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FOREIGN INVESTMENT IN THE UNITED STATES
WEDNESDAY, SEPTEMBER 24, 1975
HOUSE OF REPRESENTATIVES,
INVESTMENT AND MONETARY POLICY,
Washington, D.C. The subcommittee met, pursuant to notice, at 10:10 a.m., in room 2222, Rayburn House Office Building, Hon. Thomas M. Rees, chairman of the subcommittee, presiding.
Present: Representatives Rees, Neal, Hayes, Blanchard, Stanton, Hyde, and Kelly. Also present: Representative Boggs. Mr. Rees. I will call this meeting to order.
The purpose of the meeting is to look at U.S. Government policy in dealing with foreign investments in the United States.
This is a very difficult area of jurisdiction for the Congress. This subcommittee has a small, partial jurisdiction because of our jurisdiction over the Department of the Treasury, the Commerce Committee has jurisdiction over the Security and Exchange Commission, and the Judiciary Committee has jurisdiction over the antitrust aspects.
We have asked the staff of the other effected committees to be with us today so that we might take an overall view of the problem of foreign investments in the United States.
The major reason we are dealing with this now is that at the end of August there was a tender offer made by Imetal, a French corporation, to purchase the stock and debentures of Copperweld Corp. We are using this more or less as an example to get to the broader issue, which is, what is the U.S. Government policy dealing with foreign investments in the United States!
Last October the Congress passed the Foreign Investment Study Act of 1974. And the Department of the Treasury and the Commerce Department were asked to do a complete, intensive study of foreign investments in the United States and any policies our Government might have.
In that legislation an interim report was requested by October 26, 1975, and a final report was supposed to be delivered March 26, 1976.
I would hope that when Mr. Parsky who is representing the Secretary of the Treasury gets here—and he is at a White House meeting and will be late-he will give us some idea as to the status of the report.
It was the intent of Congress that we needed to have far more information on foreign investments in the United States than we now have.
I think most of us on this subcommittee believe that there should be a free flow of investment capital throughout the world. I don't think that the attitude of Congress is that there should be restrictions on foreign investments. The problem is, though, that we really don't know where foreign investments are going. There is no procedure to give at least a fair warning of a foreign investment, and there is no requirement of consultation with the Government of the United States. We find that many other countries that deal with investments require an elaborate screening process, and in many cases the potential investor is turned down because the investment would be deemed not to be in line with that country's economic policy.
This happened recently in France where Westinghouse, I think, was required to reduce its interest in a corporation from 45 to 15 percent.
ì think personally what we need to have is some type of an early warning system. For example, in the Copperweld case we have the prospect of a very difficult tender fight which could cost both sides several million dollars.
Let’s assume that Imetal wins. Justice might then come in and say, well, look, we have a problem with the Clayton Act and we are not going to allow this merger. It seems to me that we should go through this procedure before the tender offer and before any purchase of the assets of a company, so that a judgment by Justice or Commerce or Treasury will not be after-the-fact. Really what I think a lot of us are looking for is an early warning system, so that a potential investor at least could find out what the Government policy would be in interpretation of U.S. law in regard to a potential investment.
In the case of Imetal, the tender offer was made on Auugst 29, that was the notice. And then September 5 was the close of the offer. And there were two extentions. But here you have a 5-day period in which the stock would be tendered. And I think it caught the management by surprise.
And again there is this problem. While we might wish to have foreign investment in the United States, shouldn't there be some condition so that at least it could be screened under U.S. laws before they actually make a tender offer to purchase the assets ?
And I think this is the major problem that we should be addressing during these hearings.
I would like to yield to my colleague from Ohio, Mr. Stanton.
Mr. Chairman, I want to compliment you for holding these hearings. And I can only reiterate what you have said, that the issue before us today is first the general area of foreign investments in the United States and second, the specific case of the Copperweld Corp., a Pittsburgh-based company in the United States.
Foreign investment is a growing concern because of the dramatic increase in foreign investment in the United States in recent years. Between 1973 and the first half of 1975, for example, it is unofficially estimated that foreign direct investment increased from $17.7 billion to $20 billion.
