The U.S. Treasury Department, chair of the Committee on Foreign Investment in the United States ("CFIUS"), recently published guidance on the types of transactions previously reviewed by CFIUS that have presented national security considerations ("Guidance").  The Guidance is intended to provide insight into how CFIUS identifies the national security effects of covered transactions and may assist parties considering whether to file a voluntary notice of a transaction with CFIUS [1]. This is an important determination because, although filing a CFIUS notice is voluntary, the parties may be forced to unwind a transaction where no filing was made if the President later determines it poses national security risks.

Under the Exon-Florio Amendment, Section 721 of the Defense Production Act of 1950 ("DPA"), the President has the authority to review all mergers, acquisitions and takeovers that could result in foreign control of a U.S. business and suspend, block or order divestiture of any such transaction if it may threaten to impair national security. The Foreign Investment and National Security Act of 2007 ("FINSA"), which amended Section 721 and formally established CFIUS, mandated the Guidance.  The Treasury Department recently published its final regulations implementing FINSA [2].  

Section 721 intentionally does not define what may constitute "national security." Instead, the Guidance states that CFIUS analyzes the facts and circumstances of each transaction to identify what, if any, national security considerations are raised.  National security risk is analyzed based on the potential "threat" (i.e., foreign person's intent or ability to cause harm) to U.S. national security, whether there is a "vulnerability" (i.e., whether the nature of the U.S. business makes it susceptible to impairment of national security), and the possible consequences for U.S. national security resulting from the interaction between threat and vulnerability.

Transactions Presenting National Security Considerations

Nature of the U.S. Business

U.S. Businesses with Government Contracts.  Transactions reviewed by CFIUS have involved U.S. businesses [3] that provide products and services to U.S. Government agencies and state and local authorities.  This includes not only companies in the defense, security and law enforcement sectors, but companies that supply goods and services to U.S. Government agencies with functions relevant to national security, such as information technology, telecommunications, energy, natural resources, and industrial products.

U.S. Businesses Regardless of Government Contracts.  Transactions reviewed by CFIUS have also involved U.S. businesses (without regard to government contracts), where there are national security implications, including:

• companies in the energy sector;
• companies that affect the nation's transportation system;
• companies that could significantly and directly affect the U.S. financial system;
• companies that produce certain types of advanced technologies (such as, among others, semiconductors, cryptography and Internet security);
• companies that are engaged in research, development, production or sale of technology, goods, software or services subject to U.S. export controls; and
• where U.S. critical infrastructure is involved, including major energy assets.

Identity of the Foreign Person

With regard to the identity of the foreign person [4] acquiring control, CFIUS considers the factors set forth in Section 721, including, among others, (a) the record of such person's country with respect to nonproliferation and other national security matters, (b) the record and intentions of such person regarding actions that could impair U.S. national security (such as an intent to terminate U.S. government contracts of the U.S. business for goods and services relevant to national security), and (c) whether the transaction is foreign government controlled.

The Guidance emphasizes that the examples provided are only "illustrative" and not an exhaustive list of transactions of concern to CFIUS; however, it does provide some additional transparency regarding the CFIUS process which may be useful to parties in assessing whether to file a CFIUS notice.

Footnotes:
[1] See Guidance at: http://www.treasury.gov
[2] 31 CFR Part 800
[3] "U.S. business" is defined at 31 CFR 800.226.
[4] "Foreign person" is defined at 31 CFR 800.216.