C) Completely Overhaul and Revamp (“Broaden and Upgrade”) the CFIUS/Exon-Florio (FINSA 2007) Provision:
FINSA 2007 completely FAILS in its effort to substantively and adequately “upgrade” Exon-Florio.
A FINSA 2007 review/analysis is provided, followed by recommendations to upgrade FINSA 2007 to “FINSA 2008”:
FINSA 2007 Situational Review:
The Foreign Investment and National Security Act of 2007 (FINSA), was an (weak) attempt to upgrade the 1988 Exon-Florio Amendment (furthered amended by the 1993 Byrd Amendment) to the Defense Production Act of 1950. The trigger for this (FINSA) action being two relatively recent events. The first being China National Offshore Oil Corp’s (CNOOC) attempt to takeover Unocal and the second, Dubai Ports World’s (DPW) attempt to take over management of U.S. ports.
While the events triggered an appropriate and necessary Congressional response, the result - FINSA, however missed the mark, adding words and bureaucracy, not value in terms of substantively increasing/improving U.S. national security.
Even though FINSA added 2 more categories to the five covered by Byrd Amended Exon-Florio Provision, specifically “critical infrastructure” and “critical technologies”, it FAILED in fixing the most fundamental and most important of conditions. In fact the single condition that triggers CFIUS action and the succeeding chain of events. That being the definition of “covered transaction”.
If that condition is not triggered, than neither is a CFIUS review. In fact, that specific transaction “legally” flies under the CFIUS radar (based upon current FINSA “covered transaction” definition).
If that decision chokepoint fails, than it doesn’t matter if there are 7 or 700 categories or one or many more foreign governments involved. In effect, FINSA is not triggered and therefore no review is conducted nor legally required. FINSA is therefore easily undermined by a gaping loophole, which China has astutely already figured out.
In effect, China has learned that it does not have to “own or control” (as FINSA assumes) to get what it desperately seeks – not ownership or control but rather “expertise access” and (reverse engineering) information/knowledge/insights from that respective company.
Interestingly, a more recent case involving the sale of sensitive 3Com (Tipping Point subsidiary) internet anti-hacking technology vis-à-vis the buyout of U.S. based 3Com Inc. by a combined duo of U.S. based Bain Capital and China’s Huawei Technologies, embodied the lessons learned by the Chinese to not trigger a CFIUS review (i.e. don’t seek control or majority ownership). It only did receive such a review after Bain/Huawei decided it might be better to proactively notify the government, highlighting Huawei with just a minority interest in the deal. The alert however backfired when the U.S. government however, without the deal formally (automatically) triggering a CFIUS review, did some digging and then proactively ordered a non-FINSA triggered CFIUS review. This situation and the huge potential for it to have fallen through a gaping FINSA hole, adds further credence to immediately and substantively (dramatically) tighten FINSA. The entire Bain/Huawei/CFIUS ordeal and recommendations to address this scenario are discussed in the following article by the author:
Commulism and National Security: Thwarted Bain-Huawei 3Com Takeover Deal – A Model for the Future
http:www.opednews.com/articles/opedne_brock_no_080326_commulism_and_nation.htmTherefore, FINSA is only triggered upon that initial go-no go “covered transaction” test. Covered transaction is effectively defined as when the foreign entity, even a foreign government, effectively seeks majority ownership and/or control of a categorized U.S. company, critical infrastructure or critical technology.
It’s true that FINSA has provisions to rule out a transaction if a foreign government is involved, however, that condition from a decision tree standpoint is “downstream” of the “covered transaction” condition, so the “foreign government” condition will never be met or triggered if the transaction never triggers the “covered transaction” condition, such as the transaction designed to secure specific expertise not control. Both Case & White and Skadden Arps fail to either note or highlight this in their noted FINSA analyses.
This is supported in earlier Part 2 of this “Commulism Series” where it is noted:
The lessons learned by the Chinese government from these (prior CFIUS) skirmishes (Unocal and several others) with the U.S. government were that a) the Chinese need not fully own to get what they want – expertise/information access, b) they don’t want the public limelight, and c) they do not want to mess with CFIUS.
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