Navigating CFIUS Risks in the M&A Process: National Security Reviews of Foreign Investments in U.S. Business

Transcription

1 Navigating CFIUS Risks in the M&A Process: National Security Reviews of Foreign Investments in U.S. Business Thomas McCarthy, Kevin Wolf and Christian Davis Akin Gump Strauss Hauer & Feld LLP Association of Corporate Counsel National Capital Region July 11, Akin Gump Strauss Hauer & Feld LLP

2 Agenda Introduction: Overview of CFIUS The Context CFIUS and the M&A Process: Consider CFIUS Early in the Deal Conduct CFIUS Diligence Regarding Buyer and U.S. Business Consider CFIUS Mitigation as Part of Transaction Structure Address CFIUS Risk in Negotiations and Transaction Documents Work with the CFIUS Team to Support Notice and Review Ensure that the Company Appoints a CFIUS Point Person Develop a Mitigation Strategy (as needed) Ensure that the Company Understands Mitigation Agreement Requirements Debrief with the Company and CFIUS Team at the End of the Review Potential Political Developments Closing Remarks and Questions 1

3 Overview of CFIUS What Is CFIUS? The Committee on Foreign Investment in the United States (CFIUS) is an interagency panel that is authorized to conduct national security reviews of transactions that could result in foreign control of a U.S. business ( covered transactions ). CFIUS has the authority to require mitigation measures and recommend that the President block or order divestiture of transactions. Parties submit a voluntary notice to obtain clearance ( safe harbor ) for the transaction to proceed. The Committee consists of: 9 Executive Branch departments/offices 5 observing members Others who can be added for specific reviews (e.g., USDA) Permanent Members Observers/Ad Hoc Department of Treasury (chair) Department of Defense Department of Homeland Security Office of Management and Budget National Economic Council Departmentt of Justice Department of State Department of Energy Council of Economic Advisors Homeland Security Council Department of Commerce Office of the U.S. Trade Representative Office of Science and Technology Policy National Security Council 2

4 Overview of CFIUS What is a Covered Transaction? Covered Transactions any transaction... by or with any foreign person, which could result in control of a U.S. business by a foreign person Foreign Person : Includes any entity controlled by a foreign national Control the power, direct or indirect, whether or not exercised... to determine, direct, or decide important matters affecting an entity : No bright-line test Excludes passive investments of 10 percent or less voting interest U.S. Business : Any entity, regardless of the nationality of the persons that control it, engaged in interstate commerce in the United States Includes non-u.s. companies with U.S. operations Excludes greenfield investments 3

5 Overview of CFIUS CFIUS Filing Considerations Filing a notice with CFIUS is voluntary. However, CFIUS has the ability to direct parties to submit a notice with respect to ongoing and completed transactions. CFIUS exercised this authority at least twice in CFIUS filings are recommended when a covered transaction presents national security concerns. CFIUS s national security analysis considers whether: The foreign buyer presents a threat. The U.S. business presents a vulnerability. Note: CFIUS s analysis relies in part upon intelligence briefings, national security assessments, and other riskbased assessments. This assessment is often not shared with the parties or the public. 4

6 Overview of CFIUS Timeline of a CFIUS Review Assessment / Preparation Pre-filing Review Investigation Presidential Review At least 3-4 weeks Assessment of CFIUS risk Preparation of CFIUS notice ~2-3 weeks Consult with CFIUS staff Submit draft notice for comments 30 days Respond to information requests 45 days (as needed) Respond to information requests Negotiate mitigation agreement (as needed) 15 days Very rare Most companies withdraw if CFIUS recommends blocking 5

7 The Context Increased interest by Chinese firms in investing in the United States. Direct investment from China into the United States hit a record $45 billion in It tripled the previous record of $15 billion in

8 The Context With more direct investment comes more CFIUS scrutiny: China: 12 transactions withdrawn in 2014 Scuttled deals a few examples: Ralls (2012) divestiture order Philips Lumileds/Go Scale Capital (2016) $2.8 billion Western Digital/Unisplendour (2016) $3.775 billion Fairchild/China Resources & Hua Capital (2016) $2.4 billion Aixtron/Fujian Grand Chip (2016) $752 million blocked by Presidential order Cost of mitigation agreements: Case studies show that mitigation costs and revenue impact can often be greater than 15 pecent of deal value Extended reviews delay closing. 7

