The Exon–Florio process; Special considerations for acquisition of U.S. businesses
In 2007, foreign businesses spent a record $414 billion in acquiring U.S. companies, a 90-percent increase over the previous year and a 30-percent jump from the previous record in 2000. As the U.S. economy struggles and the Euro and other foreign currencies continue to trade at a premium to the U.S. dollar, U.S. businesses have become a prime target for foreign buyers. However, potential acquirers and the U.S. targets must keep in mind special considerations when considering a transaction, as acquisitions that result in foreign control of U.S. businesses may be subject to investigation by the U.S. government.
Introduction to Exon-Florio
Section 721 of the Defense Production Act grants the president broad authority to review all mergers, acquisitions, and takeovers that could result in people doing business within the United States becoming subject to foreign control. After completing such a review, the president can choose to block a transaction, or undo a completed transaction that is considered to be a threat to national security. More commonly known as the “Exon-Florio” amendment, Section 721 was first enacted in 1988 and has since played an important part in many transactions with foreign acquirors.
Exon-Florio is administered by the Committee on Foreign Investment in the United States (CFIUS), which is chaired by the Secretary of the Treasury. The procedures governing the CFIUS review of transactions under Exon-Florio are currently being revised by the Treasury Department; however, most of the important aspects will remain the same.
What transactions are covered?
The Exon-Florio regulations apply to transactions where a U.S. business engaged in interstate commerce would become subject to the control of a foreign person or entity through a merger, acquisition, or takeover. There is no minimum percentage of ownership to constitute “control”; even minority shareholders can be considered in control if they have any veto, vote-blocking, or similar rights.
A transaction qualifying under the above standard could be subject to review by CFIUS if there would be an impact on the national security of the U.S. The term “national security” is not defined by the Exon-Florio statute or the regulations, allowing CFIUS greater flexibility to consider the impact of a transaction on a case-by-case basis. Any products, services, or technologies that are important to U.S. national defense needs will normally be considered to have an impact on national security. Under the amendments to the regulations currently considered by the Treasury Department, CFIUS could also find a national security risk when the business of the U.S. target is related to infrastructure.
CFIUS normally begins its review of a pending transaction upon receiving a voluntary notice from the parties. While there is no requirement to submit a notice to CFIUS, there are significant benefits to a voluntary submission and great risks to avoiding review. Transactions that have not been reviewed and cleared by CFIUS remain subject to an investigation by CFIUS before and after closing, and may even be undone if a threat to national security is found. The chairman or any one of the federal agencies that comprise CFIUS, may initiate a review if there is a belief that the transaction could have a negative impact on national security. This could lead to unwelcome media coverage and widespread speculation about the future of the deal.
By voluntarily submitting to CFIUS review, parties to a transaction provide themselves a “safe harbor” from any future scrutiny, barring a finding of material representations or omissions during the review.
The notice to CFIUS must include a summary of the transaction, a description of its purpose and nature, and information about all of the financial institutions involved in the transaction. The proposed amendments require more detailed information from the U.S. business, including contracts with any U.S. government agencies.
When CFIUS is notified of a proposed merger or acquisition, it conducts a 30-day review to determine if national security considerations demand a full investigation. If no full investigation is necessary, the process ends with no further action. Otherwise, a 45-day investigation period will take place, following which a recommendation is made to the president on whether the transaction should be allowed or if it should be blocked. The full 45-day investigation is mandatory for transactions that would result in a controlling interest of a U.S. business by a foreign government or an entity controlled by a foreign government. The president must make a final decision with respect to the transaction within 15 days of receiving the CFIUS recommendation.
Although only one acquisition was ordered by the president to be rescinded, a number have been abandoned as a result of unfavorable reviews by CFIUS. It is common for CFIUS to suggest modifications to the structure of the deal to avoid an impact on national security and, therefore, a negative recommendation. The parties that involve CFIUS early in their negotiations will have a better chance for a smooth and successful transaction.
The Exon-Florio process allows CFIUS to closely scrutinize foreign acquisitions. Full investigations can be avoided by careful planning to address national security concerns in the initial stages of the process. In considering whether to voluntarily notify CFIUS of a deal (or whether a deal is likely to attract CFIUS scrutiny, whether notified or not), the parties should do the following.
- Interpret the definition of “national security” broadly. Parties should consider the potential that business disputes or political opposition concerning the deal could be given a sufficient national security “spin” to draw CFIUS scrutiny. The parties should always consider the potential implications for U.S. counter-terror and U.S. law enforcement capabilities.
- Analyze CFIUS factors closely when the U.S. target has contracts with U.S. government agencies such as the Department of Defense, Department of Homeland Security, or intelligence community, or when the U.S. target maintains sensitive, classified, or export-controlled information and technologies.
- Consider the nationality and the structure of the ownership and control of the foreign acquiring company. Any connections to foreign governments, especially those that are not U.S. allies, are critical factors in the CFIUS analysis.
Although transactions are rarely blocked or undone, such potential can lead the parties to back away from the transaction, usually at a substantial cost. Given the current focus on national security in the United States, the Exon-Florio process should be considered by any party considering a merger, acquisition, or takeover of a U.S. business by a foreign interest.