CFIUS Regulations and FINSA Compliance Leveraging Lessons from - - PowerPoint PPT Presentation

CFIUS Regulations and FINSA Compliance

Leveraging Lessons from Recent Transactions for Foreign Investment in the U.S.

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TUESDAY, APRIL 16, 2013

Presenting a live 90-minute webinar with interactive Q&A

Farhad Jalinous, Partner, Kaye Scholer, Washington, D.C. Nova J. Daly, Public Policy Consultant, Wiley Rein, Washington, D.C. Jonathan S. Kallmer, Counsel, Crowell & Moring, Washington, D.C.

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Strategies for Meeting the New FINSA Requirements and Lessons Learned from Recent Transactions

Nova J. Daly, Public Policy Consultant, Wiley Rein, Washington, D.C.

• G. Christopher Griner, Special Counsel, Kaye Scholer, Washington, D.C.

Jonathan S. Kallmer, Counsel, Crowell & Moring, Washington, D.C.

• I. CFIUS Overview
• II. Recent Developments and Implications of Recent CFIUS Decisions
• III. Intersection Between CFIUS and Other National Security Processes
• IV. Strategic Considerations and Regulatory Compliance

Agenda

• I. Overview of the CFIUS Process

The Committee on Foreign Investment in the United States (“CFIUS”) is an interagency committee that reviews foreign acquisitions of U.S. businesses that could raise national security considerations.

• Legal Authority

– Statute: Section 721 of the Defense Production Act of 1950 (the Exon-Florio Amendment of 1988), as amended by the Foreign Investment and National Security Act of 2007 (“FINSA”) (50 U.S.C. App. 2170). – Executive Order: EO 11858 (1975), amended most recently by EO 13456 (2008). – Regulations: 31 C.F.R. Part 800, amended by 73 Fed. Reg. 70702 (2008).

• Composition

– Nine Full Members: Treasury (Chair), Justice, Homeland Security, Commerce, Defense, State, Energy, U.S. Trade Representative, Office of Science and Technology Policy – Two Non-Voting, Ex Officio Members: Director of National Intelligence, Labor – Five Observers/Other Participants: Office of Management and Budget, Council of Economic Advisers, and the Assistants to the President for National Security Affairs, Economic Policy, and Homeland Security and Counterterrorism

• Timing

– Prefiling: At least 5 business days – Review: 30 calendar days – Investigation: 45 calendar days – Action by the President: 15 calendar days

• Scope of review

– Voluntary process: Parties decide whether to file, though CFIUS may unilaterally initiate. – No “Greenfield” transactions: Must be a “merger, acquisition, or takeover.” – Concept of “control”: Foreign acquirer must gain “control” of U.S. business; interpreted broadly.

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• II. Recent Developments In CFIUS
• Timing

– In 2011, 36% of cases went into the 45-day investigation; nearly 40% for 2010. – Transactions with government control rarely close in the 30-day review period. – Parties are increasingly withdrawing and re-filing their cases.

• Proximity and Cyber Security

– Proximity has always been a national security consideration, but has gained higher prominence in recent transactions. – Cyber security is a key national security consideration for CFIUS given greater incidents of cyber intrusions and increased infrastructure vulnerabilities.

• Mitigation

– CFIUS is increasingly requiring that parties enter into mitigation agreements or

• therwise imposing mitigation requirements as a condition for closing CFIUS

reviews.

– 8 and 9 cases in 2011 and 2010 vs. 2 cases in 2008.

• CFIUS Reform

– There is growing interest in CFIUS reforms centered on greater CFIUS transparency, broader CFIUS powers (e.g., “Greenfield” investments), and additional reporting for state-owned enterprise investments.

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• II. Notable Cases: Ralls
• Ralls Corporation (“Ralls”), a U.S. company owned by two Chinese

nationals, filed a lawsuit against CFIUS in connection with its acquisition of membership interests in four Oregon wind farm projects.