And as you said, Mr. Chairman, it is unfortunate that the dramatic growth of foreign investment in the United States has not been accompanied by adequate governmental oversight. At present, we are not fully aware of the extent and nature of many foreign investments in our country.
The case of the attempted takeover of the Copperweld Corp., by the French firm, Societe Imetal, is an example of some of the problems associated with foreign investments. The Copperweld case has become controversial because many people are confused and apprehensive over Imetal's intentions if the takeover is successful. Frankly, many employees are afraid of losing their jobs. Moreover, this situation has been marred—and this is the point you were making Mr. Chairmanby a lack of communication between all parties involved and a lack of adequate forewarning from the French firm to Copperweld and the Federal agencies that monitor foreign investments.
I agree with you, Mr. Chairman, it is time that this Congress and the administration took appropriate steps to insure that foreign investments in our country are adequately monitored and that we receive adequate forewarning of any direct foreign investments such as the Copperweld case.
Gentlemen, I appreciate your coming this morning.
Mr. REES. Since the major issue brought up so far has been the problem of antitrust if the tender offer were successful, we might start with you, Mr. Kauper. Thomas E. Kauper, Assistant Attorney General, Antitrust Division.
STATEMENT OF THOMAS E. KAUPER, ASSISTANT ATTORNEY GEN
ERAL, ANTITRUST DIVISION, DEPARTMENT OF JUSTICE Mr. KAUPER. Do you want me to go through this statement, or simply introduce it for the record? Whatever you prefer.
Mr. Rees. Maybe you should go through it. I have not had a chance to read through it.
Mr. KAUPER. I am pleased to appear before this subcommittee today to discuss the Department's activities concerning foreign investments in the United States. As you know, the Department has responsibility for enforcing the antitrust laws and related statutes, primarily the Sherman and Clayton Acts. The Sherman Act forbids monopolies and restraints of trade, and the Clayton Act forbids acquisition by one corporation of the stock or the assets of another corporation when the effect of such acquisition may be substantially to lessen competition or to tend to create a monopoly with the requisite relationship to interstate or foreign commerce.
An increasing number and variety of international business transactions have been subject to antitrust challenge in recent years, and the trend shows every prospect of continuing. The antitrust laws of the United States have been used since the early days of the Sherman Act to attack international cartels which affect U.S. commerce. Recently, a great deal of attention also has been given to international mergers, acquisitions, licensing agreements, and other transactions. Another form of trade restraint has particularly attracted the spotlight lately; the multilateral, Government-sponsored cartel. All of these international activities have a substantial impact on the United States economy. They also may require more enforcement resources than a similar domestic matter because the facts related to international transactions tend to be more complex and less accessible, and there may be difficult legal issues not present in a domestic case. For these reasons, the Antitrust Division has substantially increased the size of its foreign commerce section in recent years.
In the letter inviting the Department to give this testimony, Chairman Rees asked specifically for a description of the Department's role in monitoring foreign investments in the United States, and a description of what triggers our interest in a particular foreign investment. The best way to answer this is through a very broad summary of U.S. antitrust law, because the antitrust laws are our only basis for monitoring or reviewing such transactions. When a foreign firm acquires the stock or assets of a U.S. firm, or enters into a merger or joint venture with a U.S. firm, we look at precisely the same factors that we would consider if the two firms were both located in the United States. This includes whether the two firms compete in an identifiable economic market, or are potential competitors; whether one firm is a substantial supplier of the other firm under circumstances which could make the relationship anticompetitive; and whether the transaction is a pure investment, or a working arrangement which will influence the management decisions of either firm. The antitrust laws certainly are not opposed to the new competition which is created by unilateral entry into a new market. Thus, when a new entrant, foreign or domestic, builds new facilities in the United States rather than seeking to merge or join with an existing competitor, it will not be charged with an antitrust violation for doing so.