9 CFIUS and the M&A Process 8

10 CFIUS and the M&A Process Consider CFIUS Early in the Deal Planning and Feasibility The CFIUS process can be lengthy up to 90 days after the filing is accepted: Occasionally forced to withdraw and refile, starting the clock over Some transactions may not be feasible from a CFIUS perspective: Counsel should be aware of the national security implications Seek to mitigate in the structure of the deal Ex.: Chinese company seeks to acquire U.S. defense contractor 9

11 CFIUS and the M&A Process Consider CFIUS Early in the Deal (cont.) Red Flags The buyer is there a potential threat? Foreign government-owned? Chinese or other country with perceived hostile motives (e.g., Russia)? Unclear business motivations? The U.S. business is there a potential vulnerability? Government contractor? Sensitive sector/critical infrastructure? Advanced technology? Are other related filings triggered? Defense Security Service? Directorate of Defense Trade Controls? Team Telecom? 10

12 CFIUS and the M&A Process Consider CFIUS Early in the Deal (cont.) Engage the CFIUS team early: Can help assess risks, establish timelines Coordinate between corporate counsel and outside counsel Educate company about CFIUS: Parties must submit detailed, and even sensitive, information about the company and key individuals involved: CFIUS is required to keep all information confidential Time-consuming and probing process (e.g., personal identifier information is required for key individuals on the buyer side) 11

13 CFIUS and the M&A Process Conduct CFIUS Diligence Regarding Buyer and U.S. Business Assess any perceived U.S. national security vulnerabilities that may exist within the U.S. business: Government contract work? Which agencies and offices? Classified programs? Examples: IBM/Lenovo (2014) Critical Infrastructure? Energy? Transportation? Finance? Agriculture? Examples: Dubai Ports (2006) Syngenta/ChemChina (2016) 12

14 CFIUS and the M&A Process Conduct CFIUS Diligence Regarding Buyer and U.S. Business (cont.) Assessing vulnerabilities: Advanced/export-controlled technology? Cyber/semiconductors? ITAR/EAR controlled technology or products? Example: Philips Lumileds/Go Scale Capital (2016) Real estate and proximity to military or other national security facilities? Example: Ralls (2012) Blackstone Hotel del Coronado/Anbang (2016) Access to sensitive information? Insurance? Research? Example: Fidelity Life/Anbang (2016) Genworth/China Oceanwide (2017) 13

15 CFIUS and the M&A Process Conduct CFIUS Diligence Regarding Buyer and U.S. Business (cont.) Assess any perceived threats to U.S. national security associated with the buyer: Who owns the foreign buyer? Is there a shadowy ownership structure? Is the buyer foreign government-controlled? U.S. foreign government relationship? How much independence from home government? Do any key individuals in the buying entity raise national security concerns? Are there links to sanctioned parties, corruption or other criminal wrongdoing? What are the foreign entity s plans for the business? 14

16 CFIUS and the M&A Process Conduct CFIUS Diligence Regarding Buyer and U.S. Business (cont.) Chinese investors have faced increased scrutiny in recent years: Multiple China transactions have been effectively blocked in the past year (e.g., Inseego/TCL). Other China deals that were not voluntarily filed have reportedly been directed to file with CFIUS (e.g., Ingram Micro/HNA). CFIUS has also recently scrutinized China deals outside its historical sectors of interest, including: Food and Agriculture: Shuanghui/Smithfield (2013) and Syngenta/ChemChina (2016) Insurance: China Oceanwide/Genworth (2017) The most recent CFIUS Annual Report has also made the following determination which is an apparent reference to its view of the Chinese investment strategy: There may be an effort among foreign governments or companies to acquire U.S. companies involved in research, development, or production of critical technologies for which the United States is a leading producer. All of that being said, the Treasury Department has gone out of its way to make clear that the United States is open for Chinese investments. 15

17 CFIUS and the M&A Process Consider CFIUS Mitigation as Part of Transaction Structure If a transaction involves potentially serious national security concerns, mitigate early. Consider: Divesting or walling off enterprises that pose potential national security risks Limiting board membership and voting rights of the foreign person Inviting U.S. national security figures to join the board of directors Developing compliance programs and hire compliance personnel Making non-controlling, minority investments with limited (passive) ownership rights Adjusting the ownership structure to minimize any potential concerns Purging of sensitive information 16

18 CFIUS and the M&A Process Address CFIUS Risk in Negotiations and Transaction Documents Who bears the risk? If the President orders a divestiture after closing, the buyer must find a new buyer for the U.S. business and divest within a certain time period (e.g., 90 days). Possible tools to mitigate risk: Condition precedent for closing Hell or High Water clause Termination provisions/fees Insurance to cover termination fees From the seller s perspective, CFIUS risk can result in favorable deal terms. 17

