Foreign Investment: Implementation of Exon-Florio and Related Amendments
(Letter Report, 12/21/95, GAO/NSIAD-96-12).
Pursuant to a congressional request, GAO examined the Committee on
Foreign Investment in the United States (CFIUS) implementation of
Exon-Florio legislation, focusing on: (1) the characteristics of foreign
investments in the United States and the extent to which they are
reported to CFIUS; (2) the factors CFIUS considers in determining
whether a foreign investment results in foreign control of a U.S.
company; and (3) whether foreign control of U.S. companies threatens
U.S. national security.
GAO found that: (1) about two-thirds of the cases brought to CFIUS
attention involve defense-related or high technology industries and
raise national security concerns; (2) although many foreign companies
voluntarily notify CFIUS of their proposed investment in U.S. companies,
many aerospace, electronic, computer, and advanced material investors do
not notify CFIUS of proposed investments; (3) CFIUS does not base its
decision on whether a foreign company will gain control solely on its
percentage of ownership because a minority shareholder can exercise
control under various circumstances; (4) of the 174 transactions filed
between 1992 and 1994, CFIUS determined that there was foreign
government control in 18 cases; (5) CFIUS officials have difficulty
determining whether foreign investments in U.S. companies pose national
security risks and primarily rely on the Department of Defense's (DOD)
assessment of national security risks; and (6) DOD is required to direct
appropriate defense intelligence and other agencies to assess the risks
of diversion when it decides that a CFIUS case involves a company
engaged in the development of defense-critical technology or is
important to the defense industry or technology base.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: NSIAD-96-12
TITLE: Foreign Investment: Implementation of Exon-Florio and
Related Amendments
DATE: 12/21/95
SUBJECT: Foreign investments in US
Technology transfer
Foreign corporations
National defense operations
Defense industry
International economic relations
National policies
IDENTIFIER: National Industrial Security Program
Japan
United Kingdom
France
Germany
South Korea
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Cover
================================================================ COVER
Report to Congressional Requesters
December 1995
FOREIGN INVESTMENT -
IMPLEMENTATION OF EXON-FLORIO AND
RELATED AMENDMENTS
GAO/NSIAD-96-12
Foreign Investments
(705039)
Abbreviations
=============================================================== ABBREV
CFIUS - Committee on Foreign Investment in the United States
DOD - Department of Defense
ESI - Economic Strategy Institute
SDC - Securities Data Company
Letter
=============================================================== LETTER
B-256999
December 21, 1995
The Honorable Floyd Spence
Chairman
The Honorable Ronald V. Dellums
Ranking Minority Member
Committee on National Security
House of Representatives
The Honorable Cardiss Collins
Ranking Minority Member
Committee on Government Reform and
Oversight
House of Representatives
The Honorable William H. Zeliff
Chairman, Subcommittee on National Security,
International Affairs, and Criminal Justice
Committee on Government Reform and
Oversight
House of Representatives
In 1988, Congress enacted the Exon-Florio legislation\1 authorizing
the President to suspend or prohibit foreign acquisitions, mergers,
or takeovers of U.S. companies when there is credible evidence that
a foreign controlling interest might threaten national security and
when other legislation cannot provide adequate protection. The
President delegated authority to review foreign investment
transactions to an interagency group, the Committee on Foreign
Investment in the United States (CFIUS).
As requested, we examined CFIUS implementation of the Exon-Florio
legislation and related amendments. Specifically, we focused on (1)
the characteristics of foreign investments and the extent to which
these investments are reported to CFIUS and (2) the factors CFIUS
considers in making decisions on whether the foreign investment would
result in foreign companies' control of U.S. companies, whether the
acquiring company is controlled by a foreign government, and whether
there are associated national security risks. We analyzed these
issues for a judgmentally selected sample of 16 cases that were
reviewed by CFIUS in 1992 and 1993. Details on our objectives,
scope, and methodology are presented in appendix I. Previous
products on this subject are listed on the last page of the report.
--------------------
\1 The Exon-Florio legislation was a provision of the Omnibus Trade
and Competitiveness Act of 1988 and is part of the Defense Production
Act of 1950, 50 U.S.C. app. 2170.
BACKGROUND
------------------------------------------------------------ Letter :1
Preserving U.S. industrial capabilities in sectors critical to
national security has been a traditional U.S. policy goal. An
important concern in the debate on foreign investment in the United
States is the possibility that key segments of industries critical to
the national security could come under foreign control through
foreign investments.\2 Because U.S. defense strategy relies on the
deterrent effects of technological rather than numerical superiority,
concern about foreign investment focuses on the U.S. government's
ability to identify technologies crucial to defense systems and to
act to preserve and promote U.S. leadership in them.
The United States does not screen inward investment but relies on
certain laws or regulations to ensure that foreign investment does
not assume forms harmful to the nation's interests. For example,
specific restrictions are in place to protect classified defense
information from foreign access and to ensure U.S. production of
vital defense goods in the event of a crisis. Foreign investments in
U.S. firms performing classified defense work are monitored under
the National Industrial Security Program. Restrictions under this
program provide authority to restrict or deny foreign access to
classified information. Although they do not authorize denials of
foreign investments, they can, in effect, deter potential investors
who are seeking access to classified information. The U.S.
government, in addition, restricts foreign investment in certain
sectors, such as energy resources, coastal and domestic shipping, and
air transport.
To counter the loss of leading-edge or highly advanced technology and
processes that are important to the country's security through the
acquisition of U.S. companies by foreign investors, Congress passed
the Exon-Florio legislation in 1988. Congress was concerned that
foreign takeovers of U.S. firms that harmed U.S. security could not
be stopped unless the President declared a national emergency or
regulators invoked Federal antitrust, environmental, or securities
laws. The Exon-Florio legislation grants the President the authority
to take appropriate action to suspend or prohibit foreign
acquisitions, mergers, or takeovers of U.S. businesses that threaten
to impair the national security. To exercise this authority, the
President must find that (1) credible evidence exists that the
foreign interest might take action that threatens to impair national
security and (2) provisions of law, other than the International
Emergency Economic Powers Act, do not provide adequate and
appropriate authority to protect the national security. However,
Congress did not intend for the legislation to raise obstacles to
foreign investment.
