Committee on Foreign Investment in the United States (CFIUS)

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2 It is the established policy of the U.S. government to support unequivocally international investment in the United States, consistent with the protection of the national security. Source: Executive Order 13456, January 23, 2008, section 1. 2

3 What is CFIUS? An executive branch interagency committee chaired by the Secretary of the U.S. Treasury Department Authorized by statute to review transactions that could result in control of a U.S. business by non-u.s. persons in order to determine the effect of such transactions on the national security of the United States 3

4 Brief Overview CFIUS reviews foreign acquisitions, mergers and takeovers of U.S. businesses that may raise national security issues CFIUS has the authority to approve a transaction or send it to the President for his decision CFIUS operates on statutory deadlines consisting of an initial 30-day review, a possible further 45- day investigation, and a possible 15-day Presidential decision 4

5 Origins of CFIUS Created in 1975 Charged with monitoring the impact of and coordinating U.S. policy on foreign investment in the U.S. No explicit enforcement power Exon-Florio Amendment passed in 1988 as part of the Defense Production Act of 1950 Provided the President with express authority to review the national security effects of foreign investments and, if necessary, block such transactions President delegated the new authority to CFIUS, but retained authority to ultimately block foreign investments Following controversy caused by the Dubai Ports World acquisition of a U.S. port management business in 2006, Congress enacted the Foreign Investment and National Security Act of 2007 (FINSA) FINSA codified and amended the CFIUS process to implement policies and procedures that CFIUS had informally applied to notified transactions 5

6 CFIUS Law Statute: Foreign Investment & National Security Act (FINSA), effective as of October 24, 2007, amending Exon-Florio Amendment of 1988 Executive Order 11858: Amended as of January 23, 2008 Regulations: Final regulations published November 21, 2008 and effective December 22, 2008, following enactment of FINSA Guidance: Published December 8, 2008, describes types of transactions CFIUS reviews and that present national security concerns CFIUS law references are publicly available at: 6

7 CFIUS Membership Department of the Treasury (Chair) 8 other permanent voting members: Department of Justice Department of Homeland Security Department of Commerce Department of Defense Department of State Department of Energy Office of the U.S. Trade Representative Office of Science & Technology Policy 2 permanent non-voting members: Department of Labor Director of National Intelligence 5 observing members: Office of Management & Budget Council of Economic Advisers National Security Council National Economic Council Homeland Security Council Treasury appoints a lead agency or agencies for each transaction notified to CFIUS 7

8 Covered Transactions CFIUS can review any merger, acquisition, or takeover by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States that may implicate national security issues Certain transactions, such as greenfield investments, are exempt from the scope of FINSA CFIUS does not provide no action letters or informal guidance, thus it is necessary for parties to file a full formal notification to CFIUS to confirm that a transaction is not a covered transaction 8

9 Control CFIUS broadly interprets the concept of control as the power, direct or indirect, whether or not exercised or exercisable through the ownership of a majority or a dominant minority of the total outstanding voting securities of an issuer, or by proxy voting, contractual arrangements or other means, to determine, direct or decide matters affecting an entity. Even a 10% investment in a U.S. company by a foreign entity may be deemed to convey control for purposes of FINSA The acquisition of a U.S. company by a company in which a foreign entity has a 10% interest may also be deemed to result in foreign control of a U.S. company 9

10 Control CFIUS regulations provide that the acquisition of 10% or less of the voting interests of an entity made solely for the purpose of passive investment is not subject to FINSA The regulations include a list of minority shareholder protective rights that are not be deemed to confer control, including: power to prevent the sale of the assets of an entity prohibitions on changes to the organizational documents of an entity anti-dilution protection However, CFIUS may view an acquisition of a 9% voting interest and a board seat as conferring control Other factors that may indicate control include: special shares giving special rights the ability to appoint executive officers control of budgetary matters access to proprietary data Whether control exists for purposes of FINSA will depend on the specific facts of a transaction 10

11 National Security CFIUS review focuses solely on addressing national security issues and not other national interests CFIUS law does not define national security although it does provide a list of indicative factors of consideration in evaluating the effects of a proposed transaction on national security 11

12 Factors CFIUS Considers National security considerations include an investment s effects on: domestic production needed for national defense requirements U.S. critical technologies and infrastructure posing a regional military threat to U.S. interests long-term projection of U.S. requirements for critical resources (such as energy) whether a covered transaction will result in foreigngovernment control 12

13 Factors CFIUS Considers Many CFIUS reviews involve: classified defense or homeland security-related contracts sole-source contracts with federal, state or local governments critical or emerging technologies and infrastructure technologies or products subject to export control restrictions foreign government-controlled investors making sensitive investments Although the majority of CFIUS reviews involve defense-related acquisitions, CFIUS has reviewed transactions in the following industries, among many others: telecommunications aerospace software engineering chemicals and pharmaceuticals CFIUS does not typically review transactions in the financial services sector, unless they involve particular national security assets or considerations, due to the existence of other robust regulatory authority in this sector 13

