committee on foreign investment in the united states (cfius): recent developments september 2013
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Committee on Foreign Investment in the United States (CFIUS): Recent Developments September 2013. Paul Marquardt. Committee on Foreign Investment in the United States (CFIUS). Created and governed by a statute known as the “Exon-Florio Amendment” and its implementing regulations - PowerPoint PPT PresentationTRANSCRIPT
© 2013 Cleary Gottlieb Steen & Hamilton LLP. All rights reserved.Throughout this presentation, “Cleary Gottlieb” and the “firm” refer to Cleary Gottlieb Steen & Hamilton LLP and its affiliated entities in certain jurisdictions, and the term “offices” includes offices of those affiliated entities.
Paul Marquardt
Committee on Foreign Investment in the United States (CFIUS): Recent DevelopmentsSeptember 2013
Created and governed by a statute known as the “Exon-Florio Amendment” and its implementing regulations
Charged with reviewing the national security implications of transactions that involve the acquisition of a U.S. business by a foreign person
Consists of 16 representatives from various government agencies and offices
• Staff is part of the Treasury Department
Committee on Foreign Investment in the United States (CFIUS)
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Any merger, takeover, or other acquisition that results in control of a U.S. business, even if the U.S. business is acquired from a foreign entity
Any foreign national, entity, or government, or any entity over which a foreign national, entity, or government has “control”
The power to determine, direct, or decide important matters affecting an entity, including the power to block a decision
• Control is a case-by-case determination that rests upon both the acquirer’s level of ownership (with no set threshold) and the rights exercisable by the acquirer
• More like “significant influence” than formal control
Includes the U.S. operations of foreign companies
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Transaction
Foreign Person
Control
U.S. Business
CFIUS Jurisdiction: “Covered Transactions”
CFIUS has authority to review “Covered Transactions,” which include any “transaction” by or with any “foreign person,” which could result in “control” of a “U.S. business” by a foreign person
CFIUS notification is technically voluntary
• The law does not require parties to file a notice with CFIUS prior to a transaction
• CFIUS notification does not suspend the transaction
– Parties may close before a CFIUS review is complete, though this is uncommon, as it shifts all risk to the acquirer
CFIUS can compel a review
• On the Committee’s recommendation, the CFIUS Staff Chair may initiate a review
• Any CFIUS member may initiate a review by filing an agency notice of a transaction
• CFIUS has subpoena authority
CFIUS may initiate a review post-closing
• If the parties do not file a notice, CFIUS retains the right to review the transaction in the future, even after the transaction closes
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CFIUS Review as a “Voluntary” Process
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Advantages of Voluntary Notification Disadvantages of Voluntary Notification
May reduce vulnerability to political criticism
Eliminates the risk that the target, a rival bidder, or another interested party will seek to encourage CFIUS review at a late stage to delay the transaction
Eliminates the risk of a post-closing review and an order of divestiture
May draw attention to a transaction that would otherwise go unnoticed
Notification imposes burdensome requirements to produce information
May lead to pressure from U.S. agencies to alter the transaction
Advantages and Disadvantages of Voluntary Notification
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Filing Process: Overview
Pre-Filing Submission
Formal Filing &
AcceptanceBy CFIUS
CFIUSClears
orInitiates
Additional Investigation
CFIUSClears
or Refers to President
PresidentClears
or Blocks
5+ Day Pre-Filing Review
30-Day Review 45-Day National Security Investigation
15-Day Presidential
Review(Rare)
Timeline may be varied by requests for “voluntary” extensions
Timeline may be restarted if there is a material change to the
transaction or if any information request is not answered within three business days
Voluntary notices are required to include:
• Details about the transaction and foreign entities involved
• Organizational chart showing all entities in foreign acquiror’s ownership chain, including the percentage of shares held by each entity
• Details about the target’s business, products, services and market share and the acquiror’s future plans for the target’s business
• Details on the target's U.S. government contracts
• Detailed "personal identifier information" for all board members, senior management, and shareholders holding 5% or more of the acquiror, its intermediate parent or its ultimate parent.
