CFIUS Regulations and FINSA Compliance
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CFIUS Regulations and FINSA Compliance Leveraging Lessons from Recent Transactions for Foreign Investment in the U.S. Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific 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. 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.
Transcript of CFIUS Regulations and FINSA Compliance
Slide 1Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
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.
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.
Sound Quality
If you are listening via your computer speakers, please note that the quality of
your sound will vary depending on the speed and quality of your internet
connection.
If the sound quality is not satisfactory and you are listening via your computer
speakers, you may listen via the phone: dial 1-866-320-7825 and enter your PIN
when prompted. Otherwise, please send us a chat or e-mail
[email protected] immediately so we can address the problem.
If you dialed in and have any difficulties during the call, press *0 for assistance.
Viewing Quality
To maximize your screen, press the F11 key on your keyboard. To exit full screen,
press the F11 key again.
For CLE purposes, please let us know how many people are listening at your
location by completing each of the following steps:
• In the chat box, type (1) your company name and (2) the number of
attendees at your location
FOR LIVE EVENT ONLY
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.
5
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.
6
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.
7
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.
8
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.
9
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.
10
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.
11
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.
12
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.
13
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.
14
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.
15
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
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.
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.
Sound Quality
If you are listening via your computer speakers, please note that the quality of
your sound will vary depending on the speed and quality of your internet
connection.
If the sound quality is not satisfactory and you are listening via your computer
speakers, you may listen via the phone: dial 1-866-320-7825 and enter your PIN
when prompted. Otherwise, please send us a chat or e-mail
[email protected] immediately so we can address the problem.
If you dialed in and have any difficulties during the call, press *0 for assistance.
Viewing Quality
To maximize your screen, press the F11 key on your keyboard. To exit full screen,
press the F11 key again.
For CLE purposes, please let us know how many people are listening at your
location by completing each of the following steps:
• In the chat box, type (1) your company name and (2) the number of
attendees at your location
FOR LIVE EVENT ONLY
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.
5
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.
6
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.
7
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.
8
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.
9
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.
10
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.
11
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.
12
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.
13
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.
14
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.
15
