In 1976, amid mounting public fears that Arab oil sheiks were about to "buy up" American land and corporations, a beleaguered President Gerald R. Ford did the best thing he could to quell American paranoia: He formed a committee to handle the issue.
For a decade, it worked exactly as planned: The high-level Committee on Foreign Investments in the United States--or CFIUS, as it is known--essentially did nothing. America continued to welcome foreign investment. And the fear of a massive Arab takeover faded.
But last year, concerned anew about foreign investment, this time from Japan, Congress gave the panel heightened status--and new power to block acquisitions of U.S. firms. And the Treasury has just proposed regulations that some fear may turn CFIUS into a monster.
The new statutory authority transforms CFIUS--which had been little more than a monitoring group, into a "powerful actor" in international investment, contends Joseph F. Dennin, a former assistant secretary of commerce who is now a trade lawyer in Washington.
'Sword of Damocles'
Dennin argues that CFIUS' new powers are so broad--and the proposed regulations so ambiguous--that a potentially deal-blunting uncertainty will be injected into foreign acquisitions of American companies.
Dennin calls the new law "a sword of Damocles" hanging over would-be investors.
Susan Liebeler, former chairwoman of the U.S. International Trade Commission, agrees. She notes that the legislative provision giving CFIUS its new power--called the Exon-Florio amendmentafter its sponsors, Sen. J. James Exon (D-Neb.) and Rep. James J. Florio (D-N.J.)--may do seriousdamage.
Unless the new regulations are tightened, she warns, the United States could end up discouraging overseas investors, choking off foreign capital the United States badly needs and making it easier for future administrations "to implement a policy of economic nationalism."
"I think there are some big problems," Liebeler said.
The ambiguity of the draft regulations is the major difficulty cited by critics. Under the Exon-Florio provision, CFIUS may move to block a proposed foreign acquisition or merger if the takeover threatens to "impair the national security."
But the new regulations, proposed by the Treasury on July 14, do not define "national security" or cite industries that might be exempt from possible intervention--lapses that Liebeler warns could open the way for abuses later on.
"An unfortunate result of this," Liebeler said, "is that a future administration can reinterpret national security to include economic security--without even rewriting the regulations." The effect, she asserts, is virtually to invite abuse.
Bradley R. Larschan, attorney for the Washington-based Assn. for International Investment, a lobby group for foreign investors, shares Liebeler's concerns. But he wants CFIUS merely to tighten its regulations, not to try to define national security.
"We believe you can't define national security" completely enough "to conceive of all the possible options," Larschan said. Instead, he said, CFIUS should decide in advance which industries to exempt and gear up to provide prompt--and certain--rulings for the rest.
Under the regulations now being proposed, CFIUS can reopen a case at any time against any acquisition or merger if it discovers that the affected firms omitted "material information" when they reported the proposed deal. But it does not spell out what such information includes.
Larschan also wants the panel to establish a special "fast-track" procedure to deliver a final ruling for time-sensitive proposals within 72 hours. He also wants CFIUS to exempt most smaller deals--say, of $15 million or less--that do not involve weaponry.
Ironically, the furor comes despite a CFIUS track record that even critics praise as judicious. Although the panel has reviewed more than 80 cases since the Exon-Florio law took effect, it actually has questioned only four and has not formally blocked any.
Ownership in Trusts
Instead, in keeping with its low-key tradition, the agency has quietly suggested to the corporations involved that they modify a proposed takeover to satisfy any national security concerns. Usually, the firms either voluntarily make changes or withdraw from the deal.
The panel's latest case, announced Aug. 18, is an example. To counter objections that the purchase of three U.S. aerospace firms by Matra S.A., a French firm, might jeopardize sensitive technology, Matra agreed to place its ownership in trusts controlled by U.S. citizens.
In a case in April, a Japanese firm sought to buy General Ceramics Inc., which had a contract to supply detonators for hydrogen bombs for the Energy Department. CFIUS persuaded General Ceramics to sell its contract to another U.S. firm, and the deal then went through unimpeded.