The President designated CFIUS as responsible for reviewing
transactions. CFIUS is an existing Committee comprised of
representatives from
11 agencies or offices. The Secretary of the Treasury chairs the
Committee and the Departments of State, Commerce, and Defense are
among the agencies represented. The Defense Technology Security
Administration coordinates the positions of various Department of
Defense (DOD) components and provides the final DOD position for
CFIUS reviews.
Notification to CFIUS of an acquisition is voluntary. However, it is
in the interest of foreign investors to do so because CFIUS retains
the right to review in the future any acquisition not notified to the
Committee. The Exon-Florio regulations also permit a Committee
member to submit a notice of a proposed or completed acquisition for
a national security review.
The CFIUS review process serves both to protect national security and
to minimize any potential adverse effect of the Exon-Florio
legislation on foreign investment in the United States. CFIUS
determination that there are no national security issues essentially
eliminates the risk that the President will at a later time block the
transaction or order a divestiture.\3
Once it is notified, CFIUS has an initial 30-day review period to
determine if the transaction involves foreign control and whether
there are national security concerns that warrant further
investigation. If CFIUS decides that there will be foreign control
and that potentially serious national security concerns are present,
the Committee initiates a 45-day investigation. It then submits a
report and recommendation to the President. The President has 15
days to decide whether or not to take appropriate action. The
President may exercise the authority conferred by the Exon-Florio
legislation, however, only if there is credible evidence that a
foreign controlling interest might threaten national security and
that other legislation cannot provide adequate protection.
As shown in table 1, between October 1988 and December 1994, CFIUS
received 918 voluntary notifications. Of these, 15 involved 45-day
investigations with recommendations to the President. In 5 of the
15 investigations, the companies voluntarily withdrew their
investment offers. Of the remaining 10 investigations, the President
decided not to intervene in 9 transactions and ordered divestiture in
1 case involving a Chinese company's acquisition of a U.S. aircraft
parts company.
Table 1
Disposition of CFIUS Notifications (Oct.
1988 through Dec. 1994)
CFIUS Notification Presiden
notification s Notification t
Year s investigated s withdrawn blocked
------------------ ------------ ------------ ------------ --------
1988 14 1 0 0
1989 200 5 2 1\a
1990 295 6 2 0
1991 152 1 0 0
1992 106 2 1\b 0
1993 82 0 0 0
1994 69 0 0 0
======================================================================
Total 918 15 5 1
----------------------------------------------------------------------
Note: The decrease in CFIUS notifications somewhat parallels the
decline in overall foreign direct investment in the United States.
\a In this case, the President ordered China National Aero-Technology
Import and Export Corporation, a People's Republic of China aerospace
company, to divest from MAMCO, which involved a U.S. aircraft parts
manufacturer.
\b The investors withdrew their offer on the last day of the
investigation of this case, which involved the acquisition of LTV
Missiles Division by Thomson-CSF.
Source: CFIUS data as of January 1995.
In 1992, Thomson-CSF, a French government-owned company, attempted to
acquire the LTV Corporation's Missile Division, which prompted
legislation aimed at strengthening Exon-Florio.\4 One provision made
a distinction between foreign control and foreign government control
and mandated 45-day investigations when the acquiring company is
controlled by or acting on behalf of a foreign government and the
acquisition could result in foreign government control that could
affect the national security. Another provision required
intelligence agency assessments of the risk of diversion of a defense
critical technology when the U.S. company is engaged in the
development of such a technology or is otherwise important to the
defense industrial and technology base.
--------------------
\2 Foreign investment refers to foreign direct investment; that is,
investment resulting in foreign ownership or control of 10 percent or
more equity interest in a U. S. business.
\3 The Exon-Florio regulations allow CFIUS to reopen its
consideration of a transaction if parties fail to provide material
information or submit false or misleading information.
\4 See sections 837 and 838 of the Fiscal Year 1993 National Defense
Authorization Act (P.L. 102-484), Oct. 23, 1992, which amended 50
U.S.C. app. 2170 and added 10 U.S.C. 2537, respectively.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :2
About two-thirds of the cases notified to CFIUS between October 1988
and May 1994 involved defense-related and high-technology industries
that raised possible national security concerns. The remaining cases
involved transactions in industry sectors such as construction, real
estate, entertainment, and consumer products, which would be unlikely
to raise national security concerns.
Many companies voluntarily notified CFIUS of proposed investments in
and acquisitions of U.S. companies, but, according to two private
sector data bases, many others did not. These data bases included
foreign acquisitions of or investments in U.S. companies involved in
aerospace, electronics, computers, and advanced materials. We do not
know if there is any significance to be attached to the fact that not
all foreign investments are notified. The CFIUS process was not
intended to provide a comprehensive screening mechanism for all
foreign investment although CFIUS officials expressed the view that,
because CFIUS clearance essentially eliminates the risk of a forced
divestiture, most transactions affecting national security are
reported. However, after discussing these unnotified transactions
with CFIUS officials, they advised us that other committee members
will be reminded of their authority under the regulations to bring
transactions to the committee's attention.
In deciding whether a foreign investment will result in a foreign
company gaining control of a U.S. company, CFIUS considers many
factors related to the investor's ability to affect key company
decisions. CFIUS does not decide that a foreign company will gain
control based solely on the company's percentage of ownership because
a minority shareholder can exercise control under various
circumstances.
When deciding on foreign government control, CFIUS examines the
extent to which a foreign government owns and controls the acquiring
company. Of the 174 transactions filed between the 1992 legislation
and December 1994, CFIUS decided there was foreign government control
in
18 cases. None of these cases were investigated since CFIUS decided
the national security concerns were not sufficient to warrant further
investigation.
The Exon-Florio legislation does not provide a precise definition of
national security. It does identify certain factors to consider in
deciding what constitutes a threat to national security, but neither
the statute nor the implementing regulations contain guidelines for
weighing the various factors considered in examining the national
security risks of a transaction. As a result, CFIUS agencies have
significant flexibility in making such judgments. Agency officials
noted that the threshold for determining a national security threat
is high and that the Exon-Florio provision requires them to consider
whether other laws provide adequate protection. CFIUS members noted
that they rely primarily on DOD's assessment of national security
risks. In evaluating those risks, DOD officials stated they consider
several factors, including whether the company being acquired is a
sole-source supplier to DOD, whether it has classified contracts, and
whether the diversion of critical technologies is a risk.
