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Bill Introduced to Bar Foreign Ownership, Management or Operation of Critical Infrastructure


03/10/06

On March 7, 2006, House Armed Services Committee Chairman Duncan Hunter (R-Calif.) introduced HR 4881, which would bar non-U.S. corporations from owning, operating or managing "critical infrastructure" assets in the United States. If enacted, this bill would have the broadest reach of any of the infrastructure-related bills that have surfaced to date as a result of the Dubai Ports World controversy. It could potentially impact international participation in U.S. public-private partnerships in certain transportation facilities. It would also regulate the governance of U.S. corporations that own, manage or operate critical infrastructure assets.

Mr. Hunter's bill, which has over 14 co-sponsors, is called the "National Defense Critical Infrastructure Protection Act of 2006". It provides extensive regulation of any corporation that owns, operates or manages any system or asset that is included on a new national defense critical infrastructure list. The list would include both military and non-military installations, and would be developed by the Secretary of Defense in consultation with the Secretary of Homeland Security. As defined in this bill, "critical infrastructure" means:

any system or asset, whether physical or virtual, that is so vital to the United States that the incapacity or destruction of such system or asset would have a debilitating effect on national security, on national economic security, on national public health or safety, or on any combination of those matters.

The legislation expressly includes on the "critical infrastructure" list the port terminal operations that have been acquired by Dubai Ports World (and which the company now says it will divest). Another section of the bill makes clear that the definition of "critical infrastructure" is intended also to include a broad range of facilities, potentially including highways, bridges and tunnels, airports, power plants, telecommunications facilities, and information assets that meet the criteria described above.

To be eligible to manage critical infrastructure, a corporation would have to meet all of the following proposed requirements:

  • The corporation must be organized under the laws of the United States;
  • The majority of its board of directors must be composed of U.S. citizens;
  • The chairman of the board and the chief executive officer must be U.S. citizens;
  • The majority of the corporation's stockholders must be U.S. citizens;
  • More than 50% of the corporation's board members must have been approved for membership on the board by the Secretary of Defense, in consultation with the Secretary of Homeland Security;
  • At least 20% of the board members must be independent directors;
  • All of the independent directors must have been approved for membership on the board by the Secretary of Defense, in consultation with the Secretary of Homeland Security;
  • The board of directors must have a government security committee, all of whose members are approved by the Secretary of Defense, in consultation with the Secretary of Homeland Security;
  • The board of directors must have a compensation committee composed solely of U.S. citizens, and include the independent directors;
  • The corporation must have instituted certain approved procedures for handling classified information, which procedures are also subject to annual government inspections;
  • The company must report to the Secretary of Defense: (1) acquisition of ownership of more than 5 percent of the company's voting securities by a foreign person, (2) revenues in excess of 5 % from a single foreign person or 30% from foreign persons in the aggregate in any fiscal year; and acquisition by the corporation of ownership of 10 percent or more of any foreign interest;
  • A person that is not a U.S. citizen may hold more than 25% interest in a trust that directly or indirectly owns or operates critical infrastructure if each of the trustees is a U.S. citizen, and such foreign beneficiaries do not have the power to influence or limit the authority of the trustees with respect to matters involving ownership or operation of the critical infrastructure that may adversely affect the interests of the United States.

Foreign companies that already own, operate or manage assets that are placed on the new national defense critical infrastructure list would have five years from the effective date of this legislation before the U.S. corporate citizenship restrictions would apply to them. If they fail to meet such requirements, such companies would either have to divest ownership or control or place such assets into a U.S. citizen trust as described above.

The bill would also make conforming changes to the Defense Production Act of 1950 (50 U.S.C. App. 2170), which provides for review by the interagency "CFIUS" Committee that initially cleared the Dubai Ports transaction. These changes would include requiring the President or his designee to consider the "potential effects of the proposed or pending transaction on control of critical infrastructure, such as energy, telecommunications, transportation, or information."

Finally, the bill would require the inspection of all international cargo transported by truck or ship into the United States.

The U.S. Business Roundtable has asserted that this and other related bills could chill foreign investment in the United States. (Chief Executives Fear Backlash Might Deter Investors and Hurt Trade Talks, Financial Times U.S. Edition March 9, p. 4). Other critics have pointed out that the proposed law would result in the unprecedented involvement of the federal government in the internal management of any private U.S. company which happens to have a contract to manage "critical infrastructure" – regulating, among other things, the selection of officers and board members, stock ownership, and the formation of compensation committees.

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