 800.402 (B) (C).


Government Accountability Office, February 2008, P-33 available at www.gao.gov/highlights/d08320high.pdf (Last visited Jun. 22, 2008)

66 50 U.S.C.A app. § 2170(sec 2) (2) (D).

67 50 U.S.C.A app. § 2170 (sec 2) (2) (III).

68 50 U.S.C.A app. § 2170 (Sec 5) (2) (A) (i) (ii) (iii).

69 50 U.S.C.A app. § 2170 (Sec 8).

16

16

3.1 Risk Mitigation

Nearly two decades after implementation of the Exon-Florio, CFIUS developed a practice of

mitigating the risks of foreign transactions. In the past, Committee members often informally

negotiated with parties to a transaction to mitigate the risks that raise issues of national security.

These negotiations held during the 30-day review period or even before submitting the notice to

the CFIUS. Instead of mitigating or removing risks during informal negotiations, it became

necessary to adopt a legally binding procedure for risk mitigation that CFIUS would follow.70

FINSA grants authority to the Lead Agency to use legal force to negotiate with the United States

and Foreign person and to lessen the risks that might have a negative effect on national

security.71 Federal agencies or departments may be designated by the CFIUS to negotiate on

behalf of the committee to modify, monitor and enforce agreements in order to mitigate any

threat to national security.72

Under FINSA, in every half-year, agencies that are designated by CFIUS are obliged to report to

the Committee about mitigation agreements and parties who are subject to those agreements

should report on the implementation of any material change in circumstances. All the

departments and the agencies that are involved in the mitigation process should notify CFIUS

about any modification of a concluded mitigation agreement. If the modification is “significant”,

then it should be reported to the Director of National Intelligence and to those federal agencies or

departments that “may have material interest in such modification.”73

Executive Order 13,456 sets certain requirements for the departments or lead agency seeking to

propose a mitigation plan. The agency that intends to propose mitigation measures is obliged to

prepare and present a written statement for the committee that will describe threats and

consequences of the proposed investment transaction. The threats should be identified based on

an analysis that is conducted by the Director of National Intelligence. The second step that the

lead agency should carry out is to set forth measures for how it plans to mitigate the risk. After

discussing the particular facts, the Committee decides whether the mitigation is appropriate. If

70 See James K. Jackson, Exon-Florio Foreign Investment Provision: Comparison of H.R. 556 and S. 1610; CRS

Report for Congress; Updated July 2007; P-33 available at http://assets.opencrs.com/rpts/RL34082_20070713.pdf


71 50 U.S.C.A app. § 2170 (Sec 3) (K) (5).

72 50 U.S.C.A app. § 2170 (Sec 5) (1) (A).

73 50 U.S.C.A app. § 2170 (Sec 5) (3).

17

17

the approval is granted, the lead agency shall seek to negotiate such measure with the transaction

parties.74

Under the FINSA, the CFIUS is required to develop a method that would give an opportunity to

the members of the Committee to evaluate a company’s compliance with a mitigation agreement

that was required for approval of a transaction. However, such methods should not interrupt

CFIUS from reviewing the other transaction and the resources should be allocated properly and

not be “unnecessarily diverted.” 75

3.2 Reports to Congress

Many Members of Congress expressed concerns about information related to the Dubai Ports

World transaction. Some members of Congress were arguing that the present statute does not

obligate CFIUS to provide enough information to Congress. Also Congress complained about an

incorrect interpretation of the statute that required investigation of those transactions involving

the companies that are controlled by a foreign government. Some members of Congress thought

that it was necessary to carry out changes in current regulations that would give them a chance to

better monitor similar transactions such as the Dubai Ports World transactions and to address

public concerns more effectively. Accordingly, FINSA extended the monitoring power of the

Congress.76

Before July 31st of each year, the Chairperson of CFIUS must send a report to the Chairman and

ranking member of the committee of jurisdiction in the Senate and the House of Representatives,

that would cover detailed information about all reviews and investigations that they have

conducted within a previous year. The Report should describe the nature of business activities of

those parties who were involved in transactions and should contain information about the

pending review process or investigation, information on the notice or withdrawal and any

decision or action by the President taken under the Exon-Florio provision. 77 The submitted

report would include information related to the number of filings, withdrawals, investigations or

actions and decisions undertaken by the President. Additionally, CFIUS is required to provide

74 Executive Order 13,456 (Sec 7) (b).

75 50 U.S.C.A app. §2170 (Sec 5) (3) (B) (ii).

76 See James K. Jackson, Exon-Florio Foreign Investment Provision: Comparison of H.R. 556 and S. 1610; CRS

Report for Congress; Updated July 2007; P-37 available at http://assets.opencrs.com/rpts/RL34082_20070713.pdf


77 50 U.S.C.A app. § 2170 (sec 7) (b) (1).

18

18

cumulative information concerning business sectors involved in the filings and the countries

from which investments originated.78 The description of the arrangements that were used by the

Committee to mitigate national security risks and the methods the Committee or lead agency

used for determining if the parties followed the conditions stated in the mitigation agreement, as

well as a comprehensive discussion of all perceived adverse effects of business transactions on

the critical infrastructure or national security of the United States. Finally CFIUS has to disclose

whether the companies resubmitted withdrawn notifications or abandoned the transaction.79

CFIUS must also inform Congress about critical technologies. For example, CFIUS must present

its evaluation of companies that implemented a coordinating strategy for acquiring a United

States company involved in research, development or production of critical technologies in

which the United States is a chief producer. In its annual report CFIUS should also evaluate the

possibility of industrial espionage activities that are directed or assisted by foreign governments

against private companies with the aim to obtain commercial secrets. 80

While conducting the study on foreign investment the Secretary of Treasury must consult with

the Secretary of State and the Secretary of Commerce. The study should mostly cover affects of

investments in critical infrastructure and other industries that are relevant for United States

national security and must underline investment affecting critical infrastructure and national

security by 1)foreign governments, entities controlled by or acting on behalf of 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

person of foreign countries which do not ban organizations designated by the Secretary of State

as foreign terrorists organizations.” 81

If CFIUS fails to comply with the above requirements, the inspector general of the Department

of the Treasury is assigned to investigate the failure and send the investigation report to the

chairman and ranking member of each committee of the House and the Senate who has

jurisdiction over any aspect of the report including the Committees on International Relations,

78 50 U.S.C.A app. §2170 (sec 7) (b) (2) (B) (C).

79 50 U.S.C.A app. §2170 (sec 7) (b) (2) (D) (E) (F).

80 50 U.S.C.A app. § 2170 (sec 7) (b) (3) (i) (ii).

81 50 U.S.C.A app. § 2170 (sec 7) (b) (3) (c) (1) (A) (B).

19

19

Financial Services, Commerce Science and Transportation of the Senate; Banking, Housing and

Urban Affairs; Energy and Commerce of the House of Representatives.82

4. Recently Proposed Regulation on CFIUS

On April 21, 2008 the Treasury Department issued new proposed regulations. The new

regulation is designed to implement FINSA and sets certain procedures that CFIUS should use

while considering national security issues relating to foreign investment.83 The new provisions in

the proposed regulation are the determination of controlling factors and supplementary

information requirements in the CFIUS notification letter.

4.1 “Control” by foreign person

While determining national security concern, CFIUS closely examines whether the transaction

would shift the control of the entity from “U.S. Person” to “Foreign Person.” The Proposed rules

did not substantially change the determination of the control and its still defined based on

individual cases. CFIUS supposes that if the foreign person has the power to make decisions on

fundamental matters of the companies’ it has a control.84 CFIUS closely examines those

transactions that would give control of the United State Company to a “foreign person” that is

affiliated or owned by the foreign government. According to existing rules transactions that

involves the acquisition of 10 percent of voting stock and solely aimed for investment, is exempt

from the CFIUS review procedure. However the newly proposed rule is more strict and

differentiates two investment situation 1) when the transaction parties are advised to file a

notification letter to CFIUS (“active” investment) and 2) when review is not necessary

(“passive” investment). For example, exclusion of 10 percent purchase from a FINSA statute

would only be applicable if the investment is passive.85 On the other hand a new proposal

82 50 U.S.C.A app. § 2170 (sec 7) (b) (3) (d) (1) (2).

