Dubai or not Dubai? A review of foreign investment and acquisition laws in the U.S. and Canada.

Author:Lalonde, Chris


The proposed purchase of a British company that controlled several ports in the United States by Dubai Ports World could accurately be described as one of the most politically contentious acquisitions in U.S. history. The transaction raised questions not only about U.S. foreign investment laws but provoked national security concerns, as well. Similar issues were raised more recently during the acquisition of a share in Nasdaq by the Dubai stock exchange. In the same vein, Canada has seen similar issues arise during recent transactions involving domestic companies--most notably the acquisition of PrimeWest Energy by TAQA, the national energy company of Abu Dhabi. This Note attempts to address the efficacy of the foreign investment laws of both the U.S. and Canada in light of the political disputes that have surrounded a number of transactions in recent years. The Note concludes that the best result for both countries would be to maintain rigorous review standards while also establishing a climate favorable to foreign investment. To this end, this Note suggests the creation of Conciliation Committee, a bi-partisan legislative committee that would act as a mediator between the government and the parties to a contentious deal to ensure that all sides are satisfied and that the deal will ultimately go through.

TABLE OF CONTENTS I. INTRODUCTION II. THE U.S.: CFIUS AND THE EXON-FLORIO AMENDMENTS A. History of CFIUS and the Exon-Florio Amendments B. The Functioning of CFIUS Under Exon-Florio C. The Debate over Recent Additions to Exon-Florio and CFIUS III. CANADA: THE INVESTMENT CANADA ACT A. Canadian Investment Before the Investment Canada Act B. The Investment Canada Act C. ICA in Practice Today IV. RECENT AND CURRENT CONFLICTS OVER THE LAWS A. The United States i. CNOOC ii. Dubai Ports World iii. NASDAQ B. Canada V. RECOMMENDATIONS A. Pros and Cons of New Approaches B. Option: The Creation of the "Conciliation Committee" VI. CONCLUSION I. INTRODUCTION

Weighing in at number one on the U.S. Fortune 500, with over 6,775 retail stores is the behemoth known as Wal-Mart. (1) The company has become an international force by not only as the number one retailer in both Canada and Mexico, but also by owning a 95% stake in the Japanese retail company SEIYU and opening stores in Asia, Europe, and South America. (2) Meanwhile, topping Forbes' list of the largest Canadian companies is Royal Bank of Canada (Royal Bank), with over $20.7 billion in sales in 2007. (3) Royal Bank has also seen its fortunes grow internationally, as the Bank now has offices in over thirty countries, including the United States. (4) While both countries are undoubtedly pleased to see their homegrown companies expand internationally, this development raises a question concerning the response of each country in the face of an international corporation looking to compete with or acquire a domestic business.

In both the United States and Canada, policies directed at foreign investments and acquisitions have long been a topic of contentious debate at a volume much louder than other countries. (5) Recent events in each country have reignited the debate over the proper legal response to a foreign company looking to invest in or acquire a domestic company. With national security concerns often on the forefront of people's minds, the debates have become more political and heated in recent years. These debates have raised a number of questions in both countries as to how these cases should be handled by the law.

This Note focuses on the recent laws that emphasize government review of foreign investment and, in particular, foreign acquisitions in both the United States and Canada. Part II starts by providing a brief historical overview of the U.S. approach under the Committee on Foreign Investment in the United States (CFIUS) and the Exon-Florio Amendments. It then summarizes recent changes in the law and considers both sides of the debate over these changes. Part III examines the Canadian system under the Investment Canada Act by providing both a brief overview of the history of the law and examples of current attitudes towards the system and the debate over whether changes are necessary. Part IV focuses on recent transactions in each country that have raised foreign investment issues. These include the proposed CNOOC, Dubai Ports, and NASDAQ deals in the U.S., as well as the PrimeWest acquisition in Canada. Finally, Part V analyzes the benefits and drawbacks of each approach while offering suggestions on maintaining a standard of strict review while simultaneously promoting foreign investment and sustaining a pro-investment image globally.