19 CFIUS and the M&A Process Work with the CFIUS Team to Support Notice and Review Coordinate with the CFIUS team as it prepares to submit a voluntary notice. Leading up to the filing, the parties are encouraged to submit a prefiling and have meetings with the Committee, as the case warrants: These interactions will typically result in follow-up requests from CFIUS that must be addressed in a timely fashion to avoid delays in the deal timeline. CFIUS proceedings can last 3-6 months (or longer): Work with the CFIUS team to coordinate a timeline for closing. Update CFIUS regarding any material changes. 18

20 CFIUS and the M&A Process Ensure that the Company Appoints a CFIUS Point Person CFIUS will reach out to counsel with questions and concerns that can (and do) cover topics outside of the scope of the CFIUS notice. The parties have three business days to respond or risk restarting the review clock. Accordingly, the CFIUS team needs to make sure that it can obtain farreaching information about the company on a very short timeline. Parties benefit from being cooperative and forthcoming with information. 19

21 CFIUS and the M&A Process Develop a Mitigation Strategy (as needed) Mitigation strategies: Proactively identifying mitigation steps will allow the parties to set the agenda. Public relations: Defining the message and delivering it strategically can make the transaction more palatable to government officials and the public. Responding to negative press stories. Lobbying: Certain deals can become highly politicized (e.g., Dubai Ports). Attention on China, Russia, cybersecurity, trade imbalances and other politicized issues can put a spotlight on transactions. Strategically engaging with the Hill can limit potential political backlash regarding a transaction. 20

22 CFIUS and the M&A Process Ensure the Company Understands Mitigation Agreement Requirements CFIUS is empowered to monitor compliance with mitigation agreements: These agreements can involve cumbersome requirements (e.g., walling off sections of the company from one another). U.S. government (including DOJ and FBI) monitor compliance with mitigation agreements, including site visits CFIUS can assess penalties and even start a new 30-day review period in the event of a material breach: Penalties can be $250,000 or the value of the transaction, whichever is greater. Ensure that the company fully understands its obligations under the agreement after closing and how it intends to comply going forward. 21

23 CFIUS and the M&A Process Debrief with the Company and CFIUS Team at the End of Review Debrief internally and with the company at the end of the review to discuss lessons learned and to better integrate CFIUS into the next deal (particularly for a foreign buyer). Agree upon a strategy for press releases and any SEC filing requirements: Proceedings are confidential. The information released about the transaction will need to come from the parties. If the deal is unsuccessful, assess what the repercussions will be for the company in future investments and how to mitigate any negative impact. 22

24 Potential Political Developments Senate Majority Whip John Cornyn (R-TX) and Rep. Robert Pittenger (R-NC) are preparing legislation that would further tighten CFIUS review. The bill may include: Expanding CFIUS jurisdiction to include noncontrolling investments, such as: Joint ventures, if they involve critical technologies, foundational technologies, or critical infrastructure Real estate near military or sensitive facilities Foreign-government controlled transactions, including where a company acts on behalf of a government Transactions where personally identifiable information of U.S. citizens could be acquired by foreign governments Establishing a negative presumption against companies from certain countries of concern Formalizing the process for monitoring nonnotified transactions and allowing third parties to make submissions related to transactions 23

25 Potential Political Developments (cont.) Administration support of CFIUS reform: Treasury Secretary Steven Mnuchin reportedly supports mandating extra CFIUS scrutiny for deals involving hostile nations, a list that would include China, Russia, Iran and North Korea. Defense Secretary James Mattis recently called CFIUS s current governing regime outdated and argued that its expansion is necessary for national security. Other legislation: Sen. Chuck Grassley (R-IA) and Sen. Debbie Stabenow (D-MI): Food Security is National Security Act of 2017 Senate Minority Leader Chuck Schumer (D-NY): Expand CFIUS mandate to include review of economic factors when assessing foreign transactions Sen. Ron Wyden (D-OR), Sen. Sherrod Brown (D-OH) and Sen. Claire McCaskill (D-MO): Request to Government Accountability Office to investigate CFIUS s scrutiny of real estate transactions 24

26 Contact Thomas J. McCarthy Partner, Washington, D.C Kevin J. Wolf Partner, Washington, D.C Christian C. Davis Counsel, Washington, D.C