83 See Christopher R. Wall , Department of Treasury Proposes New CFIUS regulations for Foreign Investment,

Pillsbury, Winthrop Shaw Pittman LLP , May 15, 2008 P-1 available at

http://www.pillsburylaw.com/content/portal/publications/2008/5/200851516053265/International%20Trade%20Vol

%201500%20No%201518%2005-15-08.pdf (Last visited Jun 28, 2008), See Treasury Department Issues Proposed

Regulation Reforming U.S. National Security Reviews on Foreign Investment, Skadden, Arps, Slate, Meagher &

Flom LLP and its affiliates, April 22, 2008, P-1 available at

http://www.skadden.com/content/Publications/Publications1389_0.pdf (Last visited Jun 28, 2008)

84 See Sheppard Mullin, Treasury Proposes New Rules For Reviewing Foreign Investment In U.S. Companies,

Government Contracts Blog, May 15. 2008, available at

http://www.governmentcontractslawblog.com/2008/05/articles/export-controls/treasury-proposes-new-rules-for-

reviewing-foreign-investment-in-us-companies/ (Last visited Jun. 29, 2008)

20

20

includes a number of rules for the protection of foreign minority shareholders that would not be

regarded as foreign control including the authority to interrupt the sale of all majority assets of

the company, or to hinder an entity from concluding a contract with big investors, a permission

from minority investors in amending the corporate charter. In case of changes in ownership

structure of the company, the minority shareholder would be granted some protection

mechanisms in terms of anti-dilution rights. Anti-dilution rights give minority shareholders the

option to acquire additional shares and uphold its position in the company.86

The other difference related to current regulation and newly proposed rules relates to the

acquisition of convertible shares by the foreign acquirer. The current regulation states that

purchase of convertible securities will not shift the control of the company until the shares would

be converted from preferred to common stock. According to new rules, it can be assumed that

convertible securities would serve as a safe harbor for the foreign person in case it does not

control the time of conversion.87

4.2 Additional Content In CFIUS Notification Letter

The New rules also suggest but not require transaction parties to meet informally with official

representatives of CFIUS before filing a notification. This option is beneficial for transaction

parties and also for the CFIUS. A US and Foreign person can avoid further misunderstanding

and timely respond national security concerns that might arise during negotiations. It is also

helpful for CFIUS to better understand and analyze the transaction features and to give advice

about filing of any necessary documentation. Nevertheless “prefiling” negotiation is not

mandatory, the parties of the “covered transaction” should talk to CFIUS representatives for

securing smooth review of their covered transaction.88 After negotiating with CFIUS, parties




%201500%20No%201518%2005-15-08.pdf (Last visited Jun. 29, 2008)

86 See Treasury Department Issues Proposed Regulation Reforming U.S. National Security Reviews on Foreign

Investment, Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates, April 22, 2008, P-1 available at





%201500%20No%201518%2005-15-08.pdf (Last visited Jun. 29, 2008)




21

21

should move forward and collect the documentation that is required for voluntary notification.

The newly proposed rules also contain some other provisions that previously were not part of

filing requirement. For example proposed rules require information submission about financial

institutions that are engaged in a covered transaction and if the transaction party was a United

States government contractor for the past three years. Besides the above mentioned requirements

the new rule proposes that the notification letter should hold the biographies of the United States

and foreign person’s top management including directors and CEO’s. The parent company or the

other entities holding 5% or more interest in a transaction corporation are additional subject of

the notification letter. The Proposed notification rules underline another filing requirement such

as the description of any kind of military service that was conducted by companies’ directors and

senior executives in a foreign country.89

New rules have also been proposed in regard to information that is required from a United States

person. Currently, United States persons must list in notification letter all contracts with the

agencies of Department of Defense (DOD). But the newly proposed regulation obliges them to

declare not only the contracts with DOD agencies but also the other contracts that they have with

various U.S. governmental agencies. U.S. person should also include the overall proportion of

the market share for the products they produce and the services they offer. One of the interesting

additions of the new proposal is to identify defense articles and services that have not been

pointed out in the State Department export controls list. Inclusion of such products or services

without being the subject of export control list is based on parties’ discretion and assumption

whether it is necessary or not to designate them.90

Lastly proposed regulations empower CFIUS with new authority by setting civil punishment, in

cases when parties did not accomplish the preconditions set by CFIUS,91




%201500%20No%201518%2005-15-08.pdf (Last visited Jun 29, 2008), See Treasury Department Issues Proposed

Regulation Reforming U.S. National Security Reviews on Foreign Investment, Skadden, Arps, Slate, Meagher &

Flom LLP and its affiliates, April 22, 2008, P-2 available at





%201500%20No%201518%2005-15-08.pdf (Last visited Jun 29, 2008)




22

22

5. National Security and Foreign Investment in Germany

Similarly to the United States policy, the German government has two approaches toward

foreign investment. As a matter of policy Germans tries to maintain open market and impose

some investment restrictions on industries that are critical to the countries national security.

When considering impacts of foreign investment another important factor that should be

determined by the German government is the balancing position between the articles of EC

Treaty. The balancing position is the provision of the EC treaty that requires the European Union

(EU) member states to secure the free movement of capital and to allow nationals of non-

member states to do business without any unnecessary limitations, on the other side. Article 296

of EC Treaty permits the member state to impose restrictions when necessary to protect a

country’s “essential security interests.”92

5.1. Law Governing Foreign Investment In Germany

The primary law that regulates foreign investment in Germany is the 1961 Foreign Trade and

Payments Act, amended in 2004. Germany amended the act because of a number of foreign

investments in sensitive industries that impacted German national security. Section 7 of the

amendment, identifies reasons why the German government may restrict free movement of

investment.93 For example investments may be restricted for “guaranteeing the vital security

interests of the Federal Republic of Germany, prevent a disturbance of the peaceful coexistence

between nations, or prevent a major disruption of the foreign relations of the Federal Republic of

Germany.”94 Section 7 specifies types of German corporations operating in industries that are

vital for national security. Foreign companies interested in acquisition of German entities acting

operating an industry that produces weapons or other military equipment are subject to

governmental investigation and can be prohibited.95 In its report the United States Government

Accountability Office stated that catalyst for the German amendment was the acquisition of a

controlling stake by a United States private equity fund in a German company that was

92 See Bulletin EU 12-2006 The internal market (26/27), Public Procurement available at

http://europa.eu/bulletin/en/200612/p110026.htm (Last visited July 1, 2008)

93 See FOREIGN INVESTMENT; Laws and policies Regulating Foreign Investment in 10 countries, United State

Government Accountability Office; February 2008, P-60 available at www.gao.gov/highlights/d08320high.pdf (Last visited July 1, 2008)

94 See Section 7 (1), Foreign Trade and Payments Act of the Federal Republic of Germany, available at

http://www.bafa.de/bafa/en/export_control/legislation/export_control_awg_en.pdf (Last visited July 1, 2008)

95 See Section 7 (2), Foreign Trade and Payments Act of the Federal Republic of Germany, available at

http://www.bafa.de/bafa/en/export_control/legislation/export_control_awg_en.pdf (Last visited July 1, 2008)

23

23

producing submarines. Export control laws existed prior the amendment, but did not adequately

address the issue of national security. The members of German government became deeply

concerned that they could not prevent foreign acquisition of those German companies that

manufactured sensitive technologies.96

Since the passage of new amendment, the German Ministry of Economics and Technology

specified transactions that would be under the close scrutiny of German government. Foreigners

seeking to acquire German companies that are involved in production of certain items identified

in part B of German War and Weapons Act would be the subject of governmental review. Items

listed in this Act are: Projectiles, Combat Aircraft and Helicopters, Vessels of War and Special

Naval Equipment, Combat Vehicles, Barrel Weapons, Light Anti-Tank Weapons, Military

Flame Throwers, Mine-Laying and Mine-Throwing Systems, Torpedoes, Mines, Bombs and

Laser weapons.97

5.2 Foreign Investment Review Process in Germany

Unlike the Unite States Germany does not have an interagency committee similar to CFIUS that

separately examines transactions that might impair national security. However, investment

reviews are lead by the Federal Ministry of Economics and Technology, which receives

information from other ministries (Ministry of foreign affairs and Ministry of defense) if a

particular transaction creates an issue of national security. Approval of the transaction is based

on the discretion of governmental official who reviews an investment. The transaction might be

banned when ministry official concludes that it is not safe for national security. As mentioned

above, Germany does not have intergovernmental agency similar to CFIUS but recently there

was discussions among German politicians to create a committee that would have the same

function as CFIUS.98 Together with the attempt of establishing an interagency committee, the

German government proposed legislation that would amend the Foreign Trade and Payments act.