– This information includes each individual’s passport number and details about the individual’s foreign military and government service
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Contents of a Voluntary Notice
CFIUS is only concerned with transactions that impair the “national security” of the United States
• “National security” is left undefined by the Exon-Florio Amendment and its implementing regulations, though it does include “homeland security” and “critical infrastructure”
– “Critical infrastructure” Systems or assets so vital to the U.S. that their incapacitation or destruction would have a debilitating impact on national security
• CFIUS’s view of national security is broad and flexible, and it goes well beyond military matters
CFIUS utilizes a two-stage analysis to determine the degree to which a transaction may impair national security
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Focus of CFIUS Review: “National Security”
Stage 1: Vulnerability
Stage 2:Threat
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National Security: Two-Stage Analysis
CFIUS identifies all national security considerations to determine whether the U.S. business creates a vulnerability in U.S. national security
• Key Issue: Whether a foreign person in control of the business could take action that threatens to impair U.S. national security
CFIUS determines whether the particular foreign acquirer poses a threat
• Key Issue: Whether the acquirer has the capability or intention to exploit any vulnerability or to cause harm
CFIUS has identified sensitive sectors that may raise concerns, including:
• Government contractors (especially for defense, security, and national security)
• Weapons and munitions manufacturing
• Aerospace
• Critical infrastructure
– Telecommunications
– Energy
– Transportation
– Financial institutions
• Advanced technology
• Strategic resources
• Potential terrorism targets (e.g., chemical facilities)
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National Security: Sensitive Sectors
CFIUS staff has been more formal and rigid in following procedures than under prior administrations
• Very difficult to obtain meaningful informal guidance
• Not sensitive to timing concerns, even in public transactions
Lower transaction volume means more time to spend on review
• Inquiries into non-notified transactions and investigations of closed transactions becoming more frequent
Heightened concern over cyber-security
• The U.S. government has become increasingly concerned about potential cyber attacks aimed at government computer systems and those of U.S. companies, particularly from China
– The Pentagon’s 2013 Annual Report to Congress publicly accused China of a role in cyber attacks
– Congress has issued a number of reports accusing Huawei and ZTE of involvement in cyber warfare
Less focus on sovereign wealth funds
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CFIUS Review: Recent Developments
"Regulation by CFIUS" • Security agencies are using CFIUS review to regulate industries they don't have direct
authority over, especially telecommunications– Offshoring, choice of suppliers
Geographic proximity to sensitive U.S. government facilities• Ralls – Transaction involved wind farm projects located near a U.S. Navy flight training
area in Oregon
• Northwest NonFerrous International Investment / Firstgold – Acquisition involved a mine located near Fallon Naval Air Base in Nevada
• Procon Resources / Lincoln Mining – Acquisition involved another mine near Fallon Naval Air Base
• FEGRI / Nevada Gold – FEGRI required to divest its interest due to the proximity of Nevada Gold’s primary mining operation to Fallon Naval Air Base
• CNOOC / Nexen – Security agreement involved rigs in the Gulf of Mexico
Certain industries highly scrutinized• Critical technologies, telecommunications and energy sectors continue to receive greater
scrutiny from CFIUS
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CFIUS Review: Recent Developments
CFIUS has closely scrutinized deals involving Chinese acquirors and challenged several:
• SoftBank / Sprint (2013) – Obtained CFIUS clearance, but security agreement involved restrictions on the use of Huawei and ZTE equipment in the Sprint network
• Procon Resources / Lincoln Mining (2013) – CFIUS required Procon to divest its interest in Lincoln, a Canadian mining company with U.S. subsidiaries
• China Superior / Hawker (2012) – Deal failed in part due to concerns about CFIUS objections and difficulties separating Hawker’s defense operations
• Ralls (2012) – Acquisition of wind farm project companies was blocked post-closing
• Tangshan Caofeidian Investment Corp / Emcore (2010) – TCIC withdrew notification of its bid for Emcore’s fiber optics division in light of CFIUS objections
• Huawei– 3Leaf (2010) – CFIUS opened a post-closing investigation of Huawei’s acquisition of a
small server-network company’s assets– 3Com (2008) – Huawei abandoned its bid to acquire a 19% stake in 3Com after coming
under politically-charged CFIUS scrutiny