The 1992 legislation requires DOD to direct appropriate defense
intelligence and other agencies to assess the risk of diversion when
DOD decides that a CFIUS case involves a company engaged in the
development of a defense-critical technology or is otherwise
important to the defense industrial and technology base. Of the 174
cases reviewed between October 1992 and December 1994, the Office of
the Assistant Secretary of Defense for Economic Security found that 9
cases required a risk of diversion assessment.
CHARACTERISTICS OF INVESTMENTS
REPORTED AND NOT REPORTED TO
CFIUS
------------------------------------------------------------ Letter :3
Our analysis of data on CFIUS cases from October 1988 through May
1994 showed that about two-thirds of the filings involved
high-technology industries in which there could be potential national
security concerns.\5 Among these industries are computers and
semiconductors, electronics, aerospace, advanced materials,
chemicals, biotechnology, and telecommunications. About one-third of
the notifications to CFIUS involved industries in which national
security concerns would be unlikely to arise. Examples of these
industries include mining, plastics and rubber, construction,
retailing, real estate, and entertainment. (App. III contains
additional information on the industries with foreign investments
that were reported to CFIUS.)
Companies from Japan, the United Kingdom, France, and Germany
accounted for over 65 percent of the notifications to CFIUS since
1988. Japanese companies were the leading investors notifying CFIUS,
primarily on investments in computers and semiconductors. British
companies were the second most active investors filing with CFIUS,
most frequently on investments in advanced materials and electronics.
French companies most frequently notified CFIUS of investments in
aerospace, computers, and telecommunications companies, while German
companies filed with CFIUS for investments in chemicals, industrial
controls, equipment and machinery, and energy industries. Our
comparison of CFIUS data with two private sector databases on foreign
investments showed somewhat comparable investment concentrations by
country and by industry. (Details on the four countries' CFIUS
filings by industry are in app. IV.)
The 1992 legislation required the President to report on various
aspects of foreign investment in U.S. critical-technology companies.
The National Economic Council formed a working group to respond to
the requirement and reported its findings in 1994. The group found
no credible evidence that a country or private companies had a
coordinated strategy to acquire U.S. critical-technology companies.
It also noted that the absence of credible evidence demonstrating a
coordinated strategy should not be viewed as conclusive proof that a
coordinated strategy does not exist. The report also indicated that
foreign governments, including those of France, Germany, and Japan,
provide indirect assistance and guidance to their companies regarding
foreign investments in high-technology U.S. firms.
--------------------
\5 We used a Commerce Department database maintained on CFIUS cases
and other sources to develop high-technology and low-technology
industry categories. We also consulted with government and private
sector experts to develop these categories.
INVESTMENTS NOT REPORTED TO
CFIUS
---------------------------------------------------------- Letter :3.1
The Exon-Florio legislation and implementing regulations do not
define which investments are important to review for national
security reasons. Moreover, notification to CFIUS is voluntary.
CFIUS officials believe that the Committee has been notified of most
foreign investments in key or high-technology companies that could
affect national security. CFIUS officials pointed out that investors
have a strong inducement to notify CFIUS and seek its prior approval
because the President retains the authority to order divestitures of
transactions not cleared by CFIUS. However, we found that many
foreign investments occur in high-technology or defense-related
industries that were not reported to CFIUS. While the significance
of the gap is unclear, it does suggest that the CFIUS process alone
cannot be relied on to surface transactions posing potential national
security concerns.\6
Our comparison of two private databases on foreign investment in the
United States with CFIUS data showed that many transactions occurred
in high-technology industries that were not filed with CFIUS. Among
these industries were telecommunications, advanced materials,
biotechnology, electronics, computers, and aerospace. We verified
selected transactions and determined that an acquisition of a U.S.
aircraft parts manufacturer and investments in biotechnology and
chemical companies occurred without being reported to CFIUS.
However, these databases do not contain sufficient information to
establish a link to national security, since they do not contain
information on, for example, whether the acquired company had DOD
contracts or produced products subject to U.S. export controls.
(See app. I for an explanation of our comparison and app. II for
details on transactions not notified to CFIUS, according to these
private databases.) Furthermore, because Exon-Florio was never
intended to be a comprehensive foreign investment review act, it is
to be expected that there would be foreign investments that are not
notified to CFIUS.
--------------------
\6 The U.S. government has other mechanisms to safeguard national
security, such as export control laws and industrial security
regulations that protect classified facilities.
CFIUS DECISIONS ON FOREIGN
COMPANIES' CONTROL AND FOREIGN
GOVERNMENTS' CONTROL OVER
ACQUIRING COMPANIES
------------------------------------------------------------ Letter :4
Under the Exon-Florio legislation, CFIUS has considerable flexibility
to decide if a transaction results in foreign company control over a
U.S. firm or if a foreign government has control over an acquiring
company. The implementing regulations do not specify that a given
percentage of foreign ownership automatically results in control
because minority owners can exercise control under various
conditions. For example, a minority owner might hold board
membership and have special voting rights over certain company
actions. For this reason, the regulations broadly define control to
mean having the power to directly or indirectly effect key company
decisions and actions. CFIUS generally relies on a company's stated
intentions regarding the structure of the investment and the
decision-making framework of the corporation. While decisions about
foreign control are straightforward in complete acquisitions and
majority investments, such decisions can be complicated and difficult
in minority investment cases. Also, deciding foreign government
control over the acquiring company can be difficult and involves a
high degree of judgment.
DECISIONS ON FOREIGN CONTROL
---------------------------------------------------------- Letter :4.1
Of the 16 cases we reviewed, 12 involved majority investments or 100
percent acquisitions, and 4 involved minority investments. In two of
the minority investment cases, CFIUS found foreign control and in two
cases it determined there was no foreign control.
A British company notified CFIUS of its intention to acquire 20
percent of a U.S. company. The U.S. company had classified
contracts and provided a critical U.S. government emergency
service. The acquisition would give the British company 3 of
the 15 seats on the company's board of directors and certain
"consent rights" that would enable the British company to block
several corporate actions. CFIUS found that foreign control
would result on the basis of the British company's right to veto
certain acquisitions, joint ventures, and asset sales as well as
any company charter amendment adversely affecting the British
company. CFIUS conducted a 30-day review. However, this review
determined that national security concerns were not sufficient
to warrant an investigation.