The purpose of this amendment is to extend the oversight on foreign capital inflow for the

96 See FOREIGN INVESTMENT, Laws and policies Regulating Foreign Investment in 10 countries, United State


97 See War Weapons List, Part B (as amended by the ninth regulation amending the War Weapons List of 26

February 1998, Federal Law Gazette I, p. 385) available at

http://www.bafa.de/bafa/en/export_control/legislation/export_control_cwc_p_war_weapons_list.pdf (Last visited

July 1, 2008)

98 See Bertrand Benoit, Mark Schieritz, Berlin looks to vet foreign fund deals, Financial Times, June 25, 2007

available at http://www.ft.com/cms/s/0/d25a3618-2342-11dc-9e7e-000b5df10621.html (Last visited July 1, 2008)

24

24

“protection of public security and order.”99 Existing legislation does not completely cover all

types of industries that are important for Germany’s national security, there are only two types of

foreign investments that could be restricted by government. These restrictions are imposed on

those foreign investors that intend to purchase more than 25% of outstanding shares of German

company that operates in the arms industry or is an encryption manufacturer. Transactions stated

above are subject to review by the Federal Ministry of Economics and Technology (FME).100 For

broadening the area of foreign investments investigation, the government initiated new

legislation. One of the catalysts for the new initiative was the increasing number of investments

from foreign government controlled Sovereign Wealth Funds (SWF). The German government

is concerned by the fact that SWFs (total asset nearly 2.5 Trillion USD) might gain control on

various German companies.101 According to newly proposed amendment FME would be

authorized to review all foreign takeovers that would result in more than 25% shares by the

foreign acquirer in the German company. The government would review not only the

investments coming from SWFs, but all transactions that would involve non-residents of

Germany. Since the examination of the transaction, FME would have an option to take the

following decisions: 1) do not restrict the transaction and issue the permission for final

conclusion, 2) authorize the transaction in exchange to some preconditions, 3) restrict the

transaction due to the threat to “public security and order.”102 The advantage of the proposed

rules is that transaction reviews are not limited to certain industrial sectors. This opinion could

be backed by the sentence included in proposed draft of the amendment, such as “public security

and order.” In terms of public security and order it could be interpreted to mean all sectors of

German business industry, from the beginning of media and banking sectors until the entire

infrastructure and transport industry.103 There is a similarity between the United States FINSA

act and the recently proposed amendment in German legislation. Both of them are based on a

voluntary notification process which is dependant on the parties’ decision to notify respective 99 See Andrea Helfrich, Proposed Control of Foreign Investment in German Companies, McDerrmott Will & Emery,

February 2008, P-4 available at http://www.mwe.com/info/news/gu0208.pdf (Last visited July 1, 2008)

100 See Andrea Helfrich, Proposed Control of Foreign Investment in German Companies, McDerrmott Will &

Emery, February 2008, P-4 available at http://www.mwe.com/info/news/gu0208.pdf (Last visited July 1, 2008)

101 See Infrastructure: stronger restrictions on foreign investments in Germany, Freshfields Bruckhaus and Deringer,

December 2007, P-1, available at http://www.freshfields.com/publications/pdfs/2007/dec19/21133.pdf (Last visited

July 2, 2008)





July 2, 2008)

25

25

authorities about a transaction. Under both regimes, it is important for the transaction

participants to notify German and Unites States governments about a planned takeover or

acquisition to avoid obstacles that might arise because of not informing government officials. If

German and foreign companies do not notify the government about a proposed transaction, FME

may initiate an investigation during the three month after the information about the deal would

be released or the acquisition contract signed. However, if the parties submit the necessary

notification documents about the deal, FME will discuss the transaction during a one month

period and make a decision whether to authorize or restrict the transaction. Until the review

process is concluded and the FME declares its final decision about the deal, the transaction

remains invalid. There are also certain conditions that need to be fulfilled for validating a

transaction. For example, FME has three months to react to announced acquisition information.

If the FME leaves the transaction without investigating, the deal would automatically be valid. If

FME receives notification letter and do not restrict or approve investment within one month, deal

can not be restricted afterwards.104

There is a question how a government can intervene in transaction if the foreign person acquires

shares of a German company on the open market. The answer is stated in a draft version and is

the empowerment of FME with the authority that would enable its officials to force foreign

investors to sell an already acquired stake.105 Besides the governmental proposal, the party of

German chancellor Angela Merkel (Christian Democratic Union) underlined its position towards

this new amendment. Merkel’s position is slightly different from the amendment drafted by the

government. There are three distinctions, first it says that government should be allowed to block

a transaction merely for the protection of public security and critical infrastructure. Also in the

version initiated by the Chancellors party the term “public security” is changed by “public

policy.” The notion of this difference might be the intention to reduce the application of the law

to a comparably small number of transactions. Second it allows judicial review. Here it is

important to draw a line with the United States example where the transactions blocked by the

president are not subject of further judicial review. Third, secures the legal confidence by

positively approving transactions.106



July 2, 2008)



26

26

There was a critical reaction in European Commission in regards to the new proposal. The

question was whether the German market policy was shifting from openness to protectionism. In

response to this concern, the Economics Ministry of Germany declared that “the proposals did

not limit action on a national level and it would continue with its draft bill.”107 Fear that the

image of a German open market would be changed for foreign investors is not only one that

might worry German government. As soon as the recently drafted amendment would be passed,

the new law might become a reason of tension between the European Commission (EC) and

Germany. The origins of controversy are already seen today because there is an opinion among

EU politicians that the drafted legislation is not in conformity with EU regulations. To be more

specific, it can contradict provision of the EC treaty, about free movement of capital. There are

some conditions when supporting of free capital movement is not applicable for a member state.

When there is a threat towards public security and order obligation not to restrict free capital

movement can be ignored. However, this is only permissible in rare circumstances, and should

only be based on an extremely threatening situation to public security. The European Court of

Justice (ECJ) declared its position what constitutes the threat towards public security. Based on

the Judgment of the European Court of Justice from the Case: Omega Spielhallen-und

Automatenaufstellungs-GmbH v Oberburgermeisterin der Bundesstadt Bonn, it should be

assumed that any derogation from the EC treaty provisions on the grounds of public security

would be allowed “only if there is a genuine and sufficiently serious threat to a fundamental

interest of society”108 Therefore, it can be supposed that a number of lawsuits will be filed in

the ECJ after the amendment would take affect. The German government might face some

difficulties while justifying their decision in reference to a restricted transaction. It would be hard

to prove that each case blocked by the government impaired a “threat to a fundamental interest

of society.”