• Northwest Nonferrous International Investment / Firstgold (2009) – Northwest Nonferrous abandoned its bid to acquire Firstgold after CFIUS indicated it would recommend that the President block the deal
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Challenges Faced by Chinese Acquirors
Deals involving Chinese acquirors have obtained CFIUS clearance despite political and protectionist interests
• Shuanghui / Smithfield Foods (2013) – CFIUS recently cleared Shuanghui’s acquisition of Smithfield despite significant political opposition by farming interests citing food security concerns
• Wanxiang Group / A123 Systems (2013) – CFIUS cleared Wanxiang Group’s purchase of battery manufacturer A123 even though critics argued the acquisition would transfer technology developed with U.S. stimulus money to China
• Anshan Steel / Steel Development Company (2010) – The Congressional Steel Caucus unsuccessfully lobbied CFIUS to block Anshan’s purchase of a minority stake in Steel Development's Mississippi rebar facility
Deals have obtained CFIUS clearance despite attacks from rival bidder
• SoftBank / Sprint (2013) – Rival bidder Dish Networks attacked the deal on national security grounds, but it ultimately obtained CFIUS clearance
• BGI-Shenzhen / Complete Genomics (2012) – CFIUS cleared BGI's acquisition despite efforts by rival bidder Illumina to highlight national security concerns in gene sequencing technology
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Most Chinese Acquirors Obtain CFIUS Clearance
Transactions involving sensitive sectors and state-owned entities have received approval from CFIUS, even when political challenges were mounted
• CNOOC / Nexen (2013) – CNOOC’s acquisition of Nexen, a Canadian oil and gas company with assets in the U.S., was cleared with conditions despite opposition by some in Congress
• Sinopec / Devon Energy (2012) – Acquisition of a one-third stake in five Devon Energy oil and gas projects approved
• CNOOC / Chesapeake Energy Corporation (2010, 2011) – Acquisition of one-third interests in two Chesapeake Energy oil and gas projects approved
• AVIC
– Cirrus (2011) – Acquisition of U.S. aircraft manufacturer Cirrus by AVIC's subsidiary approved
– Teledyne (2010) – Acquisition by AVIC of two U.S. subsidiaries of aircraft engine manufacturer Teledyne approved
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Most Chinese Acquirors Obtain CFIUS Clearance
Additional Chinese investments approved in recent years include:
• Lenovo / EMC (2012) – Joint venture between Lenova and data-storage provider EMC to develop and sell servers and network storage
• China Three Gorges / EDP (2011) – Acquisition of a 21% stake in Portuguese power group EDP, which operates a significant number of wind farms in the U.S.
• Canon / Altair (2011) – Acquisition of a 51% stake in Altair, a U.S. manufacturer of lithium-ion energy systems and batteries
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Most Chinese Acquirors Obtain CFIUS Clearance
Transparency
• Transparent governance and ownership
• Supplement self-disclosure with external audit and verification
• Independent external advisors/board members
• Consider whether public listing outside China is feasible/desirable from a business perspective
• Participation in industry and standard-setting bodies
Political and public engagement
• Channels to CFIUS and its agencies should remain open
• Consider retaining public relations and government relations advisors to work as a team with legal advisors
• Public image needs to support strategy
• Try to engage critics in Congress where possible
• Take a leadership role in global efforts to cooperate with industry and government
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Risk Mitigation Strategies
Avoid or divest sensitive businesses
Consider separating sensitive operations
• Approaches such as “firewalls” and security monitoring by the U.S. Government may be accepted
• Structure to avoid operational control of sensitive U.S. assets
• Spin off problematic business to a second buyer
Pursue non-controlling investments
• Under 10% and passive is safe, but clear minority investments can work
• Non-ownership joint ventures, R&D/marketing agreements, sales of individual assets
• Pursue influential U.S. partners
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Risk Mitigation Strategies (continued)
Avoid or divest sensitive businesses
Consider separating sensitive operations
• Approaches such as “firewalls” and security monitoring by the U.S. Government may be accepted
• Structure to avoid operational control of sensitive U.S. assets
• Spin off problematic business to a second buyer
Pursue non-controlling investments
• Under 10% and passive is safe, but clear minority investments can work
• Non-ownership joint ventures, R&D/marketing agreements, sales of individual assets
• Pursue influential U.S. partners
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Risk Mitigation Strategies (continued)
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