A German company notified CFIUS of its intention to purchase 12.25
percent of the common stock of a U.S. company. The U.S.
parent company controlled 51 percent of the stock, and three
European companies controlled the remaining 49 percent. The
proposed investment would redistribute the stock among the
foreign owners, leaving the U.S. majority ownership intact.
The U.S. company had classified DOD and other U.S. government
contracts that were protected by facility security clearances.\7
CFIUS determined that the purchase of 12.25 percent of the
company's voting stock constituted foreign control because of
several minority veto rights. These rights included the ability
of any single foreign director to block decisions such as the
adoption of a strategic plan or annual budget or the development
of a new product that varies from the types of business stated
in the strategic plan. CFIUS reviewed the company's
notification for national security concerns and decided to
proceed with a 45-day investigation. During the investigation,
CFIUS addressed issues relating to DOD's ability to mitigate
foreign control and influence over the company under the
existing security agreement. As required, CFIUS prepared a
report to the President. The transaction was not blocked.
A Singaporean company proposed acquiring 22.8 percent of the voting
stock in an investor group formed to acquire all of a U.S.
company. A majority of the investor group's voting stock was
held by U.S. entities. The Singaporean company was indirectly
owned by a holding company that was 99.9 percent owned by the
Singapore Ministry of Finance. The U.S. company had classified
contracts with DOD, necessitating a security agreement
protecting classified information and technologies. CFIUS based
its finding that the foreign company would not have control
partly on the minority investor's willingness to execute a proxy
agreement under industrial security regulations that would give
the minority investor's voting rights to two U.S citizens.\8
(The minority foreign investor later entered into a security
agreement that would allow the foreign investor to gain board
membership.) In our discussions on this case, CFIUS officials
agreed that a proposed security agreement should not be used to
determine foreign control. The Exon-Florio control standards
are not comparable to the control issues under the industrial
security regulations, which intend to isolate foreign control
and influence over certain aspects of the business, not to
determine whether the entire company will become foreign
controlled. Although CFIUS's letter to the company notifying it
of its decision referenced the proxy agreement, CFIUS officials
stated the finding of no foreign control was based on other
factors, including a requirement for a two-thirds stockholder
majority for certain decisions. Because CFIUS found no foreign
control, it did not review the transaction for national security
concerns.
Two Israeli companies acquired a total of 35.6 percent of the
outstanding stock of a U.S. company. One of the Israeli
companies increased its ownership from 10.5 percent of the
outstanding stock to 17.4 percent, while the second company
acquired 18.2 percent of the outstanding stock. The
notification to CFIUS stated that the two companies were
considering entering into a shareholders' agreement to vote
their respective shares in concert. In subsequent
correspondence, CFIUS was informed that the two Israeli
companies had not concluded a shareholders' agreement. CFIUS
found that there was no foreign control because the two firms
were not acting together and did not either individually or
collectively have the ability to control the U.S. company.
Because CFIUS found no foreign control, it did not review the
transaction for national security concerns.
--------------------
\7 The industrial security regulations require a company to obtain a
security clearance when working on DOD classified contracts and
prescribe procedures for defense companies to protect classified
information. A defense company under foreign ownership or control
can be eligible for a security clearance if it takes action to
effectively negate or reduce the risk posed by foreign ownership or
control. See Defense Industrial Security: Weaknesses in DOD
Security Arrangements at Foreign-Owned Defense Contractors
(GAO/NSIAD-96-64, forthcoming).
\8 The proxy agreement was referenced in a letter to the company
notifying it of CFIUS's finding of no foreign control and explaining
the basis for this determination. The letter also referred to
correspondence in which the company explains the proxy agreement it
planned to enter into in response to DOD industrial security
regulations.
DECISIONS ON FOREIGN
GOVERNMENT CONTROL
---------------------------------------------------------- Letter :4.2
The 1992 legislation required mandatory investigations of CFIUS cases
in which the foreign company proposing an investment is controlled by
a foreign government and the transaction could result in foreign
control that "could affect the national security." As a result, CFIUS
also reviews cases for foreign government control. Of the 174 cases
reviewed between October 1992 and December 1994, CFIUS found foreign
government control in 18 cases. None of these cases resulted in
investigations. CFIUS found the national security concerns in these
cases were not sufficient to warrant investigations. In implementing
the legislative requirement, CFIUS has determined that even when
there is foreign government control, the provision does not mandate
an investigation for a notification that does not pose a credible
threat to the national security.
Of the 16 cases we reviewed, 13 occurred after the 1992 legislation.
Six cases involved some level of foreign government ownership of or
participation in the acquiring companies. In two of these cases,
CFIUS determined there was foreign government control.
A subsidiary of a German company proposed acquiring a U.S.
manufacturer of large machine tools. The U.S. company had
unclassified contracts with DOD, and its products were subject
to export controls applying to dual-use products, but it did not
possess unique capabilities, and its technology was not
considered defense critical. About one-third of the German
company was indirectly owned by one German state government and
two German city governments. Under German law, this level of
ownership gave the government-owned entities the power to block
certain decisions, such as the acquisition or closing down of
businesses. The government-owned entities offered to abstain on
shareholder decisions affecting the U.S. company. CFIUS found
that there was foreign control because the acquiring company was
German- owned and planned to purchase substantially all the
assets of the U.S. company. Because the government entities
had the power to block certain decisions, CFIUS determined there
was foreign government control. CFIUS also concluded that there
were not sufficient national security concerns to warrant an
investigation.
A subsidiary of a French company proposed purchasing a U.S.
developer and manufacturer of software tools. The U.S. company
had unclassified contracts with DOD and other U.S. government
entities, but the technology was not militarily sensitive. The
ultimate parent of the acquiring company is 100 percent owned by
the French government. CFIUS determined that the acquiring
company was foreign owned and that the outright acquisition of
the U.S. company would result in foreign control. Because the
buyer was owned by the French government, CFIUS decided that
foreign government control would result from this acquisition.
CFIUS also concluded that there were not sufficient national
security concerns to warrant an investigation.
In the other four cases, CFIUS determined that there was no foreign
government control. Two of these cases are discussed below for
illustrative purposes. In the other two cases, CFIUS decided there
was no foreign government control because either multiple intervening
layers of ownership diluted government control or the foreign
government could not appoint board members.
