Transcript of CFIUS Regulations and FINSA Compliance
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TUESDAY, APRIL 16, 2013
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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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
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 otherwise 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 on 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 obtaining 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;
– 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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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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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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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
ownership. – 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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