Presenting a live 90-minute webinar with interactive Q&A CFIUS Regulations and FINSA Compliance: Surviving Heightened Federal Scrutiny Leveraging Lessons from Recent CFIUS Cases WEDNES DAY, MAY 7, 2014 1pm East ern | 12pm Cent ral | 11am Mount ain | 10am Pacific Today’s faculty features: Karalyn Meany Mildorf, Counsel, Kaye Scholer , Washington, D.C. pecial Counsel, Stroock & Stroock & Lavan , Washington, D.C. Anne S alladin, S The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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CFIUS Regulations and FINSA Compliance: Surviving Heightened Federal Scrutiny Anne W. Salladin Karalyn Meany Mildorf Special Counsel Counsel Stroock & Stroock & Lavan LLP Kaye Scholer LLP 202-739-2855 202-682-3547 asalladin@stroock.com karalyn.mildorf@kayescholer.com
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). Guidance Concerning the National Security Review Conducted by CFIUS : 73 Fed. Reg. 74567 (Dec. 8, 2008). Composition • Nine Full Members: Treasury (Chair), Justice, Homeland Security, Commerce, Defense, State, Energy, U.S. Trade Representative, and the Office of Science and Technology Policy Two Non-Voting, Ex Officio Members: Director of National Intelligence and 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: Generally, at least 5 business days Review: 30 calendar days Investigation: 45 calendar days Decision 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”: Transaction must be one that “could result in control” of a U.S. business by a foreign person. 5
Covered Transactions • “Any transaction . . ., by or with a foreign person, which could result in control of a U.S. business by a foreign person.” § 800.207 “Transaction” - § 800.224 “Foreign Person” - § 800.216 “Control” - § 800.204 “U.S. business” - § 800.226 • Numerous examples in these sections to illustrate these terms. • Numerous examples in §§ 800.301 and 302 addressing, e.g., “ could result in control,” collections of assets, multinational companies, joint ventures, supply contracts, and technology licenses. 6
CFIUS Process • Prefile draft CFIUS notice (and exhibits) generally at least 5 business days before the formal filing. • 30-day CFIUS Review Begins once formal notice has been filed and accepted as complete. There are no “expedited” reviews. • Investigation Required if an acquisition will result in foreign government control – unless waived. Lasts up to 45 days after the 30-day review. Will follow if CFIUS wants more time to review the transaction, if a member agency believes national security concerns require investigation, or if CFIUS is considering blocking the deal. 7
CFIUS Process (cont.) • Presidential review/decision (rare) Lasts up to 15 days. If CFIUS cannot reach a decision, recommends that the transaction be blocked, or requests a presidential decision. • Review concludes when CFIUS has determined that there are no “unresolved national security concerns.” The transaction does not pose a national security risk; Any national security risk has been addressed by other authorities; or Mitigation measures have been established to resolve the risk. 8
CFIUS Process (cont.) • Cases can be initiated pursuant to: Voluntary notice - §§ 800.401(a) and 402 CFIUS request and notice filed by parties - § 800.401(b) Agency notice - § 800.401(c) • CFIUS may pose questions to the parties, with responses due in 3 business days, unless extended. • Safe harbor defined in § 800.601 CFIUS advises parties that transaction is not a covered transaction; CFIUS advises parties that it has concluded all action; or The President has announced his decision not to exercise his authority. 9
Recent Developments In CFIUS • Significant increase in Chinese investments 23 notices in 2012, up from 10 in 2011 and 6 in 2010. Overtook the United Kingdom for the most filings. • Timing In 2012, about 40% of cases went into the 45-day investigation, which was up from 36% in 2011. Transactions involving foreign government control often move to investigation. 2012 marked a stark increase in abandoned transactions, with 22 cases withdrawn and only 12 refiled. Cases are often withdrawn and refiled to provide additional time to complete the CFIUS process. • Close Proximity Proximity has always been a national security consideration, but has gained higher prominence in recent years after being a key factor in several transactions. Ralls Corporation is a notable recent example of close proximity concerns impacting a transaction. 10
Recent Developments in CFIUS • Cyber Security Cyber security is an important national security consideration for CFIUS given greater incidents of cyber intrusions and increased infrastructure vulnerabilities. There is often heightened sensitivity in transactions related to cyber security and identity authentication. The Department of Homeland Security just released a Federal Register notice regarding procedures for critical infrastructure assets for which it has been determined that a cyber-security incident could reasonably result in catastrophic regional or national effects on public health or safety, economic security, or national security. (79 Fed. Reg. 21780 (2014)) • Mitigation CFIUS continues to require mitigation measures in order to clear transactions in about 8% of cases, which has been the trend since 2010. In 2012, 8 transactions resulted in mitigation, covering U.S. companies engaged in software, information, mining, energy, and technology industries. 11
Notable Cases: Smithfield Foods • Shuanghui International Holdings Limited (“Shuanghui International”), a private Chinese company, acquired Smithfield Foods, Inc. (“Smithfield”) in 2013 for $4.7 billion (total deal value, including debt, of $7.1 billion). Largest ever Chinese acquisition in the United States. • Shuanghui International owns a variety of businesses, including food and logistics companies. It is the majority shareholder of China's largest meat processor. • Smithfield is the world’s largest pork processor and hog producer. 12
Notable Cases: Smithfield Foods • CFIUS analysis may have considered food safety, which is part of critical infrastructure, and market considerations. Smithfield was also reportedly a supplier to the U.S. Department of Defense and other government agencies. • CFIUS conducted both an initial review and a follow-on investigation of the transaction, completing the process in one cycle. • CFIUS ultimately approved the transaction, apparently without requiring mitigation measures. • There was significant concern raised about the transaction from both Congress and industry groups. Highlights that CFIUS focuses on its national security review and is not a political process. 13
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