A South Korean company notified CFIUS of its intent to acquire a
U.S. designer and manufacturer of semiconductor devices. The
U.S. company was a defense subcontractor engaged in a
defense-critical but not state-of-the-art technology. The
foreign buyer indicated its intention to transfer the U.S.
company's technology to Korea and establish a production
facility there. The foreign buyer received a small proportion
of its total assets from two banks owned by the Korean
government. Because this was a 100-percent acquisition by a
Korean-owned company, CFIUS made a determination of foreign
control. Although the foreign buyer had financing arrangements
with the government-owned banks, CFIUS determined the amount of
capital provided was not sufficient to constitute foreign
government control. CFIUS also determined that there were not
sufficient national security concerns to warrant a 45-day
investigation.
A British company notified CFIUS of its intention to acquire 20
percent of a U.S. company. The U.S. company had classified
contracts and provided a critical U.S. government emergency
service. Although the British government owned only 1.5 percent
of the acquiring company's issued shares, it retained special
powers over the acquiring company. These powers included
requiring the government shareholder's written consent to alter
certain sections of the foreign buyer's articles of
incorporation. For example, consent must be obtained when there
are changes in the limit of any single shareholder owning more
than 15 percent. The British government could also appoint two
directors. As discussed on page 8, CFIUS determined that the
minority investment would result in foreign control. CFIUS
decided that there was no foreign government control because the
government owned only a small amount of stock, had not recently
appointed directors to the board, and had no significant consent
rights over the acquiring company. CFIUS conducted a 30-day
review and determined that there were not sufficient national
security concerns to warrant a 45-day investigation.
DOD'S REVIEWS OF CFIUS CASES
FOR NATIONAL SECURITY RISKS
------------------------------------------------------------ Letter :5
DOD has no special statutory role in reviewing transactions for
national security concerns, and all other CFIUS members have equal
standing to raise such concerns. However, officials from other CFIUS
agencies stated that they look to DOD to make key judgments regarding
the national security risks of a transaction. DOD considers, among
numerous factors, whether (1) the technologies and products involved
are critical to the national security, (2) the firm being acquired is
a sole-source supplier to DOD, and (3) the U.S. company has
classified contracts with the U.S. government. In addition, DOD
reviews and analyzes information from the intelligence community
regarding the foreign buyer's past record of compliance with export
controls, proliferation of sensitive weapons-related technologies,
and other matters.\9
Our sample included some cases involving intelligence information on
the acquiring company or its government's practices, including
violations of U.N. sanctions and transfers of U.S. technology to
proscribed countries; for most of these cases, DOD did not recommend
a 45-day investigation. According to Defense Technology Security
Administration officials, this information alone did not provide
sufficient grounds to warrant investigations. They said that in some
cases the technology at the U.S. company was not deemed to be
critical and in others the intelligence information was not
sufficiently corroborated, did not show violations of U.S. laws, or
had occurred so long ago that it was no longer relevant.
--------------------
\9 The other CFIUS participants also receive and consider
intelligence information in their deliberations.
DOD DETERMINATIONS OF
DEFENSE-CRITICAL TECHNOLOGIES
FOR RISK OF DIVERSION
ASSESSMENTS
------------------------------------------------------------ Letter :6
As required by the 1992 legislation, DOD agencies, including defense
intelligence entities, assess the risk of diversion when the
Secretary of Defense determines that a proposed merger, acquisition,
or takeover may involve a firm engaged in the development of a
defense-critical technology or is otherwise important to the defense
industrial and technology base. These assessments are to be shared
with all the Committee members, according to CFIUS officials. The
Office of the Assistant Secretary of Defense for Economic Security
found that 9 of the 174 CFIUS cases reviewed between October 1992 and
December 1994 required a risk of diversion assessment. The
responsible DOD official noted that the legislation requires a risk
of diversion assessment only when the company is involved in the
development, not the application, of a critical technology or is
otherwise important to the defense industrial base. DOD uses the Key
Technologies Plan, as authorized by the legislation, to decide
whether the company is developing a defense-critical technology.
AGENCY COMMENTS
------------------------------------------------------------ Letter :7
The Departments of Defense, State, and the Treasury generally agreed
with our draft report and provided minor technical comments. The
Department of Defense said it concurred with the report as presented.
The Department of State, in official oral comments, said that the
report fairly and thoroughly describes the activities of CFIUS and
accurately reflects the role of CFIUS members. The Department of the
Treasury discussed the voluntary nature of CFIUS notification and
said it will remind agencies to bring to CFIUS's attention
transactions in high-technology industries that have not been
notified to CFIUS. Treasury also stated that it believes Exon-Florio
implementation "has increased the awareness of investors to national
security issues, brought transactions into conformity with existing
laws where needed, and caused investors to consider explicitly
national security when putting together proposals to acquire U.S.
businesses." The full text of the comments from the Departments of
the Treasury and Defense are included in appendixes V and VI,
respectively.
The Department of Commerce reviewed the final draft and provided
minor technical comments. The Department of Justice also reviewed
the report but did not comment.
---------------------------------------------------------- Letter :7.1
We are sending copies of this report to other congressional
committees; the Secretaries of the Treasury, State, Defense,
Commerce, and Justice; and the Director, Office of Management and
Budget. We are also making copies available to other interested
parties upon request.
Please contact me at (202) 512-4125 if you or your staff have any
questions concerning this report. Major contributors to this report
are listed in appendix VII.
David E. Cooper
Director, Acquisition Policy,
Technology, and Competitiveness Issues
OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I
Our examination of the implementation of Exon-Florio legislation and
its amendments was requested by the former Chairs of the Subcommittee
on Legislation and National Security and the Subcommittee on
Commerce, Consumer, and Monetary Affairs, House Committee on
Government Operations, and the Chairs and Ranking Minority Members of
the Subcommittee on Research and Technology and the Subcommittee on
Oversight and Investigation, House Committee on Armed Services.
Specifically, we focused on (1) the extent foreign investments are
reported to the Committee on Foreign Investment in the United States
(CFIUS) and the characteristics of these investments and (2) the
factors CFIUS considers in making decisions on whether the foreign
investment would result in foreign companies' control of U.S.
companies, whether the acquiring foreign company is controlled by a
foreign government, and whether there are associated national
security risks.