– The parties had communicated with the Navy about close-proximity issues, but did not file a CFIUS notice for the transaction. – Post-closing, CFIUS requested a filing and advised Ralls to postpone construction during the pendency of the CFIUS review; it then ordered mitigation measures that included Ralls ceasing all construction on, removing its assets from, and not accessing the acquired property.

• Ralls alleged that the CFIUS order violated the Administrative Procedures

Act, constituted an unlawful taking of its property without due process of law, and exceeded CFIUS’ authority by effectively prohibiting the transaction, which is a power reserved for the President.

– President Obama ultimately reviewed and prohibited the transaction.

• U.S. District Court for the District of Columbia dismissed all of Ralls’ claims

except for the due process one, stating that it would not hear any attack

• n the President’s findings but would hear argument on whether Ralls is

entitled to know the reasons for the Presidential order of divestment.

• This case highlights how critical it is to file with CFIUS if there are any

questions about the national security implications of a transaction.

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• II. Notable Cases: A123/Wanxiang
• Wanxiang America, a U.S. subsidiary of a large Chinese automotive parts

company, gained CFIUS approval in January 2013 for the acquisition of the non-defense related business of A123 Systems (“A123”), a U.S. manufacturer of advanced lithium ion batteries.

• The transaction faced opposition from Congress (11 Senators) and other

parties due to a number of CFIUS and non-CFIUS related considerations including:

– Classified contracts; – Critical technology; – Critical infrastructure; – Defense applications; – Supply chain vulnerabilities; and – American Reinvestment and Recovery Act of 2009 funding.

• A123’s defense related assets were spun-off into a separate company that

was sold to Navitas Systems LLC.

• This case highlights how national security and public policy concerns can

be merged to create difficulties for CFIUS transactions as had happened with the CNOOC/Unocal and Dubai Ports transactions in 2005 and 2006.

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• II. Notable Cases: CNOOC/Nexen
• CNOOC Ltd. (“CNOOC”), a Chinese state-owned entity,

acquired Canadian oil and gas company Nexen Inc. (“Nexen”) for $15.1 billion, which is China’s largest foreign acquisition to date.

– CNOOC had tried to acquire Unocal Oil Company in 2005, but withdrew its bid in the face of strong U.S. political opposition.

• CFIUS reviewed the transaction since it included Nexen’s

U.S. exploration and production assets in the Gulf of Mexico.

– The parties withdrew and resubmitted their original CFIUS filing, going through two review cycles.

• CFIUS approved the transaction.

– The parties indicated that mitigation was required, though the conditions have not been disclosed.

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• III. Foreign Ownership, Control or Influence
• A company under foreign ownership, control or influence (“FOCI”) is not eligible

to be issued a facility security clearance (“FCL”) or continue to hold an FCL unless its FOCI is mitigated in accordance with the National Industrial Security Program Operating Manual (“NISPOM”) in a manner acceptable to the U.S. Government.

• A U.S. company is considered to be under FOCI when a foreign interest has the

power, direct or indirect, whether or not exercised, to direct or decide matters affecting the management or operations of the company in a manner which may result in unauthorized access to classified information or may affect adversely the performance of classified contracts (NISPOM, paragraph 2-300a).

– Even a minority interest can constitute FOCI.

• The Defense Security Service (“DSS”) administers the NISP on behalf of the

Department of Defense (“DoD”) and 25 non-DoD agencies, and is responsible for examining foreign involvement in U.S. companies that are in the process of

• btaining a DoD FCL or that hold a DoD FCL.
• The Department of Energy (“DoE”) fulfills this role for DoE FCLs.

– The DoD FOCI program is significantly larger than the DoE’s.

• For acquisitions involving a cleared company, FOCI mitigation will need to be

addressed, either by establishing a new FOCI mitigation agreement or having the target operate under an existing buyer FOCI mitigation agreement.