14 Notification CFIUS notification is a joint submission by the parties to a transaction and must include information regarding: the nature of the transaction and identity of the parties the activities, assets and location of the U.S. company and any subsidiaries whether the target is a supplier to any defense or national securities agencies (including a list of any relevant U.S. government contracts) whether the target makes any products or has any technologies which have or could have military applications or that are subject to export control licensing requirements the proposed intent of the acquiring party whether the acquiring party is subject to foreign government control detailed biographical information on the acquirer s officers and directors Section 721 of the CFIUS regulations prohibits disclosure to the public of information filed with CFIUS, and explicitly provides that such information is exempt from disclosure under the Freedom of Information Act (FOIA) This confidentiality requirement applies to any information provided by the parties: in connection with a pre-notice consultation or a draft notice as part of an initial notice in response to any follow-up questions from CFIUS There is no filing fee for submitting a CFIUS notice 14

15 CFIUS Review Process Pre-filing consultation Initial 30-day review Extended 45-day investigation Mitigation agreement Presidential determination 15

16 CFIUS Review Process Informal Pre-Filing Consultation Filing / Review 30 days 45 days Withdrawal Investigation Decision Presidential Decision 15 days Congressional Notification 16

17 Pre-Filing Consultation The long-standing practice of engaging in pre-filing consultations with CFIUS was formalized in the CFIUS regulations following FINSA Parties typically engage CFIUS prior to the execution of transaction documents to identify any threshold issues, and provide CFIUS drafts of the notification prior to formal submission The objective of pre-filing discussions is to provide CFIUS members with sufficient information about the parties and the proposed transaction to enable CFIUS to begin its assessment of the activities of the target U.S. company that may implicate national security concerns These discussions also permit the parties to assess the likelihood that the transaction may be cleared during the initial 30-day review period, or whether an extended 45-day investigation may be required 17

18 Initial 30-Day Review Commencing upon receipt of a complete notification, CFIUS undertakes an initial 30-day review of the proposed transaction The Director of National Intelligence is required to complete a national security threat analysis within 20 days of the notification During this period, the parties to the transaction are likely to be engaged in discussions with the lead agency or agencies, providing supplemental information and responding to specific questions It is also common to provide CFIUS (either the full membership or interested agencies) with more detailed briefings, which may involve executives from the U.S. and foreign companies With the consent of CFIUS, companies may withdraw and re-file a notification in order to give CFIUS additional time to review and approve their transaction without commencing an extended 45-day investigation The vast majority of notified transactions are approved during the initial 30-day review period However, the past few years have seen an increase in the number of investigations undertaken 18

19 Extended 45-Day Investigation If CFIUS is unable to complete its review during the initial 30-day period, CFIUS undertakes an extended 45-day investigation In most cases, the parties are able to determine well in advance of the conclusion of the initial review whether an investigation may be initiated (or whether to withdraw and resubmit the notification); however, CFIUS can raise national security concerns at any time during the initial review period There are two special circumstances under which FINSA requires a full 45-day investigation: when the transaction could result in control of a U.S. entity by a foreign government or an entity controlled by a foreign government when the transaction would result in control of any domestic critical infrastructure by any foreign person Even if the transaction involves a foreign government-owned entity or critical infrastructure, an extended investigation is not required if the Secretary of the Treasury and the lead agency determine that the transaction will not impair national security 19

20 Mitigation Agreement CFIUS may require parties to enter into a mitigation agreement to address national security concerns raised by the proposed transaction based on a risk analysis conducted by CFIUS The terms of mitigation agreements are confidential and often include commitments by the foreign acquiring entity to refrain from certain actions with respect to the operations of the U.S. company, along with restrictions on access to sensitive technologies FINSA requires CFIUS to evaluate compliance of the parties with a mitigation agreement, although even before FINSA, CFIUS routinely monitored and audited mitigation agreement compliance as a matter of policy If there is a material breach of a mitigation agreement, CFIUS may initiate a new 30-day review of the transaction 20

21 Presidential Determination If CFIUS does not clear a transaction during the 45-day investigation and the notification is not withdrawn, CFIUS presents a report and recommendation to the President who has 15 days to approve or block the transaction There have been only two instances where the President has used his authority to order the divestment of an acquisition In 1990, the President invalidated a transaction that involved the acquisition by China s National Aero-Technology Import and Export Corporation of MAMCO Manufacturing, Inc., an aircraft component manufacturer located in Seattle, Washington In September 2012, the President ordered that Ralls Corporation, ultimately owned by Chinese entities, divest certain wind farm assets held in Oregon within three months Over the past 20 years, only five CFIUS transactions have gone to the President for a final determination 21

22 Possible Outcomes Transaction approved Transaction approved subject to mitigation agreement Transaction renegotiated to address national security concerns Transaction blocked/abandoned Occurs occasionally if the parties and CFIUS are not able to reach a mutually acceptable mitigation agreement, or the transaction encounters significant political opposition Many high-profile abandoned transactions involve China Divestment 22