To address these objectives, we interviewed officials and examined
records at the Departments of Defense (DOD), the Treasury, State, and
Commerce. We also discussed CFIUS procedures and selected foreign
company notifications with officials from the Defense Technology
Security Administration and other DOD participants, including the
Office of the Under Secretary of Defense for Acquisition and
Technology; the Office of the Assistant Secretary of Defense for
Command, Control, Communications, and Intelligence; the military
services; the Defense Intelligence Agency; the National Security
Agency; the Defense Investigative Service; the Defense Logistics
Agency; and the Advanced Research Projects Agency. We also obtained
information from other CFIUS participants, including the Department
of Justice, and contacted the Council of Economic Advisers, the
Office of Management and Budget, the Office of Science and Technology
Policy, and the National Security Council.
To examine the scope of foreign investments voluntarily filed with
CFIUS, we used an unofficial Department of Commerce database on CFIUS
cases maintained by the Office of Strategic Industries and Economic
Security.\1 We also compared the CFIUS data with foreign investment
databases maintained by the Economic Strategy Institute (ESI) and
Securities Data Company (SDC). The ESI database tracks foreign
investments in and acquisitions of U.S. companies involved in high,
key, or critical technologies. These technology categories are
developed by consultation with technical experts and generally follow
broad standard technology categories. The SDC tracks investments,
acquisitions, and mergers worldwide, but we obtained selected data on
foreign investment in the United States in technology areas
comparable to those tracked by ESI. SDC categorizes the technology
sector by ascertaining the primary business of each company and by
identifying pertinent standard industrial classification codes. From
this comparison of the databases, we identified transactions not
reviewed by CFIUS. We further selected transactions involving
foreign acquisitions of or majority investments in high-technology
industries and verified that these transactions were completed
without CFIUS review for foreign control and national security
concerns.
We eliminated duplications in the Commerce database and deleted
notifications withdrawn from CFIUS review. To develop industry
categories, we relied primarily on those used by Commerce but also
considered ESI's categories. We divided the U.S. industries listed
in the database into two categories, high technology and low
technology, by referring to DOD's Key Technologies Plan and the
Militarily Critical Technologies List. We consulted with experts
within and outside the government on our industry groupings and made
changes in response to their recommendations.
To evaluate the overall concentration or frequency of foreign
investments by country and industry, we obtained data from federal
government reports and interviewed agency officials at Commerce's
Bureau of Economic Analysis about aspects of their data collection
efforts. We also obtained information from several private sector
firms tracking foreign investment in U.S. companies, including SDC,
Ulmer Brothers, Inc., and Technology Strategic Planning, Inc. We did
not independently verify the information in the Commerce, ESI, or SDC
databases.
To examine the factors CFIUS considers in its decision-making
process, we selected a judgmental sample of notifications from 1992
and 1993. We used the Defense Intelligence Agency's list of 188
CFIUS filings for these years to select 33 notifications that the
agency ranked high, moderate, and low risk. After an initial
examination, we focused on 16 cases for in-depth review on the basis
of the following criteria: (1) the technologies and industries
involved, including cases DOD found to involve critical technologies;
(2) the countries and companies involved in the transactions,
including foreign government-owned companies; (3) whether validated
export licenses are required; (4) the risk and intelligence analyses
done; (5) the presence of DOD classified contracts and associated
security agreements; and (6) the presence of sole-source or last
supplier considerations. The 16 cases we reviewed covered 8 foreign
countries and 6 industrial sectors. Table I.1 shows the 16 cases we
selected for review.
Table I.1
Sixteen Selected CFIUS Notifications in
1992-93
Foreign
CFIUS government State Commerce
file Foreign owner/ munitions export Classified Percent Risk of Case
number country control licenses licenses contracts acquired diversion withdrawn Investigated Technology
------- ------------ ----------- ---------- ---------- ---------- ------------ ------------ ------------ -------------- -------------------
92-022 United N/A\a Yes No Yes 100.0 N/A No No Electronics
Kingdom
92-027 France N/A\a Yes No Yes 100.0 N/A Yes Yes Aerospace
92-057 Germany N/A\a Yes No Yes 12.0 N/A No Yes Aerospace
92-087 France Yes No No No 100.0 No No No Computers
92-105 Japan No No Yes No 100.0 No No No Computers
93-004 Israel No Yes Yes No 100.0 No No No Aerospace
93-013 South Korea No No Yes No 100.0 Yes No No Electronics-
telecommunications
93-014 France No No Yes No 51.0 No No No Telecommunications
93-038 Germany Yes No Yes No 100.0 No No No Machine tools
93-054 Israel No No Yes No 17.4\b No Yes\c No Electronics
18.2
93-059 Singapore No Yes Yes Yes 23.0 No Yes\c No Electronics
93-060 France No Yes Yes No 100.0 No No No Telecommunications-
electronics
93-064 Israel No No Yes No 100.0 Yes No No Telecommunications
93-065 France No No Yes No 100.0 No No No Aerospace
93-069 Hong Kong No Yes Yes Yes 100.0 Yes Yes\c No Advanced materials
93-078 United No No Yes Yes 20.0 Yes No No \d
Kingdom
-----------------------------------------------------------------------------------------------------------------------------------------------------
\a These cases were reported before the October 1992 legislation
requiring (1) investigations of cases involving foreign government
control that could affect the national security and (2) intelligence
assessments of diversion risk in cases involving defense-critical
technologies.
\b Represents two investors.
\c Notifications were determined to involve no foreign control and
therefore did not come under Exon-Florio jurisdiction.
\d Technology information is not included to avoid revealing the
transaction.
The sampling is not statistically representative of the entire CFIUS
caseload, but these cases illustrate the CFIUS process and allowed us
to examine the more difficult cases (that is, those involving
minority investments, foreign government ownership and control,
critical defense technologies, and/or adverse intelligence
information).
We reviewed records for each of the 16 cases at the Departments of
the Treasury, Defense, State, and Commerce because CFIUS does not
maintain a central file repository. DOD and State screened their
CFIUS files and documents before making them available to us, which
may have impeded our scope. The Defense Intelligence Agency and
Central Intelligence Agency also provided information on our sample
cases, where applicable.
We reviewed the Exon-Florio legislation and subsequent amendments,
implementing regulations, and the legislative history. We considered
DOD's role in the legislation and focused on the implementation of
recently related legislation.
