key cfius developments: lessons from recent cfius report
TRANSCRIPT
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Presenting a live 90-minute webinar with interactive Q&A
Key CFIUS Developments: Lessons from
Recent CFIUS Report and Cleared Transactions Preparing for Reviews, Navigating Investigations, and Negotiating and Understanding Mitigation
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
WEDNESDAY, JULY 8, 2015
Dr. Paul Halpern, Former Director of the CFIUS Program, U.S. Dept. of Defense, Arlington, Va.
Farhad Jalinous, Partner, White & Case, Washington, D.C.
Andy M. Walker, Managing Director, Accenture - Strategy, Arlington, VA
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Committee on Foreign Investment in the United States
Recent Trends and Developments
June 2015
CFIUS Overview
The Committee on Foreign Investment in the United States (“CFIUS”) conducts national security reviews
of foreign direct investment into the United States
The CFIUS statute is the Exon-Florio Amendment to the Defense Production Act of 1950, which was
enacted in 1988, amended in 1993, and overhauled in 2007 with the passage of the Foreign Investment
and National Security Act of 2007 (FINSA)
Current CFIUS members:
– The Secretaries of Treasury (Chair), Homeland Security, Commerce, Defense, State and Energy, the U.S. Attorney
General, the U.S. Trade Representative, and the Director of the Office of Science and Technology Policy
– On a case-by-case basis, the President or the Secretary of the Treasury can appoint the head of any other executive
department, agency, or office
– The Secretary of Labor and the Director of National Intelligence are ex-officio, non-voting members
– The following are observers appointed by the President: the Director of the Office of Management and Budget, the
Chairman of the Council of Economic Advisers, and the Assistants to the President for National Security Affairs,
Economic Policy, and Homeland Security and Counterterrorism
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CFIUS Timing
Prefiling of draft CFIUS notice and exhibits
30-day initial review
– Formally file at least 5 business days following prefiling
– Majority of filed transactions are approved at the end of this period or determined not to be “covered transactions” subject to
CFIUS jurisdiction
Additional 45-day investigation
– Mandatory in cases of foreign government control (interpreted broadly) or critical infrastructure unless deputy agency heads
of co-lead agencies waive this requirement
– Also triggered when:
• Unresolved issues need more time for review or CFIUS believes there may be unmitigated national-security concerns posed by the
deal requiring mitigation measures
• CFIUS is considering a recommendation to block the deal
15-day Presidential review and decision (very rare, and parties given opportunity to abandon the deal)
If CFIUS requires more time to resolve outstanding issues, the parties may withdraw and resubmit the
filing, restarting the initial 30-day review period
7
(7)
(30)
(45)
(15)
7
37
82
97
Days
CFIUS Trends & Developments: Key Areas
Transactions and nationalities of investors
Industries
Investigations
Mitigation Trends and Developments
Mitigation Considerations
8
CFIUS Trends & Developments: Transactions and Nationalities
Deal flow picked up in 2014
– The number of CFIUS reviews reached a post-FINSA high of 156 (previous high was 155 in 2008)
– For comparison: 97 CFIUS reviews in 2013; 114 in 2012; 111 in 2011
Investment has been expanding beyond the historically dominant European/Canadian
buyers, including to China, Japan, the Middle East, and India
– For the second time in two years (2012 and 2013), China led foreign countries represented in CFIUS
reviews (21 in 2013), surpassing historical leader United Kingdom, which continues to decrease its
CFIUS filings (7 in 2013)
• Lull in UK activity could be in part due to effects of U.S. sequestration
– Japan was the second-largest source of CFIUS-reviewed transactions in 2013, with 18 (a significant
jump from nine in 2012)
• The recent move towards opening Japanese defense trade may lead to further increased Japanese investments
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CFIUS Trends & Developments: Industries
Expansion from traditional defense-related transactions to broader
industries and more infrastructure-related deals
– E.g., energy, critical infrastructure, communications, cyber security, food
safety, identity authentication, and real estate
Manufacturing sector (35 notified transactions) and finance,
information and services sector (32 notified transactions) accounted
for the greatest number of covered transactions in 2013
10
CFIUS Trends & Developments: Industries
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CFIUS Trends & Developments: Investigations
CFIUS investigations increased in 2013
– 49% of all cases went to investigation (up from 40% in 2012)
– This may be somewhat artificially inflated due to five cases that went
to investigation during the government shutdown in October 2013
Even discounting the five cases, the increase is notable—
rising from 39% of cases in 2012 to at least 44% in 2013
Parties should anticipate the possibility of investigation and
factor in sufficient time when planning acquisitions
– Investigation does not necessarily mean mitigation
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CFIUS Trends & Developments: Mitigation
CFIUS-based mitigation continues to be required in only a minority of cases
(11% in 2013), but it can significantly impact a deal and needs to be considered
as part of CFIUS planning in all cases
Cases requiring mitigation increased from 7% in 2012 to 11% in 2013
In 2013, mitigation covered a broad array of industries:
– Telecommunications; software; mining; oil and gas; manufacturing; consulting; and technology
We have seen cyber security, identity authentication and access to databases of
personally identifiable information receive particular CFIUS scrutiny
