Review of Acquisitions for National Security Concerns

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Review of Acquisitions for National Security
Concerns
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Foreign Investors and National Security

• The U.S. government can investigate acquisitions
  of U.S. companies or operations by foreign
  investors that may affect the national security
  of the United States
• The Exon-Florio Act, 50 U.S.C. app. 2170
• The rules apply to
• Acquisition of companies
• Purchase of individual divisions, operations, or
  assets
• The government can block an acquisition if there
  is credible evidence that the acquisition could
  constitute a threat to U.S. national security
• The government can also impose conditions for an
  acquisition to go forward

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CFIUS

• Acquisitions are reviewed by the Committee on
  Foreign Investment in the United States (CFIUS)
• CFIUS is an inter-agency body comprised of, among
  others, representatives from
• Treasury Department (Chair)
• Department of Homeland Security
• State Department
• Department of Defense
• Commerce Department
• Other agencies may be involved as need
• CFIUS may
• Decline to conduct a full investigation
• Conduct an investigation and make a
  recommendation to the President

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When CFIUS May Investigate

• An acquisition of control of a U.S. company or
  U.S. assets
• By a foreign person or government
• Where there is credible evidence that the
  acquisition may threaten U.S. national security

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Acquisition

• An acquisition of control
• Voting securities
• Convertible securities
• Proxies
• Assets of an identifiable business
• A purchase solely for investment is not
  considered an investment
• Purchase of 10 or less of securities or voting
  Power
• No management role
• Acquirer is an institutional investor

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Foreign Person

• To be subject to review, the transaction must
  involve a foreign person
• A foreign individual or group of individuals
• A foreign company, partnership, or association
• A U.S. corporation or company controlled by a
  foreign parent or individuals

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Foreign Government Buyers

• There is an automatic 45-day investigation of
  acquisitions by foreign government buyers
• unless the Treasury Secretary and another CFIUS
  agency head personally sign off
• Government buyers include
• Foreign government agencies
• Officials of foreign governments
• Companies controlled by foreign governments
• Dubai Ports Worlds bid for PO Steamship Lines
  revived Congressional concern over
  government-controlled buyers

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U.S. Person

• To be reviewable, the acquisition must involve a
  U.S. person
• U.S. persons include
• Corporations organized under the laws of a state
  of the United States, even if their corporate
  parent is a foreign company
• U.S. branches of foreign companies
• Any businesses operating in the United States,
  regardless of legal form

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Control

• The transaction must give the foreign person
  control over the target
• CFIUS applies a functional control test
• CFIUS will consider whether the purchaser will
  have
• A majority interest
• A dominant minority interest
• A minority interest

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Functional Control

• CFIUS may find control if the purchaser can
  determine, direct or decide matters, even if
  the purchaser acquires a10 or less stake
• Indicators of functional control
• Right to appoint a director
• Formal or informal agreements between owners
• Special shares giving special rights
• The ability to appoint executive officers
• Control over budget matters
• Access to proprietary data

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Credible Evidence of a Threat to National Security

• What constitutes credible evidence and
  national security are not defined in the
  statute or CFIUS regulations
• National security will be interpreted broadly
• Ultimate, national security is what the President
  says it is
• Recent statements by Congress indicate that
  national security also includes
• Industries supplying key materials or components
  to the defense industry
• Industries supplying key materials or components
  to critical infrastructure
• For private purchasers, the standard is whether
  the acquisition threatens to impair U.S.
  national security
• For foreign government buyers, the standard is
  whether the purchase could affect national
  security

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Factors CFIUS Considers

• Whether domestic production is needed for
  national defense goods
• The capability of domestic industry to meet those
  requirements
• The effect foreign control over production might
  have on meeting national defense needs
• Whether foreign control will lead to an increased
  risk of proliferation of weapons of mass
  destruction and missile technology
• The potential impact of the transaction on U.S.
  technological leadership in defense areas

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Focus of CFIUS Activities

• Defense contractors
• High tech computers, chipmakers, networks
• Satellites and communications Infrastructure
• Nuclear
• Companies with
• Technologies or products subject to export
  controls
• Classified contracts with the U.S. government
• Transactions where CFIUS has derogatory
  intelligence about the would-be purchaser

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Structure of CFIUS Process

• Unofficial consultation
• Voluntary notice of planned transaction
• CFIUS will decide within 30 days whether further
  investigation is necessary
• 45-day investigation period, if any
• 15-Day Presidential decision period, if any

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Review Process

• Informal consultation
• Not required, but strongly advised
• CFIUS likes the earliest possible notification so
  that it can consult with intelligence agencies
• CFIUS never says no
• But if your deal has a problem, youll know
• Any assurances made by CFIUS are non-binding
• Informal consultations are especially useful when
  the foreign purchaser is inclined not to file a
  notice of the transaction

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Voluntary Notice

• CFIUS regulations specify content of disclosures
• Detailed information on the transaction
• Detailed information on the purchaser
• Detailed information on the target, including
  whether it has any government contracts
• Joint submissions by purchasers and targets are
  advisable if possible

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Initial Investigation

• CFIUS has 30 days after the filing of a voluntary
  notification to decide whether or not to conduct
  a full investigation
• If CFIUS decides not to conduct a full
  investigation, it will approve the transaction
• If CFIUS decides to conduct a full investigation,
  it may also advise
• Withdrawing the voluntary notice
• Restructuring the transaction

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Full Investigation

• CFIUS will complete a full investigation in 45
  days
• At the end of that period, CFIUS will make a
  recommendation to the President
• CFIUS may recommend
• Approval of the transaction
• Prohibition of the transaction
• Approval of the transaction with conditions
  (mitigation agreement)
• CFIUS may also suggest that the purchaser
  withdraw the voluntary notice, restructure the
  transaction, and re-file

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Mitigation Agreements

• CFIUS may require a formal agreement as a
  condition for recommending approval of a
  transaction
• Common mitigation agreement terms
• Restructure the transaction not to include
  sensitive businesses or assets
• Divest sensitive businesses
• Divest government contracts
• Adopt formal agreement to limit foreign
  government intervention in operations

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The Presidents Decision

• The President has 15 days after CFIUSs
  recommendation to make a decision
• The President can accept, reject, or modify
  CFIUSs recommendation
• There is no judicial review of either CFIUSs
  recommendation or the Presidents decision

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Due Diligence Concerns

• Classified contracts
• Exports subject to ITAR or EAR license
• Leadership by the target company in a high
  technology field
• Involvement of the target in critical
  infrastructure
• Dubai Ports
• CNOOC/Unocal
• Whether the target is a major player in its
  industry

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Further Information

• Scott Nance
• 1750 K Street, NW
• Washington, DC 20006 USA
• 1.202.719.3524
• snance_at_dsnance.com