July 2, 2008)

107 See European Commission recommends a common EU approach to sovereign wealth funds, Linklaters,

28 February 2008, available at

http://www.linklaters.com/newsanddeals/newsdetail.asp?newsid=3470&navigationid=205 (Last visited July 2,

2008)



July 2, 2008) See judgment of the Court of Justice in Case C-36/02 Omega Spielhallen- und

Automatenaufstellungs-GmbH v Oberburgermeisterin der Bundesstadt Bonn, 14 October 2004, available at

http://curia.europa.eu/en/actu/communiques/cp04/aff/cp040082en.pdf (Last visited July 2, 2008)

27

27

6. National Security influence on Foreign Investment in France

Similar to Germany, the EC treaty is legally binding for France. Therefore any restriction

imposed on foreign investment must be backed by substantial reason. While Germany is drafting

its new bill today, France has already implemented changes in legislation. Companies

manufacturing crucial products and creating important technologies cannot be acquired by

foreign entities without consent of French government. Previously, when France adopted the

new law, the ECJ expressed its concern due to uncertainty that foreign investors would face

under French law. The Final verdict came when the ECJ declared on the decision of the French

government about restricting an English investment fund from investing in the Church of

Scientology of Paris. This raised a question whether the legislation existing at the time was clear

enough for foreign investors. According to an ECJ judgment, investors were confused because

the law did not specify which industrial sectors were the subject of governmental review.109

France quickly reacted on ECJ decision and tried to resolve the problem by issuing a decree.

This was not enough however, and for compliance with EC regulations, The French government

was forced to wholly amend the law which considered national security implications on foreign

investments.

6.1 The law regulating Foreign Direct Investment in France

The law that authorizes French government to examine foreign investments and consider its

implication on national security is French Monetary and Financial Code. The code that was

amended in 2005 lists some sectors came under the scrutiny of French government. The purpose

of the amendment is to protect French national security and public interest. The newly enacted

law authorized the French Ministry of Economy to review and take decisions on the approval of

the transaction. There are certain circumstances when it is necessary for prior approval of the

transaction, for example, if the foreign investment would jeopardize public order, negatively

influence public safety or may impair national defense interests automatically becomes subject

of governmental scrutiny.110 Also, if the foreign investor intends to acquire a French company

which is involved in research, development and production of, arms, munitions, or explosive

equipment the foreigner must file a notification in the French Ministry of Economy and get

109 See Controls on foreign investment in France and their recent reform, Support for strategic companies and

Protection of State interest, Jun 22, 2007 available at http://www.intelligence-

economique.gouv.fr/article.php3?id_article=277 (Last visited July 3, 2008)

110 Monetary and Financial Code, Article L. 151-3.

28

28

approval for transaction.111 These categories in the current law are different from previous laws.

Transactions in Public health sectors which were included before the amendment took place,

does not require governmental approval any more. On the other hand, the amended law is

broader and includes a spectrum of industries which are crucial for national defense interests.112

On December 31, 2005 France adopted Decree No. 2005-1739. Even after adoption of the

Decree, tension between the French government and the EC was not resolved. Inclusion of

gambling activities as the one of the subject of governmental reviews was one issue of

disagreement. The French government argued that it was indispensable to include these

industries in the list, because foreign investors could have used French gambling sector as a

means for money laundering. Another feature of the new Decree which deepened the tension is

the difference in the foreign investment review process. Specifically, under French law

investments from EU member states and from third countries are not subject to same procedural

review. The European Commission expressed its concern for discriminating characteristic of

Decree.113 However, the French government justified its decision and declared that WTO

regulations and article 57 of EC treaty allows them to implement double standards in terms of

treating different investments from third countries and from European Union.114 Companies

incorporated in third countries and involved in three types of investments are required to get

prior approval. Article R 153-1 of the Monetary and Financial code specifies these three types of

transaction: 1) Investments that would give 33.33 % ownership in French company, 2) If the

foreign company directly or indirectly acquires part or total assets of French company, 3) or if

the takeover will fall under the Article L 233-3 of the French Code of Commerce. On the other

hand, investments flowing from EU countries are subject to approval if the assets of French

company are totally or partially purchased 115

111 Article L. 151-3.

112 Reform of French Foreign Investment Regulations, Fried Frank Harris Shriver & Jacobson LLP, January 26,

2005, P-4 available at

http://www.ffhsj.com/siteFiles/Publications/C1A6ABC45D5AD7EA5D7A003DED3EBA22.pdf (Last visited July

2, 2008)

113 See United State Government Accountability Office; FOREIGN INVESTMENT; Laws and policies Regulating

Foreign Investment in 10 countries, February 2008, P-54 available at www.gao.gov/highlights/d08320high.pdf (Last visited July 1, 2008)

114 See Controls on foreign investment in France and their recent reform, Support for strategic companies and

Protection of State interest, Jun 22, 2007 available at http://www.intelligence-

economique.gouv.fr/article.php3?id_article=277 (Last visited July 4, 2008)

115 See Regulation of Foreign Investment in France, Euro-American Lawyers Group, November 2006, P-3 available

at http://www.ealg.com/doc/Legal%20Framework/REGULATION%20OF%20FOREIGN%20INVESTMENTS%20-%20France.doc (Last visited July 4, 2008)

29

29

6.2 foreign investment review process in France

The Ministry of Economy is the French governmental authority and reviews foreign investments

that could threaten national security.116 The Ministry basis its decision on information received

from other governmental agencies. There is a distinction between United States, German and

French review processes. In United States and in Germany transactions that have not been

notified, the government can only block the transaction and no further penalties will be imposed

on transaction parties. In France however, certain criminal and civil punishments if the parties

would fail to submit a notification letter.117 The Decree creates flexibility for investors who are

uncertain whether the following transaction in sensitive sectors for French national security

should be reviewed and approved by the government. A Parties’ uncertainty is resolved by

allowing them to approach the Ministry of Economy and to get information on whether the

transaction has to be reviewed by the government. However if the Ministry will not respond

within a two month time period, it means that transaction has been automatically approved.

Parties should take into consideration that if they continue transaction without getting

authorization from Ministry that there is no need for further review, the government might

punish them by imposing a penalty which could exceed a double amount of already spent money

in a completed investment.118 This part of the Decree somehow resembles the newly proposed

rules issued by U.S. Department of Treasury, both regulations encourage transaction parties to

contact respective authorities (CFIUS in U.S. and Ministry of Economy in France) prior to filling

there notification letters.

The Decree permits the Ministry of Economy to block transactions that would result in the

removal of certain R&D activities from France. Also the portfolio of the French companies that

are comprised from only small part of sensitive technologies can be divested. By the meaning of

divestiture foreign acquirer would be allowed to purchase a big part of entity that does not

116 Article L. 151-3.

117 See 31 C.F.R. §§ 800.401-.402. See Infrastructure: stronger restrictions on foreign investments in Germany,

Freshfields Bruckhaus and Deringer, December 2007, P-2, available at

http://www.freshfields.com/publications/pdfs/2007/dec19/21133.pdf (Last visited July 5, 2008) See FOREIGN

INVESTMENT Laws and policies Regulating Foreign Investment in 10 countries United State Government

Accountability Office; February 2008, P-55 available at www.gao.gov/highlights/d08320high.pdf (Last visited July

1, 2008)

118 See Pierre Servan-Schreibe, Stephane Heliot, The International Comparative Legal Guide to: Mergers &

Acquisitions 2007, A practical insight to cross-border Mergers & Acquisitions, Chapter13, P-75 available at

http://www.iclg.co.uk/khadmin/Publications/pdf/1156.pdf

30

30

include sensitive sectors since divestiture.119 The divestiture requirement is similar the risk

mitigation procedure established in the U.S. Similarity is in the main idea of both procedural

requirements. By engaging in negotiations with transaction parties French and U.S. governments

intend to lessen risks of national security impairment.