We performed our work between March 1994 and April 1995 in accordance
with generally accepted government auditing standards.
--------------------
\1 CFIUS does not maintain an official database on its cases.
FOREIGN INVESTMENT TRANSACTIONS
NOT REPORTED TO CFIUS
========================================================== Appendix II
Tables II.1 and II.2 provide information on foreign investment
transactions from two private databases that were not in the Commerce
Department's database on CFIUS notifications. In our tables, we
include only those transactions involving high-technology industries.
Table II.1
Data From the Economic Strategy
Institute on Transactions Not Reported
to CFIUS (Oct. 1988 through May 1994)
High-technology United Other
industry Japan Kingdom France Germany Canada Switzerland Taiwan Australia Finland South Korea countries Total
------------------ -------- -------- -------- -------- -------- ------------ -------- ---------- -------- ----------- ------------ ======
Computers 93 18 7 2 7 2 10 1 0 5 11 156
Semiconductor 27 1 1 1 0 3 0 1 0 0 0 34
equipment
Semiconductors 39 2 0 1 1 0 1 0 0 1 1 46
Electronics 35 11 2 1 1 1 0 1 0 2 10 64
Aerospace 11 3 1 1 4 1 0 0 0 0 1 22
Advanced materials 23 4 0 3 0 0 0 1 0 0 2 33
Chemicals 19 5 9 6 3 1 0 0 0 0 5 48
Biotechnology 24 9 3 11 0 8 0 1 0 0 9 65
Telecommunications 29 7 2 3 4 2 1 2 0 1 5 56
and information
Machine tools 9 2 0 0 1 0 0 0 0 0 2 14
Environmental 1 0 1 0 0 0 0 0 0 0 0 2
technologies
Robotics 3 0 0 0 0 1 0 0 0 0 0 4
Miscellaneous 25 6 2 0 0 0 0 0 0 0 1 34
=====================================================================================================================================================
Total 338 68 28 29 21 19 12 7 0 9 47 578
-----------------------------------------------------------------------------------------------------------------------------------------------------
Table II.2
Data From the Securities Data Company on
Transactions Not Reported to CFIUS (Oct.
1988 through May 1994)
High-technology United Other
industry Japan Kingdom France Germany Canada Switzerland Taiwan Australia Finland South Korea countries Total
------------------ -------- -------- -------- -------- -------- ------------ -------- ---------- -------- ----------- ------------ ======
Biotechnology 29 30 5 7 10 9 0 4 1 0 47 142
Computers 62 27 4 1 27 6 8 4 0 3 58 200
Semiconductors 22 3 0 1 1 0 2 0 0 1 6 36
Electronics 19 26 2 4 4 3 0 2 0 1 17 78
Telecommunications 11 9 3 1 6 1 1 1 0 1 14 48
Advanced materials 5 2 1 0 0 1 0 0 1 0 3 13
Lasers 6 3 0 0 0 0 0 0 0 0 1 10
Robotics 3 2 0 1 0 0 0 0 0 0 2 8
Other 2 5 1 0 2 0 0 0 0 0 4 14
=====================================================================================================================================================
Total 159 107 16 15 50 20 11 11 2 6 152 549
-----------------------------------------------------------------------------------------------------------------------------------------------------
CFIUS CASES REVIEWED FOR NATIONAL
SECURITY CONCERNS
========================================================= Appendix III
From the Commerce Department's database on CFIUS cases, we obtained
data on cases reviewed for national security concerns between October
1988 through May 1994. Table III.1 shows the number of CFIUS cases
reviewed during that period, by country, in high-technology and
non-high-technology industry categories. Table III.2 provides
further details of CFIUS cases reviewed for national security
concerns by high-technology industry category and by country. Table
III.3 illustrates CFIUS cases in non-high-technology industries by
country. We developed these industry categories using the Commerce
Department's groupings and by consulting with industry experts within
and outside the U.S. government.
Table III.1
CFIUS Cases Involving All Industries
Reviewed for National Security Concerns
(Oct. 1988 through May 1994)
High- Non-high-
technology technology
Country cases cases Total
------------------------------ -------------- -------------- ======
Japan 134 73 207
United Kingdom 131 53 184
France 62 25 87
Germany 41 18 59
Netherlands 20 21 41
Switzerland 25 9 34
Canada 20 10 30
Sweden 15 5 20
Taiwan 14 0 14
Australia 9 5 14
Finland 9 5 14
Italy 4 8 12
Belgium 7 5 12
South Korea 8 2 10
Norway 7 3 10
Singapore 8 0 8
Israel 5 2 7
South Africa 4 1 5
China 4 1 5
India 3 1 4
Austria 3 1 4
Venezuela 3 0 3
Mexico 0 3 3
Liechtenstein 3 0 3
Kuwait 2 1 3
Bermuda 2 1 3
Spain 2 0 2
Soviet Union 1 1 2
Panama 2 0 2
Luxembourg 0 2 2
United Arab Emirates 1 0 1
Thailand 1 0 1
Saudi Arabia 1 0 1
New Zealand 1 0 1
Malaysia 1 0 1
Ireland 1 0 1
Indonesia 0 1 1
Hong Kong 0 1 1
Greece 1 0 1
Denmark 1 0 1
British Virgin Islands 0 1 1
British West Indies 0 1 1
Brazil 0 1 1
======================================================================
Total 556 261 817
----------------------------------------------------------------------
Table III.2
CFIUS Cases Involving High-Technology
Industries Reviewed for National
Security Concerns (Oct. 1988 through May
1994)
Number
High-technology United Other of
industry Japan Kingdom France Germany Canada Switzerland Taiwan Australia Finland South Korea countries cases
------------------ -------- -------- -------- -------- -------- ------------ -------- ---------- -------- ----------- ------------ ======
Computers 30 12 9 0 3 4 3 0 1 4 11 77
Energy 4 9 6 5 6 3 2 2 1 0 17 55
Semiconductors 32 3 5 3 0 0 4 0 0 2 4 53
