The process in the United States for reviewing the national security implications of foreign acquisitions of U.S. businesses is complex, nontransparent, and often unpredictable. Willkie’s Global Trade & Investment Group is regularly sought to assist foreign acquirers and domestic targets with all aspects of this onerous review process, including the threshold determination of whether a particular transaction warrants notifying the U.S. government.
The proliferation of foreign ownership and control of U.S.-based businesses in all sectors and at all levels of operation has been one of the hallmarks of economic globalization over the last two decades. The historic investment flow of U.S.-based multinationals expanding abroad has been counterbalanced, and in many years exceeded, by foreign acquisitions of U.S. entities. While the United States maintains, at least in principle, an "open investment" policy, that policy has been significantly tempered by concerns about protecting U.S. national security, especially since the September 11, 2001 terrorist attacks.
U.S. law has long restricted foreign investment in key defense and intelligence activities, as well as in industry sectors such as airlines and telecommunications. However, over the past two decades the government has established an increasingly rigorous and systematic investment- screening regime, and has sought to apply that regime to an ever-widening range of transactions. Thwarted transactions, such as the ill-fated attempt by Dubai Ports World to acquire certain U.S. port service operations as part of a larger international enterprise, demonstrate the need to treat this review process as an essential element in implementing foreign acquisition transactions in the United States.
The "Exon-Florio" provision of U.S. law gives the president, through the inter-agency Committee on Foreign Investment in the United States ("CFIUS"), the authority to accept, reject, or impose conditions on a merger, acquisition, or takeover of a U.S. business that results in foreign ownership or control of that business (a "covered transaction") and that "affects the national security" of the United States. This includes situations in which an existing U.S. subsidiary of a foreign parent comes under new foreign ownership or control. If the president, acting through CFIUS, determines that a covered transaction "could impair" national security, the Exon-Florio law allows him to act only if no other provision of U.S. law can adequately address those concerns. Final decisions under the Exon-Florio law are not reviewable by any U.S. agency, court, or government body. CFIUS reviews transactions based on voluntary notifications filed by the parties or on its own initiative in the absence of a voluntary notification. If a transaction has not been reviewed and "cleared" by CFIUS prior to closing, CFIUS has the authority to seek post-closing restrictions on the portion of the transaction involving U.S. business, up to and including divestiture.
Our Global Trade & Investment Group works with clients to manage CFIUS notifications. The group calls upon the technical experience of attorneys in our Washington, New York, and European offices in a broad range of practice areas relevant to the U.S. national security screening review process, including financial institution and securities law, technology and telecommunications, intellectual property, mergers and acquisitions, asset management, antitrust and competition law, and national security and export control law. Our teams include lawyers with many years of experience working with all major federal agencies and Congress.
This close collaboration of the firm’s attorneys across multiple offices and disciplines of law provides clients with comprehensive, practical advice and support optimally tailored for their particular CFIUS-related issues. Clients count on us to successfully navigate the CFIUS and related U.S. national security review processes, minimizing the risk of adverse effects on their transactions.
Our Clients
U.S. government perception of what constitutes national security has significantly broadened in recent years to include both "critical technologies" and "critical infrastructure." Many more economic sectors are now considered appropriate for CFIUS review, including information technology, financial services, energy, environmental services, telecommunications, aviation and space technology, and defense-related activities. In addition, the increasing activity of commercial enterprises involving foreign government participation, sovereign wealth funds, and other foreign government investment vehicles, all of which have sought to purchase U.S. businesses, has served to expand the scope of transactions that raise national security questions.