Similar to U.S. regulatory requirements, France considers whether the foreign transaction in a

sensitive sector would change control of the company. The decree sets review requirements in

regards to investments flowing from third countries to sensitive sectors. If the foreign buyer

gains control over the company that is headquarted in France the acquisition in this case would

be the subject of review.120

The decree identifies 11 sensitive sectors that are important for national security and might be

scrutinized by the government: 1) gambling 2) private security services; 3) research and

development or products that can be illegally used in terrorist activities such as pathogens and

toxins; 4) equipment for intercepting wire tapping 5) monitoring and approving correctness of

information technology systems and products; 6) goods or services for ensuring safety of critical

infrastructure; 7) Dual-use items and technology; 8) cryptology services; 9) Contractors of the

French government in the defense sector that possesses classified information about French

national defense; 10) production of weapons, munitions and other explosive equipment that are

manufactured for military purposes; and 11) when company is a contractor or subcontractor of

Ministry of Defense and is engaged in business activities in terms of designing and supplying

military arms for the Ministry.121

There is also a distinction in the treatment of investments from EU and from non-EU countries.

For example, sectors 8 to 11 are applicable to all countries without. Whereas investment reviews

in first seven sectors we strict for companies incorporated in non-EU countries.122



http://www.iclg.co.uk/khadmin/Publications/pdf/1156.pdf

120 See FOREIGN INVESTMENT Laws and policies Regulating Foreign Investment in 10 countries United State


121 See R 153-2 Monetary and Financial Code, See Pierre Servan-Schreibe, Stephane Heliot, The International

Comparative Legal Guide to: Mergers & Acquisitions 2007, A practical insight to cross-border Mergers &

Acquisitions, Chapter13, P-75 available at http://www.iclg.co.uk/khadmin/Publications/pdf/1156.pdf

31

31

The decree specifies information required from investors when submitting documents for

transaction review. The following documentation should be submitted: The place where the

company is incorporated; information on legal or private persons that control the investing

company; details on major shareholders whose ownership in the company exceeds five percent

of overall outstanding shares or voting rights; The names and addresses of the members of

boards of directors; If the foreign entity is an investments fund, detailed information about the

fund; Business activity of a French company that is intended to be acquired; what was the

revenue of the targeted French company during last fiscal year; the ownership structure of the

company before completion of the transaction and after its conclusion.123

Again, transaction parties are encouraged to contact the Ministry of Economy and get advice on

what additional information would be required for a review. There resemble between prefailing

and postfailing processes. For example in prefailing situation if the ministry does not respond to

the questions within two month, transaction is automatically completed, the same rule applies

when parties submit all required documents for approval and ministry does not conclude

transaction review in two month. However if the ministry would require more information for

the review conclusion, time can be prolonged.124

The investment review processes in European countries (Germany; France) is softer compared to

the United States. Individuals or companies investing in these countries might have an interest

whether they can appeal transactions blocked by reviewing authorities. The main factor that

distinguishes United States policies from German and French approaches is the enormous power

granted to the United States President when deciding to approve or block a transaction. A

decision taken by the United States President cannot be appealed in a court. However,

transactions restricted in France are subject to judicial review. Also newly presented ideas by

122 See Regulation of Foreign Investment in France, Euro-American Lawyers Group, November 2006, P-4 available at http://www.ealg.com/doc/Legal%20Framework/REGULATION%20OF%20FOREIGN%20INVESTMENTS%20-%20France.doc (Last visited July 5, 2008)





http://www.iclg.co.uk/khadmin/Publications/pdf/1156.pdf (Last visited July 6, 2008) See FOREIGN

INVESTMENT Laws and policies Regulating Foreign Investment in 10 countries, United State Government


1, 2008)

32

32

Chancellor Merkel’s party state that any prohibited transaction in Germany can be challenged

and parties should have a right to file a law suit in a court and appeal a governmental decision.125

An Unapproved transaction in Germany and France can be appealed not only in national courts,

but also in European Court of Justice. An appeal in the European Court of Justice will be

accepted if the countries have violated the EC Treaty.

France not only regulates foreign investments in strategically sensitive sectors but also in some

business transactions that do not fall under the list of critically important transactions for national

security. For example, foreign companies planning an acquisition of a French financial

Institution or Insurance Company would be subject of different review procedures. In the case if

French financial institution, the acquirer must notify the Head of the French National Bank.

Notification should be made eight days prior to submitting an application to the French Financial

Markets Authority (AMF). The Consent of the National Bank is required if the acquisition would

result is ownership transfer in the following percentage amount: 33.33%, 20% and 10%. Also it

is helpful to notify French insurance regulator if an individual plans to purchase certain

percentage (50%, 33.33%, 20% or 10%) of a French insurance company.126

7. Foreign Direct Investment and National Security Concerns in China

Chinas’ approach towards foreign investments is somehow similar to the policies adopted in the

United States. This paper already discussed the United States attempt to maintain a balance

between national security interests and increasing the number of foreign investments. The same

is true for China. The Chinese government encourages foreign business activity and at the same

time sets strict regulations for foreign investors.127 However, China’s foreign investment rules

and regulations are much more complicated than the United States, Germany and France. There

is no single adopted law or regulation that foreigners should take into consideration when

investing in China. Unlike the countries discussed above China does not have a single



July 2, 2008) See Alan P. Larson, David M. Marchick, Foreign Investment and National Security Getting the

Balance Right COUNCIL ON FOREIGN RELATIONS, 18, JULY 2006, P-3 available at

www.cfr.org/content/publications/attachments/CFIUSreport.pdf (Last visited Jun. 18, 2008) See FOREIGN

INVESTMENT; Laws and policies Regulating Foreign Investment in 10 countries, United State Government


1, 2008)



http://www.iclg.co.uk/khadmin/Publications/pdf/1156.pdf (Last visited July 6, 2008)

127 See Stanley Lubman, LOOKING FOR LAW IN CHINA, Columbia Journal of Asian Law, Fall 2006, P-17

33

33

governmental authority that would review national security impacts of foreign investment.

Instead there are several governmental agencies involved in review processes. The acquisition

of State owned Enterprises might require investment review on provincial or state level,

generally this kind of reviews are conducted by the special departments that are established

locally and provincially. The so called “department in Charge” that has an authority to review

particular investment and can approve transaction, but not all transaction can be approved by

these departments. If the acquisition involves nationally important enterprises, review and

approval might be required from Ministry of Commerce (MOFCOM).128

7.1 Laws Applicable For FDI Review Process in China

The China conducts foreign investment review in compliance with three main regulations. Those

are: 1) Regulation adopted by MOFCOM on foreign investment; 2) Catalog for the Guidance of

Foreign Invested Enterprises that has been revised in 2007 and 3) Newly passed Anti-Monopoly

law.

7.1.1 MOFCOM Foreign Investment Regulation

Since MOFCOM “Promulgated the Provisional Provisions on the Merger and Acquisition of

Domestic Enterprises by Foreign Investors”, it became difficult for foreign purchasers to acquire

Chinese companies.129 New regulation requires MOFCOM approval if the transaction would

have a negative affect on “national economic security”, would transfer Chinese famous brand

name to foreign acquirer or if the acquisition involves the “Key Industry” for China.130

However like the Unite States FINSA act does not completely define term “national security”

and gives full discretion to CFIUS to determine national security based on individual cases, the

same approach is in MOFCOMs’ regulation, it does not determine what composes threat towards

“national economic security” or which industries are regarded as major ones.131 The United


129 See Provisions for Foreign Investors to Merge Domestic Enterprises available at

http://english.mofcom.gov.cn/aarticle/policyrelease/gazettee/200610/20061003378460.html (Last visited July 7,

2008)

130 Eileen Francis Schneider, BE CAREFUL WHAT YOU WISH FOR: CHINA’S PROTECTIONIST

REGULATIONS OF FOREIGN DIRECT INVESTMENT IMPLEMENTED IN THE MONTHS BEFORE

COMPLETING WTO ACCESSION, Brooklyn Journal of Corporate, Financial & Commercial Law, Fall 2007,

P-280

34

34

States and Chinas tricky decision to leave the question open and not to clarify what constitutes

“national security,” “national economic security” or “Key industry” gives both countries an

option to verify its decision not on the basis of strictly limited scopes but instead they are free in

their choice.