In practice, CFIUS is more likely to impose mitigation than to recommend to the
President that a deal be blocked
– Ralls Presidential action was exceptional; reaction to lawsuit challenging CFIUS mitigation
– Parties should consider potential mitigation measures as part of CFIUS strategy
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CFIUS Trends & Developments: Mitigation
Proximity concerns remain relevant
– Key factor in Ralls
– December 2014 GAO report recommends that DoD develop means of
assessing the risk of close proximity of foreign entities to its ranges
and work with other agencies to obtain additional information on
transactions near ranges
– Report specifically mentions CFIUS as a potential means of
addressing proximity issues
Proximity may be issue even when target has no other obvious
nexus to US national security
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CFIUS Trends & Developments: Mitigation
Typical types of mitigation measures:
– Ensuring that only authorized persons have access to certain technology and information
– Establishing a security committee and/or appointing a USG-approved security officer or director
– Implementing security policies, annual reports, and independent audits
– Establishing guidelines and terms for handling USG contracts, USG customer information, and
other sensitive information
– Allowing only U.S. citizens to handle certain products and services
– Restricting certain activities and products to within the United States
– Establishing visitation policies for foreign persons
– Notifying relevant USG parties of vulnerabilities or security incidents
– Allowing USG to review certain business decisions for national security concerns
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Factors Impacting Likelihood of CFIUS Mitigation
ODNI threat assessment of acquiring country and company
CFIUS’s overall risk assessment, which often includes:
– countries with whom acquiring country and company trade in defense goods
– record of their compliance with export control regimes
– impact of the transaction on U.S. technology leadership
Target’s possession of leading-edge critical defense or defense-relevant technology
(including manufacturing technology & art) that is not readily available to buyer from non-US
sources
Target’s possession of sensitive personal identifiable information or other sensitive
unclassified data
Potential vulnerabilities to US defense and critical infrastructure supply chain reliability and
integrity
– for example, target is sole qualified source or single source that could offshore production to unreliable country or simply
terminate production
Proximity of target’s assets to sensitive DoD test and training ranges
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Distinction Between CFIUS and FOCI Mitigation
CFIUS mitigation
– Required as a condition of CFIUS concluding its review and allowing a transaction to proceed
– No set format or duration
• Terms at CFIUS’s sole discretion
– Intended to fill gaps not covered by other regulatory regimes (e.g., FOCI mitigation, export controls)
– Nature and scope of mitigation difficult to predict in advance
FOCI mitigation
– Required in all cases of a US cleared company under FOCI as a condition to maintaining the facility
security clearance
– Five-year default duration (renewable)
– Based on template agreements with possibility of minor case-specific tailoring
– Nature and scope of mitigation generally knowable in advance
17
How National Security Agreements Impact the Company NSAs can have far-ranging impact on company’s operating models – particularly if there is
an “audit clause” in the NSA. Business Operating
Model
What we sell
Product / Offer development
Product Production
How we sell it
Marketing
Sales
How we deliver and support it
Product / Offer Support
How we manage the business
Technology
Legal & Regulatory
Finance
HR
Security
Real Estate & Facilities
U.S. citizenship requirements can
force substantial changes to R&D
and product development, as this
activity is often offshore.
In addition, flow-through provisions
of NSA’s that impact vendors and
supply chain are often difficult to
implement & costly.
U.S. citizenship requirements
can force substantial changes
to customer care and product
support. These functions are
often offshore.
U.S. citizenship and flow through
requirements will drive substantial
costs and transformation
requirements into IT.
Further, Legal and security are often
overburdened in their ability to drive
compliance.
18
Best Practices in NSA Compliance: Pre-Transaction
The best way to approach NSA compliance is to address issues and concerns
before the NSA is signed
Pre-Signature Compliance Themes
– CFIUS is advancing security interests of the USG, not protecting a status quo – this often
clashes with the shareholder value perspective of most corporations
– Engaging an experienced Washington-based CFIUS counsel is a must
– Engaging your business and IT functions within the company is a necessity – they understand
the business
– Do not sign a document that has not been financially scored for cost and revenue impact
– It is ok to walk away – better than signing something that cannot be implemented or that kills
the deal business case
19
Best Practices in NSA Compliance: Post-Transaction
NSA compliance can be a challenging affair, but there are tactics and
approaches that tend to work better than others
Post-Signature Compliance Themes
– Make the CFIUS Security Directors and Board Members part of the process
– Compliance needs to be driven by the business
– Budget for compliance now
– Pass your first audit with flying colors
– The compliance governance model is important
– Always conduct a pre-audit
20
Thank you
Farhad Jalinous, Partner
Head of the National Security/CFIUS Practice
White & Case LLP
701 Thirteenth Street, NW
Washington, DC 20005-3807
T +1 202 626 3691
Andy Walker
Partner
Accenture Strategy
T +1 703 371 4561
Paul J. Halpern, PhD
Halpern Analytics
10900 Clara Barton Court
Fairfax, VA 22032
T +1 703 994-8586