Our Experience
Our attorneys not only participated in the original 1988 drafting of the Exon-Florio law, but have been integrally involved in subsequent amendments and in implementing regulations published by the Treasury Department as the lead CFIUS agency. We have advised both acquirers and targets on CFIUS issues in a wide variety of transactions. Representative transactions include:
- The multibillion dollar merger of two European information technology companies (both with manufacturing facilities in the United States) in which CFIUS required that the parties negotiate with the Department of Homeland Security and the Department of Justice to reach a "mitigation agreement" establishing national security protections
- The multibillion dollar merger of two European information technology companies (both with manufacturing facilities in the United States) in which CFIUS required that the parties negotiate with the Department of Homeland Security and the Department of Justice to reach a "mitigation agreement" establishing national security protections
- The transfer of significant minority ownership in a foreign company with U.S. defense operations between two foreign shareholders
- The acquisition of a U.S. petroleum services company by a foreign purchaser
- The acquisition of a U.S. communications satellite company by a foreign telecommunications company
- The acquisition of a U.S. telephone company by a foreign purchaser
- The acquisition of a U.S.-based international freight forwarding company by a foreign maritime container company
- The acquisition of a UK manufacturer of cyber-security devices primarily operating in the United States by a diversified foreign technology company in which a foreign government owned significant equity
- In addition to these transactions, we have worked with both foreign and domestic clients to evaluate the extent to which possible transactions might invoke CFIUS notification, and the expected timetable and prospects for CFIUS review and approval with or without national security conditions. We have engaged in confidential discussions with CFIUS staff regarding possible transactions, or arranged such discussions for our clients.
Managing the Process
The U.S. national security review process requires parties to a proposed transaction to understand and manage a combination of technical, administrative, legal, and political challenges within a limited timetable. Parties must be prepared to provide detailed information under very short deadlines, educate government officials about their businesses, deal with diverse and sometimes conflicting concerns of multiple government agencies, and recognize and respond to possible political influences on those agencies. We have the expertise and experience to meet these challenges. Additionally, when clients need or wish to utilize outside public relations or government relations consultants in support of a transaction, we establish precise goals and strategies, help create key informational and media materials, and provide overall coordination and supervision. Where appropriate, we identify suitable public affairs or government relations consultants or work with consultants already associated with our clients.
Some of the specific tasks we cover are:
- Evaluating the transaction and advising on whether a voluntary notification is warranted
- Forming the CFIUS team within the acquirer and the target
- Coordinating the gathering of information necessary for the notification
- Arranging a prenotification briefing for CFIUS agencies and preparing briefing materials
- Preparing the notification and filing with CFIUS
- Maintaining contact with CFIUS staff to respond to questions and track the status of the review process
- Arranging meetings and briefings with other CFIUS agencies with an interest in the transaction
- Preparing and filing required notifications with the Department of State under the International Traffic in Arms Regulations ("ITAR") and addressing other issues involving goods and services covered by U.S. export control laws
- Advising and, where appropriate, representing clients in complying with the novations provisions of the Federal Acquisition Regulations ("FAR")
- In the case of U.S. entities holding security clearances, notifying and filing with the Defense Security Service ("DSS") of information on foreign ownership, control, or influence ("FOCI") required by the National Industrial Security Program Operating Manual ("NISPOM"), and, if required, instituting measures to address FOCI concerns
- Negotiating mitigation agreements
- Dealing with possible opposition, congressional interest, and public relations
TRANSACTION TYPES AND BUSINESS SECTORS THAT PROMPT CFIUS NATIONAL SECURITY CONCERNS
Transaction Types
- Purchase of U.S. target by foreign acquirer
- Purchase of foreign target with U.S. operations by foreign acquirer
- Merger of U.S. entity with foreign partner in which foreign partner takes control
- Merger of two foreign entities, one or both of which has U.S. operations
- Acquisition of stock (majority or significant minority) in which foreign entity obtains attributes of control, including one or more board seats, veto over key corporate decisions, etc.
- Loan agreement in which a foreign lender obtains significant rights (including rights upon default) regarding U.S. entity or foreign entity with U.S. operations
Business Sectors
- U.S. aerospace and defense contracts, especially those involving classified (security-cleared) work
- Wireless and wireline telecommunications and equipment
- Transportation: airlines, railroads, ocean shipping, aircraft manufacturing, auto manufacturing, shipbuilding
- Natural resources: minerals and mining, petroleum, petroleum services
- Biotechnology and environmental, including services
- Utilities and nuclear equipment and fuels
- Computer hardware and software and computer services
- Cybersecurity
- Financial services
- Private security services
- Basic manufacturing: metals, plastics, advanced materials, machine tools