7.1.2 Catalog for the Guidance of Foreign Invested Enterprises

Catalog for foreign investment industrial guidance was first adopted in June 1995. Since 1995 it

has been amended for few times, the last changes were undertaken in 2007. National

Development and Reform Commission that is one of the governmental agencies that reviews

foreign investments, implemented changes in main regulatory principals of the Catalog. These

principals split foreign investments in three categories such as "encouraged," "restricted" and

"prohibited." The provisions embodied in Catalog do not exclusively regulate foreign

investments impairment on national security, it is rather concentrated on regular business

transactions.132

7.1.3 Anti-Monopoly law

The new anti-monopoly law that China passed in 2006 will take affect on 1st of August 2008.

Before law was passed, its’ drafted version was a reason of long debates during a decade. It is

clear that Anti-Monopoly law will have a huge effect on Mergers and Acquisitions in China.

Until the August 30, 2007 when the law was adopted, the country with one of the largest

economy in the world did not have substantial anti monopoly regulation.133 This paragraph of the

paper will be concentrated only on article 31 of chapter IV of the anti-monopoly law, which

addresses national security threats imposed by acquisition of Chinese enterprises by foreign

investors. Article 31 states the following: “Where national security is involved in the case of





visited Jun. 15, 2008) See Venessa Wong, China’s new M&A regulations may make some aspects of acquisitions

easier for foreign investors, but overall reflect a move by the central government to retain control over key business

sectors, November 2007, P-17 available at

http://www.venessawwong.com/INSIGHT%20Cover_Story%20M&A.pdf (Last visited July 7, 2008)

132 See Steve Dickinson, China Changes Foreign Investment (FDI) Rules, November 12, 2007 available at

http://www.chinalawblog.com/2007/11/breaking_news_china_changes_fo.html (Last visited July 7, 2008)

133 See CARL W. HITTINGER AND JOHN D. HUH, THE PEOPLE’S REPUBLIC OF CHINA ENACTS ITS

FIRST COMPREHENSIVE ANTITRUST LAW: TRYING TO PREDICT THE UNPREDICTABLE, NYU

JOURNAL OF LAW AND BUSINESS, March 31, 2008, P-246

35

35

acquisition of domestic enterprises by foreign capital or the participation by foreign capital in the

concentration of undertakings by other means, in addition to a review on the concentration in

accordance with this Law, a review on national security shall also be conducted in accordance

with the relevant laws and regulations.”134 The article has raised some concerns among foreign

and Chinese businessmen who are engaged in investment transactions in China. The reason why

the transaction parties are not comfortable with this article is unclear situation on conducting

national security review. To be more specific it is difficult to understand for them which

governmental agency is responsible to review transactions and where they should file necessary

documentation for review. However based on a notion that is incorporated in the article which

states that “national security shall be conducted in accordance with the relevant laws and

regulations” it should be assumed that new law authorizes agencies that has been previously

working on national security matters to review foreign investments containing a threat and

impairments towards national security. Those kind of transactions can be examined based on

some facts and considerations that it will be determine by the agencies themselves.135

7.2 National Security and Foreign Investment Review Process in China

In the beginning of the chapter it was discussed the acquisition and review process of state

owned enterprises by special departments. However here would be discussed review procedure

in regards to acquisition of private business companies. Certain steps exist while filing necessary

documentation for approval of the transaction. Mostly transaction review process is conducted

on provincial level. Review on provincial level is supervised by local Ministry of Commerce and

in case if local MOFCOM finds something suspicious towards national security it transmits the

case for approval to national MOFCOM, afterwards MOFCOM investigates national security

threats and approves or blocks transaction. On the other hand transactions that might involve

sensitive sectors for the national security should have to be reviewed and approved by national

MOFCOM.136 The transaction parties are often unsure where they should submit necessary

134 See The Anti-Monopoly Law of the People’s Republic of China, translated by DLA Piper (2007) Chapter IV

article 31 available at http://www.dlapiper.com/files/upload/China_AML_Translation_Alert_.html#ch4 (Last

visited July 8, 2008)

135 See CARL W. HITTINGER AND, JOHN D. HUH, THE PEOPLE’S REPUBLIC OF CHINA ENACTS ITS



136 See FOREIGN INVESTMENT Laws and policies Regulating Foreign Investment in 10 countries United State

Government Accountability Office, February 2008, P-47 available at www.gao.gov/highlights/d08320high.pdf (Last visited July 8, 2008)

36

36

documentation for review. If the both Chinese and foreign person think that investment

somehow includes sensitive sector for Chinese national security it would be better for them to

submit notification documents directly to national level MOFCOM and avoid further

prolongation of review. Chen Laingyu who was the secretary of Shanghai’s Communist Party

was dismissed from his position, Beijing stated that the reason for his dismissal was related to

pension scandal, however unofficially this removal is regarded as a sign for the Shanghai’s local

government officials that that Beijing will not allow to approve transactions locally if it involves

sensitive sectors for Chinese national interest. Shanghai as one of the largest financial centers in

China is highly attractive for investors, currently more than 120 foreign companies operate in

Shanghai and that is why foreign investments carried out in Shanghai is under scrutiny of

national government.137

Moreover the approval process that transaction parties should undergo on local or national level

of MOFCOM, China has additional governmental circle for foreign investment reviews. National

Development and Reform Commission (NDRS) has an influence over macroeconomic policy of

china and also is involved in examining foreign transactions. In 2004 NDRS implemented

procedures on administration of foreign investment reviews. According to this rules foreign

investors should submit the so called "application report to the NDRC with information on the

project's operation, construction scale, location, natural resources requirement and environmental

impact.”138 After receiving an application NDRC should complete review within 20 days.

Additional requirement of NDRS review process makes whole system more complicated.

Usually foreign investments and capital changes in Chinese non manufacturing companies where

subject of MOFCOM approval but new rule broadened administrative function of NDRS and

increased number of investment projects that requires NDRS examination. The rule created

unclear and confusing situation for investors. The current M&A regulations require transaction

approval on local or national MOFCOM level, however new regulation also obliges parties to go

through NDRS review process and obtain its consent.139 In 2006 NDRS declared creation of new

policy that would lead to better control of foreign investment in China. The plan that was created

by NDRS addresses tension between national security and open foreign investment policy, it

137 See CARL W. HITTINGER AND, JOHN D. HUH, THE PEOPLE’S REPUBLIC OF CHINA ENACTS ITS





37

37

formulates an approach that China should support foreign investment inflows, except under the

circumstances when investment is painful for national security.140 Foreign investment summary

that was published by US china business council reviews NDRS new plan. According to the

summary, NDRS states that “foreign capital should be directed toward high-tech industries,

modern service industries, high-end manufacturing, infrastructure development, and ecological

and environmental protection.”141

Chinese domestic companies can highly influence foreign acquisition process of local

enterprises. Foreign investment regulation that MOFCOM introduced in 2006 states that foreign

investment can be challenged by local companies on the grounds of anti-trust issues. By creating

negative view about transaction, competitors can indirectly increase pressure on the government

and this could have an affect when taken decision. In the introduction of the paper it was

discussed purchase of 85 percent stake by the US investment fund Carlyle Group in Xugong

Group Machinery, one of the reason why transaction was suspended by the government was the

CEO of competitor Chinese company who opposed investments and declared that it was not

beneficial for countries national interest. Apparently the CEO of the rival company worked

actively to disturb completion of the transaction.142

7.3. Negotiations between U.S. and China on Bilateral Investment Treaty

As the United States and China are both subjects of the research paper it would be interesting to

discuss recently started negotiations between these two countries on adopting bilateral

investment treaty. The treaty will be created on the fundamental investment principals such as

the promotion of open market, fair and transparent treatment of all the investments carried out

between United States and China, also completion of transaction based on a rule of law.143 The