23 Congressional Notification Under FINSA, the Secretary of the Treasury and the head of the lead agency must notify Congress of completed reviews and extended investigations Such notices include: description of actions taken by CFIUS identification of the determinative factors considered in the decision statement confirming there are no unresolved national security concerns related to the transaction On a classified basis, members of Congress may request briefings on covered transactions for which action has concluded or on compliance with a mitigation agreement The Secretary of Treasury must also provide an annual report to Congress on covered transactions for which national security reviews or investigations were initiated The report must include information regarding: the volume of transactions reviewed for each procedural step of the CFIUS review process types of security arrangements entered into perceived adverse effects of covered transactions on U.S. national security CFIUS reports to Congress are publicly available at: 23

24 Best Practices Political as well as legal process Cooperation and good faith generally rewarded Develop the political and public relations message early in the process Take advantage of pre-filing consultation Ensure adequate compliance program post-transaction 24

25 Covered Transactions, Withdrawals, and Presidential Decisions Year Number of Notices Notices Withdrawn During Review Number of Investigations Notices Withdrawn During Investigation Presidential Decisions Total Source: CFIUS Annual Reports to Congress, November 2010 and December

26 Importance of Filing with CFIUS Filing with CFIUS is voluntary but recommended if a transaction may raise national security issues CFIUS reviews less than 10% of all inbound foreign transactions However, CFIUS actively monitors investment activity and can self-initiate a review of a transaction that is not filed voluntarily Transactions not reviewed by CFIUS can be examined at any time in the future and can be exposed to mitigation remedies, including divestiture 26

27 U.S. Government Agency Regulation of Foreign Ownership, Control, and Influence The Department of Defense (DOD), Department of Energy (DOE), and the Nuclear Regulatory Commission (NRC) regulate Foreign Ownership, Control or Influence (FOCI) with respect to companies in the national security sector The Defense Security Service (DSS) conducts adjudication of FOCI factors of contractors performing classified contracts under the National Industrial Security Program 27

28 Agency Regulation of FOCI FOCI Guidance: Directive-Type Memorandum (DTM) Policy Guidance for Foreign Ownership, Control, or Influence (FOCI), dated September 2, 2009 National Industrial Security Program Operating Manual (NISPOM), updated February 28,

29 Agency Regulation of FOCI FOCI issues arise when the activities of a company involve access to classified information Indicative personnel and information system security requirements of such company activities may include the following: Facility Clearance, an administrative determination that, from a national security standpoint, a facility is eligible for access to classified information at the same or lower classification category as the clearance being granted Personnel Security Clearance, an administrative determination that an industrial employee is eligible for access to classified information Certification and accreditation of information technology systems processing classified information at contractor facilities cleared under the National Industrial Security Program 29

30 Agency Regulation of FOCI Under DTM , a company is considered to be operating under FOCI whenever a foreign interest has the power, direct or indirect, whether or not exercised, and whether or not exercisable, to direct or decide matters affecting the management or operations of that company in a manner which may result in unauthorized access to classified information or may adversely affect the performance of classified contracts 30

31 Agency Regulation of FOCI NISPOM requires that a form SF 328 be submitted during the initial facility clearance process and when significant changes occur to information provided previously DSS requires a company with a facility security clearance to notify DSS at the commencement of entering into negotiations for a proposed merger, acquisition, or takeover by a foreign interest 31

32 Agency Regulation of FOCI The company is required to provide DSS with the following information: the type of transaction under negotiation (stock purchase, asset purchase, etc.) the identity of the potential foreign investor a plan to mitigate/negate the FOCI whether the parties to the proposed transaction will be filing a notice with CFIUS 32

33 Agency Regulation of FOCI DSS will only allow a company to maintain a valid Facility Clearance if an acceptable FOCI mitigation plan has been agreed upon and approved by DSS FOCI mitigation plans must be consistent with NISPOM requirements The elements of the plan will depend on the circumstances of the potential FOCI 33

34 Agency Regulation of FOCI Plans may include the following types of mitigation measures: Board Resolutions may be appropriate when a foreign interest does not own voting interests sufficient to elect directors or is not entitled to representation on the company s board Security Control Agreements may be appropriate when a foreign interest does not effectively own or control a company or corporate family but is entitled to representation on the company s board Special Security Agreements may be appropriate when a foreign interest effectively owns or controls a company or corporate family Voting Trust or Proxy Agreement are arrangements whereby the foreign owner relinquishes most rights associated with ownership of the company to cleared U.S. citizens approved by the U.S. Government, and may be appropriate when a foreign interest effectively owns or controls a company or corporate family 34

35 For further information: Robert S. Townsend Market Street San Francisco, CA USA 35

Foreign Investment in the US: An Overview of CFIUS

February 2018 Foreign Investment in the US: An Overview of CFIUS Purpose Established in 1988, the Committee on Foreign Investment in the United States (CFIUS) is a federal, interagency committee with the