    1. History of CFIUS and the Exon-Florio Amendments

      Gerald Ford created CFIUS in 1975 with the signing of Executive Order 11,858. (6) At the time, CFIUS consisted of six members and was tasked with "monitoring the impact of foreign investment in the United States" and "coordinating the implementation of United States policy on such investment." (7) It has been posited that the major external motivation for the creation of CFIUS was the earlier establishment of the Organization of Petroleum Exporting Countries (OPEC), which gave oil exporting nations extra capital that could have been used to purchase U.S. assets. (8)

      Fears of such transactions were realized in cases such as the 1981 proposed transaction between the Kuwait Petroleum Company and the U.S.-based Santa Fe International Company. (9) The U.S. government did not approve of the transaction; however, under the original Executive Order, neither CFIUS nor the President possessed the authority to block foreign takeovers of U.S. companies. Instead, the committee and the President could only generally review such transactions. (10) The government managed to stall the transaction by invoking antitrust law until a more suitable agreement came along. (11) The perceived sense of helplessness of the executive branch in the face of such transactions led to the passage of legislation to ensure that such cases would not happen again.

      In 1988 Congress passed the Exon-Florio Amendments (Exon-Florio) to the Defense Production Act of 1950. (12) Much like the creation of CFIUS, external forces may have prompted the passage of the measure. As opposed to OPEC, the inspiration for CFIUS rested in the number of large purchases of U.S. business by Japanese firms in the 1980s, including well-known New York buildings, Hollywood movie studios, and a large U.S. semi-conductor business. (13) Before the passage of Exon-Florio, many in Congress believed that the President only could block the foreign acquisition of a U.S. company by declaring a national emergency. (14) Exon-Florio explicitly addressed these concerns by empowering the President to "investigate and, if necessary, block foreign takeovers of American businesses on national security grounds." (15) More explicitly, Exon-Florio allowed the President to look at the potential national security implications of all "mergers and acquisitions involving foreign persons which could result in foreign control of persons engaged in interstate commerce in the United States." (16)

      The President delegated his authority under Exon-Florio to CFIUS through Executive Order 12,661. (17) CIFUS currently consists of twelve interagency members and is housed in and chaired by the Treasury Department. (18) The expanded panel has representatives from across the government, including:

      [T]he Secretaries of State, Treasury, Defense, Homeland Security, and Commerce; the United States Trade Representative; the Chairman of the Council of Economic Advisors; the Attorney General; the Director of the Office of Management and Budget; the Director of the Office of Science and Technology Policy; the Assistant to the President for National Security Affairs; and the Assistant to the President for Economic Policy. (19) CFIUS is also overseen by the Senate Banking, Housing, and Urban Affairs Committee currently chaired by Senator Christopher Dodd of Connecticut with ranking member Richard Shelby of Alabama. (20) CFIUS now exercises the President's power under Exon-Florio and executes the explicit mandate given to CFIUS to consider foreign investment issues. (21)

    2. The Functioning of CFIUS Under Exon-Florio

      CFIUS under Exon-Florio follows a fairly straight-forward process for addressing potential purchases of U.S. companies by foreign buyers. The four-step process involves:

      (1) [V]oluntary notice by the companies, (2) a 30-day review to identify whether there are any national security concerns, (3) a 45-day investigation to determine whether those concerns require a recommendation to the President for possible action, and (4) a Presidential decision to permit, suspend, or prohibit the acquisition. (22) Since Exon-Florio's inception, CFIUS has received over 1,500 notifications from parties looking to transact with foreign buyers. (23) Either or both parties provide notice of a transaction by filing documentation with the Committee that a deal is being contemplated. (24) The notice must contain details about both the foreign buyer and the U.S. target company. (25) The notices must disclose information such as "business the target company does with US government agencies having national security responsibilities, the target company's technology having national security significance, the business plan of the proposed acquirer for the target company and its technology, including any plans to move technology or jobs offshore." (26) The chair of the Committee also maintains the right to reject any notice as incomplete and ask for additional information before moving on to the next step in the process. (27)

      Parties have a strong incentive to file notice voluntarily with the Committee because the President can require companies to divest deals that represent a threat to national security when completed without a...

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