United States government official stated that: "The United States and China have agreed to

140 See Foreign Investment in China, THE US-CHINA BUSINESS COUNCIL publishes February 2007, available

at http://www.uschina.org/info/forecast/2007/foreign-investment.html (Last visited July 9, 2008)

141 See Foreign Investment in China, THE US-CHINA BUSINESS COUNCIL publishes February 2007, available

at http://www.uschina.org/info/forecast/2007/foreign-investment.html (Last visited July 9, 2008)

142 See United State Government Accountability Office; FOREIGN INVESTMENT; Laws and policies Regulating

Foreign Investment in 10 countries, February 2008, P-48 available at www.gao.gov/highlights/d08320high.pdf (Last visited July 8, 2008)

143 See US, China agree to launch talks for key investment accord available at

http://www.channelnewsasia.com/stories/afp_asiapacific_business/view/354973/1/.html (Last visited July 9, 2008)

38

38

launch negotiations for a bilateral investment treaty," which would be based on "high standard of

investor protection." It has been more than one year that Washington and Beijing have been

actively cooperating about importance to start negotiations on creation of bilateral investment

treaty. The treaty would be beneficial for investors operating in both states. It will guarantee

open door policy for the investments flowing between these states. United States corporations

raised concern in terms of new changes in Chinese investment policy, they are worried about

protectionist approaches towards foreign investors which are in favor of local domestic

companies and discriminates investments of foreign enterprises. The main reason why the United

States companies think that Chinese open investment climate has been changed is the adoption

of new anti-monopoly law that results tough treatment of foreign companies compared to

Chinese firms.144 However not only the Chinese investment policy raises some concerning

issues, but also there is a growing dissatisfaction among Chinese investors about CFIUS foreign

investment reviews process. Washington justifies its position by the increasing number of

foreign investments that are threatening for the U.S. national security. The President of U.S.-

China business council declared that: “A bilateral investment treaty would provide additional

protections to investors from each country and the other country and goes beyond what was in

the World Trade Organization entry agreement, and It can provide additional protection to the

Chinese investors in the US and at the same time could also deal with some of the issues facing

US companies that invest in China as well.”145

8. Conclusion

The paper summarized policies and regulations of the United States, Germany, France and China

in regards to foreign investment and its implications on national security. Despite some

differences that the countries have related to foreign investment regulations and review

processes, they all share an opinion that foreign control over the national companies that are

operating in sensitive sectors and industries somehow impairs national interest and national

security. Each country has a different review system but on some level they look like each other,

all four states are in favor of open market policy and are trying to persuade foreign companies to

invest in their markets, but as soon as the investment will raise the concern of national security it

automatically falls under the oversight of the government. The United States FINSA act and





39

39

newly proposed German legislation resembles each other, none of them requires mandatory

notification of foreign investment, transaction parties are free in their choice and they can decide

whether to notify or not. However France has completely different approach towards notification

process, it sets certain criminal and civil sanctions in case if the parties would not submit

notification letter. The most important distinction that differentiates foreign investment review

processes among United States, Germany and France is in the post review process. Transactions

blocked by the United States president can not be reviewed by the courts, on the other hand

unapproved investments in France are subject of judicial review. Also the position asserted by

Chancellor Angela Merkels’ party underlines the idea that transaction parties should have a right

to file a law suit in a court and appeal governmentally blocked investment. Chinas FDI laws is

completely different from all other three States but there is one important likeness among

Chinese, German and U.S. regulations. For example in China MOFCOM approval is required if

transaction impairs “national economic security”, and “Key Industry”, In the U.S. foreign

investment is subject of CFIUS review if the “national security” is under the high risk, and newly

drafted law of Germany includes investigation of transaction in case it threatens “public security

and order.” However none of these regulations defines what constitutes “national security,”

“national economic security” or “public security and order.” This is not a mistake that these

states made when the laws were drafted. For ensuring that they will not be limited in their

actions when the state interest is endangered they did not define these issues intentionally.

The paper discusses one interesting feature of the French Decree that looks like CFIUS risk

mitigation process. Decree 2005-1739 state that before transaction parties submit necessary

documents for review, the Ministry of Economy of France may be engaged in prior negotiations

with transaction parties. The main reason for these negotiations is to oversee whether the

transaction would transfer sensitive sectors of French national security in the control of foreign

company. If the Ministry concludes that transfer is not in the best interest for the countries

national security, they may request divestiture of targeted French company. By the meaning of

divestiture foreign acquirer would be allowed to purchase a part French company only after

Ministry of Economy concludes that there is no further risk that transaction might contain to

national security. The divestiture requirement is very similar to the risk mitigation procedure that

has been recently established in the United States, resemblance is in the main idea on how to

lessen the threat towards the national security, before the parties submit required documents for

the approval of the transaction. By cooperating with transaction parties the United States and

France governments aim to mitigate risks that can endanger national security. However it seems

that the United States risk mitigation procedure is more proficient than of French. In the United

40

40

State FINSA empowers the Lead Agency to negotiate with the United States and Foreign person

and to mitigate the risks that might negatively influence on countries national security, Also

FINSA requires Lead Agency to repot CFIUS about the mitigation agreements that it has

concluded with transaction parties, on the other hand if the one of the transaction parties will

deviate from the mitigation agreement they should notify to CFIUS. However France does not

have an inter agency committee like CFIUS that would designate the Lead Agency for risk

mitigation procedures. Instead the Ministry of Economy is directly engaged in negotiations for

lessening the risk of the transaction.

In the end it should be mentioned that foreign investment and its implication on national security

is a long debating issue between the foreign investors and the governments of the United States,

Germany, France and China. However the foreign companies investing in these countries should

take into consideration States national security interests. On the other hand it is important to

maintain an open market policy and override unnecessary restrictions of foreign investments.

41

41

Bibliography

Benoit, Bertrand. Barber, Tony and Parker, George. Germany plans for own CFIUS deal watchdog, Financial Times, available at http://www.ft.com/cms/s/0/48128c56-6c82-11dc-a0cf-0000779fd2ac.html

Bulletin EU 12-2006 The internal market (26/27), Public Procurement available at

http://europa.eu/bulletin/en/200612/p110026.htm

Chirac is against NYSE takeover of Euronext, available at http://us.ft.com/ftgateway/superpage.ft?news_id=fto060620061502361920

Clark, Harry L; Wang, Lisa W, Foreign Investment and National Security, The China Business Review, January. 1. 2008, P-53, available at

http://www.deweyleboeuf.com/files/News/5020bb98-6718-4337-97a6-

64667f03834d/Presentation/NewsAttachment/a3420492-97fd-4f45-9b4b-

6800e36248eb/Clark.pdf

Controls on foreign investment in France and their recent reform, Support for strategic companies and Protection of State interest, Jun 22, 2007 available at http://www.intelligence-

economique.gouv.fr/article.php3?id_article=277

Crocker, Thomas E. What banks need to know about the coming debate over CFIUS, foreign direct investment and sovereign wealth funds, Banking Law Journal, May 2008.