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• III. Team Telecom
• Team Telecom is an informal gathering of officials from the Departments of

Homeland Security and Justice (sometimes also DoD), and the FBI.

• It reviews Federal Communications Commission (“FCC”) licenses as part of the

FCC’s obligation to consider the “public interest” with respect to various applications, including:

– Section 214 authority; – Cable landing licenses; and – Applications that involve more than 25 percent indirect foreign ownership.

• Team Telecom often operates on a parallel track with CFIUS where foreign

investment transactions involve communications licenses or the foreign investment may jeopardize or compromise U.S. law enforcement access to and use of telecommunications channels.

• Team Telecom can require parties to enter into a Network Security Agreement.
• Because it is not a creature of statute or regulations, Team Telecom has no

formal rules, procedures, or timetables.

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• IV. Strategic Considerations:

Determining Whether (and When) to File

Since the CFIUS statutory framework contains few bright lines, including a lack of a definition of “national security,” it is critical for parties to carefully consider potential issues raised by their transactions in deciding whether (and if so when) to file.

• Sectoral issues: Transactions more likely to raise CFIUS concerns include those

in the defense, energy, information and communications technology, financial, and transportation sectors.

• Country issues: Countries posing political or security challenges to the United

States naturally receive scrutiny, as do some sophisticated U.S. allies.

• Subject matter issues: Transactions involving export-controlled products,

contracts with the U.S. government, or defense-related issues likely should be filed.

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• IV. Strategic Considerations:

Engaging with CFIUS and Others

The post-FINSA regulations explicitly encourage parties to a transaction to consult with CFIUS in advance of filing a notice and/or to file a draft notice. Companies should take this seriously and have a broad and robust pre-filing engagement strategy.

• Engage with the Committee: Be forthcoming and constructive with CFIUS.

Trust is key.

• Engage with individual agencies: Prior to filing, address specific national

security considerations where agencies have specific oversight authorities.

• Engage with Congress and the public: Demonstrate that the foreign acquirer

is a responsible actor and that the transaction will benefit U.S. companies and American workers.

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• IV. Strategic Considerations:

Managing the Timeline

Once they have filed with CFIUS, companies have little ability to actively manage the various timelines. There are small things that companies can do, however, to more effectively manage scarce time on the margins, and this may make all the difference.

• Submit fulsome pre-filings: Especially for relatively complex cases, companies

should engage the Committee to the greatest extent possible before “starting the clock” with a formal filing.

• Prepare to respond quickly: Companies should anticipate questions from the

Committee and prepare for mitigation scenarios, so that they do not lose precious time when CFIUS engages them on such issues.

• Consider withdrawal/re-file: It is possible to buy time by agreeing to

withdraw and re-file a transaction, recognizing that this may also involve costs.

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• IV. Strategic Considerations:

CFIUS Mitigation

• It is critical to consider potential CFIUS mitigation when negotiating a deal.

– Fully understand the target’s business and whether it has sensitive/unique technology or is in an area of significant concern to the U.S. Government. – Assess potential sensitivities regarding the buyer, e.g., foreign government

• wnership.

– Determine whether the target has facilities located in close proximity to sensitive U.S. assets.

• CFIUS mitigation can be standalone or in addition to FOCI mitigation

arrangements.

• CFIUS-based mitigation can address specific areas (e.g., trade compliance,

supply chain), external concerns such as close proximity to sensitive U.S. assets, or broader governance issues.

• CFIUS mitigation is more likely than a transaction being blocked, but

mitigation can undermine the rationale for the deal and even effectively require divestment.

• Buyers should negotiate purchase agreement provisions providing

protection against unfavorable CFIUS-based mitigation.

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Nova J. Daly Wiley Rein 202.719.3282 ndaly@wileyrein.com

• G. Christopher Griner

Kaye Scholer 202.682.3619 christopher.griner@kayescholer.com Jonathan S. Kallmer Crowell & Moring 202.624.2978 JKallmer@crowell.com

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