Electronics 12 17 3 4 0 1 3 1 1 0 7 49
Aerospace 7 15 11 2 2 3 1 0 0 0 8 49
Industrial 6 13 7 6 0 2 0 1 2 1 11 49
controls,
equipment,
instruments, and
machinery
Advanced materials 7 21 2 3 1 1 1 1 2 0 5 44
Chemicals 7 12 1 7 0 0 0 1 1 0 8 37
Biotechnology, 7 4 2 3 0 5 0 0 0 0 15 36
medical, and
pharmaceutical
Telecommunications 6 5 8 1 5 1 0 0 0 0 8 34
and information
Electrical 6 4 3 4 1 1 0 0 1 0 1 21
equipment
General components 3 5 1 3 1 0 0 1 0 1 3 18
Optics 2 6 1 0 0 3 0 0 0 0 4 16
Coatings and 2 3 1 0 0 1 0 2 0 0 0 9
adhesives
Analytical 1 2 0 0 0 0 0 0 0 0 0 3
instruments
Environmental 0 0 1 0 0 0 0 0 0 0 1 2
technologies
Robotics 1 0 0 0 0 0 0 0 0 0 0 1
Specialty gases 1 0 0 0 0 0 0 0 0 0 0 1
Micro-machines 0 0 0 0 1 0 0 0 0 0 0 1
Submersibles 0 0 1 0 0 0 0 0 0 0 0 1
=====================================================================================================================================================
Total 134 131 62 41 20 25 14 9 9 8 103 556
-----------------------------------------------------------------------------------------------------------------------------------------------------
Table III.3
CFIUS Cases Involving Non-High-
Technology Industries Reviewed for
National Security Concerns (Oct. 1988
through May 1994)
Non-high- Number
technology United Other of
industry Japan Kingdom France Germany Canada Switzerland Taiwan Australia Finland South Korea countries cases
------------------ -------- -------- -------- -------- -------- ------------ -------- ---------- -------- ----------- ------------ ======
Mining, metals, 18 19 12 8 2 1 0 1 1 1 10 73
and metal-
working equipment
Plastics and 5 3 2 1 0 1 0 0 1 0 13 26
rubber
Construction and 9 4 2 0 2 1 0 1 0 1 6 26
construction
material
Automotive 5 4 0 2 2 0 0 0 0 0 6 19
Transportation 3 1 0 1 1 1 0 0 0 0 4 11
services
Engineering 2 4 0 1 0 0 0 0 1 0 2 10
services
Financial 7 0 0 0 0 0 0 1 0 0 10 18
Printing and 1 2 0 1 0 1 0 2 0 0 3 10
publishing
Food, beverage, 4 2 2 0 0 0 0 0 0 0 1 9
and tobacco
Consumer products 2 3 0 0 2 1 0 0 0 0 0 8
Environmental 0 4 0 2 0 1 0 0 0 0 0 7
services
Real estate 6 0 0 0 0 0 0 0 1 0 0 7
Entertainment 6 0 0 0 0 0 0 0 0 0 0 6
Retailing 2 2 1 0 0 0 0 0 0 0 1 6
Information 0 0 1 1 1 1 0 0 0 0 1 5
services
Consulting 0 1 2 0 0 0 0 0 0 0 1 4
Textiles 2 0 0 0 0 1 0 0 0 0 1 4
Small arms 0 1 1 1 0 0 0 0 0 0 0 3
Educational 0 1 0 0 0 0 0 0 0 0 1 2
services
Wood products 0 1 0 0 0 0 0 0 1 0 0 2
Cans and 0 0 1 0 0 0 0 0 0 0 1 2
containers
Photographic 1 1 0 0 0 0 0 0 0 0 0 2
Parts fabrication 0 0 1 0 0 0 0 0 0 0 0 1
=====================================================================================================================================================
Total 73 53 25 18 10 9 0 5 5 2 61 261
-----------------------------------------------------------------------------------------------------------------------------------------------------
CFIUS FILINGS FROM JAPAN, THE
UNITED KINGDOM, FRANCE, AND
GERMANY
========================================================== Appendix IV
Figure IV.1: CFIUS Cases
Involving Japanese Companies
Investing in High-Technology
Industries (Oct. 1988 through
May 1994)
(See figure in printed
edition.)
Note: Total does not equal 100 percent due to rounding.
Figure IV.2: CFIUS Cases
Involving British Companies
Investing in High-Technology
Industries (Oct. 1988 through
May 1994)
(See figure in printed
edition.)
Figure IV.3: CFIUS Cases
Involving French Companies
Investing in High-Technology
Industries (Oct. 1988 through
May 1994)
(See figure in printed
edition.)
Note: Total does not equal 100 percent due to rounding.
Figure IV.4: CFIUS Cases
Involving German Companies
Investing in High-Technology
Industries (Oct. 1988 through
May 1994)
(See figure in printed
edition.)
Note: Total does not equal 100 percent due to rounding.
(See figure in printed edition.)Appendix V
COMMENTS FROM THE DEPARTMENT OF
THE TREASURY
========================================================== Appendix IV
(See figure in printed edition.)
(See figure in printed edition.)Appendix VI
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
========================================================== Appendix IV
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix VII
NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C.
Davi M. D'Agostino
Maria Cristina Gobin
Anne-Marie Lasowski
Russell Reiter
James J. Ungvarsky
Karen S. Zuckerstein
OFFICE OF GENERAL COUNSEL
Margaret Armen
Raymond J. Wyrsch
RELATED GAO PRODUCTS
=========================================================== Appendix 0
Defense Industrial Security: Issues in the Proposed Acquisition of
LTV Corporation Missiles Division by Thomson-CSF (GAO/T-NSIAD-92-45,
June 25, 1992).
Foreign Investment: Analyzing National Security-Related Investment
Under the Exon-Florio Provision (GAO/T-GGD-92-49, June 4, 1992).
National Security Reviews of Foreign Investment (GAO/T-NSIAD-91-8,
Feb. 26, 1991).
National Security Review of Two Foreign Acquisitions in the
Semiconductor Sector (GAO/T-NSIAD-90-47, June 13, 1990).
Foreign Investment: Analyzing National Security Concerns
(GAO/NSIAD-90-94, Mar. 29, 1990).
The President's Decision to Order a Chinese Company's Divestiture of
a Recently Acquired U.S. Aircraft Parts Manufacturer
(GAO/T-NSIAD-90-21, Mar. 19, 1990).
Strategic Minerals: Implications of Proposed Takeover of a Major
British Mining Company (GAO/NSIAD-89-123, Mar. 3, 1989).
*** End of document. ***