“Congress Strengthens Laws to prevent Foreign investments that could threaten national security” ARNOLD & PORTER LLP Client Advisory; available at http://www.arnoldporter.com/resources/documents/A&PCA_CongressStrengthensLaw_080107.pdf

Dickinson, Steve. China Changes Foreign Investment (FDI) Rules, November 12, 2007 available at http://www.chinalawblog.com/2007/11/breaking_news_china_changes_fo.html

European Commission recommends a common EU approach to sovereign wealth funds, Linklaters, 28 February 2008, available at http://www.linklaters.com/newsanddeals/newsdetail.asp?newsid=3470&navigationid=205

Francisco Noel J. & Newman, Bevin. Congress Reforms CFIUS Review Process, available at

http://www.mondaq.com/article.asp?articleid=51466

French, Monetary and Financial Code

Foreign Trade and Payments Act of the Federal Republic of Germany, available at

http://www.bafa.de/bafa/en/export_control/legislation/export_control_awg_en.pdf

Foreign Investments; Laws and policies Regulating Foreign Investment in 10 countries United State Government Accountability Office; February 2008, P-61 available at

www.gao.gov/highlights/d08320high.pdf

42

42

Foreign Investment in China, THE US-CHINA BUSINESS COUNCIL publishes February 2007, available at http://www.uschina.org/info/forecast/2007/foreign-investment.html

Fried, Frank, Harris, Shriver & Jacobson LLP. Reform of French Foreign Investment Regulations, January 26, 2005. available at

http://www.ffhsj.com/siteFiles/Publications/C1A6ABC45D5AD7EA5D7A003DED3EBA22.pdf

Gordon, Mark & Veblen, Mark F. Sovereign Wealth Fund Investment intheU.S.–Just warming up? P-1 available at http://www.abanet.org/buslaw/committees/CL930000pub/newsletter/200803/gordon.pdf

Helfrich, Andrea. Proposed Control of Foreign Investment in German Companies, McDerrmott Will & Emery, February 2008, P-4 available a http://www.mwe.com/info/news/gu0208.pdf

Hittinger, Carl W. & Hugh John D. The People’s Republic of China enacts its first comprehensive Antitrust Law: Trying to predict the unpredictable, NYU Journal of Law and Business, March 31, 2008.

H.R. 556: Foreign Investment and National Security Act of 2007

Infrastructure: stronger restrictions on foreign investments in Germany, Freshfields Bruckhaus and Deringer, December 2007, P-1, available at

http://www.freshfields.com/publications/pdfs/2007/dec19/21133.pdf

Jackson, James K. Exon-Florio Foreign Investment Provision: Comparison of H.R. 556 and S. 1610; CRS Report for Congress; Updated July 2007; P-37 available at

http://assets.opencrs.com/rpts/RL34082_20070713.pdf

Judgment of the Court of Justice in Case C-36/02 Omega Spielhallen- und Automatenaufstellungs-GmbH v Oberburgermeisterin der Bundesstadt Bonn, 14 October 2004, available at http://curia.europa.eu/en/actu/communiques/cp04/aff/cp040082en.pdf Larissa, Robert S & Raisner, Lisa and Wilner, Thomas The new Law heightens scrutiny of foreign acquisition of U.S. companies, NYU Journal of Law and Business 31 March 2008, available at http://www.law.nyu.edu/journals/lawbusiness/issues/uploads/4-1/nyb106.pdf Larson, Alan P & Marchick, David M. Foreign Investment and National Security Getting the Balance Right, Council of foreign relations, July 18, 2006, available at

www.cfr.org/content/publications/attachments/CFIUSreport.pdf

Lavey Warren G. Telecom globalization and deregulation encounter U.S. national security and labor concerns, Program on Information Resources Policy, Harvard University, June 2007, available at http://pirp.harvard.edu/pubs_pdf/lavey/lavey-p07-2.pdf

Lubman, Stanley. Looking for law in China, Columbia Journal of Asian Law, fall 2006

Makheim, Daniella. Sovereign Wealth Funds and U.S. National Security, Published by the Heritage Foundation, March 6, 2008, P-4, available at

http://www.heritage.org/Research/TradeandForeignAid/upload/hl_1063.pdf

Marans, Eugene J. & Shenefield, John H. Pattison, Joseph E & Byam, John T. Manual of Foreign Investment in the United States, 3 edition, 2004.

Mullin, Sheppard. Treasury Proposes New Rules For Reviewing Foreign Investment In U.S. Companies, Government Contracts Blog, May 15. 2008, available at

43

43

http://www.governmentcontractslawblog.com/2008/05/articles/export-controls/treasury-proposes-new-rules-for-reviewing-foreign-investment-in-us-companies/

PART 800—Regulations Pertaining to Mergers, Acquisitions and Takeovers By Foreign Persons

Provisions for Foreign Investors to Merge Domestic Enterprises available at http://english.mofcom.gov.cn/aarticle/policyrelease/gazettee/200610/20061003378460.html

Regan, Keith, Alcatel Lucent Make Merger Plans Official, 04.03.2006 available at

http://www.ecommercetimes.com/story/49724.html

Regulation of Foreign Investment in France, Euro-American Lawyers Group, November 2006,

available at http://www.ealg.com/doc/Legal%20Framework/REGULATION%20OF%20FOREIGN%20INVESTMENTS%20-%20France.doc

Schneider, Eileen Francis. Be careful what you wish for: China’s protectionist regulations of

Foreign Direct Investment implemented in the months before completing WTO accession. Brooklyn Journal of Corporate, Financial & Commercial Law, fall 2007

Servan-Schreibe, Pierre & Heliot, Stephane. The International Comparative Legal Guide to: Mergers & Acquisitions 2007, A practical insight to cross-border Mergers & Acquisitions, Chapter13, available at http://www.iclg.co.uk/khadmin/Publications/pdf/1156.pdf

The Anti-Monopoly Law of the People’s Republic of China, translated by DLA Piper (2007) Chapter IV article 31 available at http://www.dlapiper.com/files/upload/China_AML_Translation_Alert_.html#ch4

The White House Release “Statement on CFIUS Recommendation Regarding Proposed Merger of Lucent Technologies, Inc., and Alcatel” November 17, 2006 available at http://www.whitehouse.gov/news/releases/2006/11/20061117-13.html

The Exon-Florio process; KAYE SCHOLER LLP, January 2007, http://www.abanet.org/buslaw/newsletter/0059/materials/pp6.pdf

The New Law Governing CFIUS National Security Review of Foreign Investment, MILLER & CHEVALIER LLP, Volume 14, Issue 6/October 11, 2007; available at http://www.milchev.com/files/Publication/498011d8-27cb-49d1-9947-0071cc3938ba/Presentation/PublicationAttachment/4e5c8c4f-cfc2-4807-b67e-018a54ddfc51/International%20Alert%20%5BNew%20Law%20Governing%20CFIUS)%20October%2011%202007.pdf

Treasury Reaches Agreement on Principles for Sovereign Wealth Fund Investment with Singapore and Abu Dhabi, March 20, 2008, available at http://www.treas.gov/press/releases/hp881.htm

Treasury Department Issues Proposed Regulation Reforming U.S. National Security Reviews on Foreign Investment. Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates, April 22, 2008, available at http://www.skadden.com/content/Publications/Publications1389_0.pdf

US, China agree to launch talks for key investment accord available at

http://www.channelnewsasia.com/stories/afp_asiapacific_business/view/354973/1/.html

44

44

“Verizon to Sell Caribbean and Latin American Telecom Operations in Three Transactions Valued at $3.7 Billion,” Verizon Press Release (Apr. 3, 2006) available at http://investor.verizon.com/news/view.aspx?NewsID=731

Wall, Christopher R. Department of Treasury Proposes New CFIUS regulations for Foreign Investment, Pillsbury, Winthrop Shaw Pittman LLP, May 15, 2008 available at http://www.pillsburylaw.com/content/portal/publications/2008/5/200851516053265/International%20Trade%20Vol%201500%20No%201518%2005-15-08.pdf

War Weapons List, Part B (as amended by the ninth regulation amending the War Weapons List of 26 February 1998, Federal Law Gazette I, p. 385) available at

http://www.bafa.de/bafa/en/export_control/legislation/export_control_cwc_p_war_weapons_list.pdf

West, Joseph D & Lee, Judith A. Brennan, Christine K & Wharwood, Dave M. Speice, Patrick F. Jr. National security implication of foreign investment in U.S. government contractors, briefing papers, second series, October 2007, available at

http://www.gibsondunn.com/publications/Documents/West-NatlSecImplicationsOfForeignInvestment.pdf

National Security Implications on Foreign Investment in ... · 3 3 1. Introduction- national...

Documents

Transcript of National Security Implications on Foreign Investment in ... · 3 3 1. Introduction- national...