Administration officials involved in the CFIUS (pronounced SIH-fee-us) process defend the Treasury's proposed regulations as sensible. They contend that they have intentionally left "national security" undefined so that they can decide the issues on a "common-sense, case-by-case" basis.
In a speech in Los Angeles last week, Stephen J. Canner, CFIUS' staff chairman, dismissed as "overblown" warnings by critics that the proposed regulations threaten to hold a government sword permanently over the heads of foreign investors.
Current concerns "will be alleviated by observing what we do rather than by reacting to what observers say we might do," Canner told a conference of foreign investors and attorneys. "U.S. investment policy (still) welcomes market-driven foreign investment."
Open Investment Policies
Indeed, economists note that with so much of the nation's currently available savings pool now financing the federal budget deficit, the United States needs all the foreign money it can get to help finance the investment it needs here at home.
Commerce Department figures show that foreigners poured about $58 billion into buying U.S. corporations, real estate and the like in 1988--complementing about $1.2 billion of investment in securities and other financial instruments.
In fact, Washington has been trying for decades to persuade other countries to follow America's open investment policies. Mainly as a result of U.S. urging, the 106-country Uruguay Round talks under way in Geneva are seeking to reduce investment barriers worldwide.
Ironically, it was CFIUS' reluctance to intervene in an earlier case--the proposed takeover of Fairchild Semiconductor Corp. by Japan's Fujitsu Ltd. in 1987--that sparked passage of the Exon-Florio provision.
Although Fairchild already was owned by a foreign company, France's Schlumberger Ltd., opponents said a Fujitsu takeover would jeopardize national security because no American firm was producing the kind of advanced microchips made by Fairchild.
While Fujitsu eventually abandoned the deal on its own for fear of setting off a political backlash, CFIUS clearly was on the verge of approving the proposed transaction--enraging congressional trade hawks, who viewed it as a sellout.
'We Were Asleep'
A year later, Exon-Florio was passed--virtually overlooked by U.S. business lobbyists, who were sidetracked trying to defeat a companion proposal by Rep. John Bryant (D-Tex.) that would have imposed stricter requirements for reporting foreign investments in the United States.
But from the investors' own viewpoint, the Exon-Florio provisions have turned out to be far more restrictive than the Bryant amendment would have been. "It looks like we were asleep when that was coming to the floor," one industry lobbyist conceded.
Although Canner's office tried to provide some guidance regarding the kinds of industries that might be exempt from CFIUS review, it listed only four--toys and games, food products, hotels and restaurants, and legal services--only a smattering of those that could be easily exempted.
Larschan contends that the draft regulations are far broader than most businesses recognize--embracing acquisitions by predominantly domestic firms that have foreign shareholders such as Du Pont Co., and even the banks that finance foreign takeovers.
Although reporting a proposed merger or acquisition to CFIUS is voluntary, the regulations give CFIUS the indefinite right to review any transaction that has not been reported--even years after the fact. As a result, Dennin said, reporting is virtually mandatory.
Liebeler suggests that the Exon-Florio provision might evolve into a "show-stopper" that U.S. firms can use to block unwelcome takeovers by foreign buyers. At the least, the target firm can gain an extra 30 to 90 days simply by appealing to CFIUS, she noted.
'Reasonable Person' Test
But Canner--and other CFIUS officials--dispute such warnings. The CFIUS chief said investors themselves were misinterpreting the scope of the regulations, with companies making such clearly innocuous products as swimming pools filing unnecessarily.
"Apply the reasonable-person-in-the-street test," he advised last week. "If a reasonable person would judge a transaction (to relate to) U.S. national security interests, then notice should be filed."
It is still not clear how the Treasury will respond to the barrage of complaints expected in response to its July 14 proposal. The period for public comment ends Sept. 12. After that, authorities have several weeks to issue a final version.
Besides members from the Treasury and Commerce departments, CFIUS includes representatives from the Defense, State and Justice departments and the Office of Management and Budget, the U.S. Trade Representative's Office and the Council of Economic Advisers. All are at the assistant secretary level.
But it's likely that the battle will continue no matter what Treasury does.