In some instances, the Department of Justice has challenged foreign firms' acquisition of U.S. competitors. Let me review briefly one of the more widely publicized incidents, the BP-Sohio merger case. Judge McLaren, when he was head of the Antitrust Division, stated that Justice welcomed BP's acquisition of Sinclair's east coast properties, because that acquisition introduced a substantial new competitor into the U.S. market. When BP proposed a second acquisition involving Sohio, however:
BP was in effect an American concern with a substantial business in the United States. We analyzed the merger proposal precisely the same way we would have analyzed a proposal to unite Sohio with another American company in the position of BP's American subsidiary. Since Sohio had about 30 percent of the Ohio market, and since we concluded BP was one of the most likely potential entrants into the Ohio market, this seemed to us to involve a typical “big firmleading firm” market extension situation, and we announced our intention to challenge the merger.
Chairman Rees also asked if existing Department policy adequately handles the growing number of foreign investments in the United States. I believe that nondiscriminatory and vigorous antitrust enforcement represents the best antitrust policy for the United States internationally as well as domestically, and the Department intends to continue that type of policy. Your final question was whether we see a need for improved or expanded monitoring, or advance notice procedures for foreign investment in the United States. I believe it would be desirable to have advance notice procedures involving all major mergers and acquisitions. I have testified elsewhere before the Congress in support of S. 1284, a pending bill that would give us such premerger notification. The provisions of S. 1284 would greatly im
1 "Antitrust Policy Today," an address by Richard W. McLaren, Assistant Attorney General, Antitrust Division, before the National Industrial Conference Board, Inc., New York, N.Y., March 5, 1970, p. 7.
prove antitrust enforcement by allowing an orderly and prompt antitrust review of merger transactions before they go into effect. These benefits would be just as applicable to mergers involving foreign firms as totally domestic mergers, and they may be even more applicable.
I have said that we apply the same antitrust principles to merger transactions, regardless of whether they involve foreign firms or not. But mergers involving foreign firms are one of several types of mergers which frequently require us to make unusually difficult judgments as to the facts relevant to the transaction, thus increasing our need for notice of the transaction some reasonable period in advance of its consummation. For instance, the market share of a foreign firm in a U.S. domestic market may overstate or understate its actual competitive influence on that market, depending upon the facts surrounding that firm's participation in the U.S. market. If the firm's position in the U.S. market is the best it can do after a substantial effort, it may be subject to a great downside risk because of currency devaluation, changes in tariffs, and the other uncertainties of international trade. But if the firm is a very substantial global competitor which has only begun penetrating the U.S. market, its existing market share may greatly underestimate its potential competitive impact on the United States.
Considerations such as these will require increasing sophistication in our investigation of mergers involving foreign firms. This will not require a change in policy or law relevant to antitrust enforcement, but it probably will require an increase in the resources which we devote to such transactions. Assuming that our resources keep pace with the demands of international antitrust law enforcement, and assuming that we obtain premerger notification similar to that provided for in S. 1284, I believe there is no antitrust reason for the Congress to enact special procedures related to foreign investments in the United States.
I would like to take this opportunity to emphasize a point that has been made frequently by my predecessors and colleagues in the Federal antitrust enforcement agencies. That is, the U.S. antitrust laws are blind to the nationality of the businesses to which they apply. Antitrust law is a traditional and fundamental economic policy of the United States. The most basic objective of antitrust law is to preserve an environment within which business enterprises are free to compete in a flexible and productive manner. It would be totally inconsistent with that basic objective to restrict the competitive freedom of any enterprise, domestic or foreign, simply because of its nationality.
Thus, the Department is not sympathetic to the enhancement of the competitive opportunities of domestic firms by arbitrarily limiting the opportunities of foreign firms. A set of Government restrictions that seek to alter the ordinary flow of business from foreign firms to domestic firms may have short term domestic economic advantages. But to the extent that such restrictions result in a pattern of economic development based on arbitrary Government decisions rather than the efficiency-seeking process of competition, both the foreign and domestic economies are less efficient, and poorer as a result.
U.S. discrimination against foreign firms also would encourage discrimination by foreign governments against U.S. firms when they seek to compete abroad. Thus, in order to maximize our own firms' ability