Committee on Foreign Investment in the United States Primer

Transcription

1 Committee on Foreign Investment in the United States Primer Breakdown of the Committee on Foreign Investment in the United States Process, the Risks, and the Next Steps May 27, 2016 Producer: Hunter Hamrick Edited by: Katharine Conlon Director: Afzal Bari

2 PRESENTATION CENTER CFIUS PRIMER Key Terms CFIUS The Committee on Foreign Investment in the United States (CFIUS) is the interagency committee that serves the President in overseeing the national security implications of foreign investments in the economy Exon-Florio Provision Provision that granted the President the authority to suspend or prohibit any foreign acquisition, merger, or takeover of a U.S. business when the transaction was determined to threaten the national security of the United States FINSA The Foreign Investment and National Security Act (FINSA) is the act that significantly expanded CFIUS mandate by establishing them with statutory authority and designating the Secretary of the Treasury as the Chairman of the CFIUS Byrd Amendment Amendment to the 1992 Exon-Florio provision that requires the CFIUS to investigate proposed mergers, acquisitions, or takeovers in cases where the acquirer is controlled by or acting on behalf of a foreign government and the acquisition could affect the national security of the United States Source: Congressional Research Service, The Committee on Foreign Investment in the United States (CFIUS), James K. Jackson,, February 19,

3 The CFIUS Consists of the Heads of Several Departments and Offices Heads of the CFIUS CFIUS PRIMER Sec. of the Treasury, Jacob Lew (Chair) Sec. of Commerce, Penny Pritzker Sec. of Energy, Dr. Ernest Moniz Attorney General, Loretta Lynch Sec. of Defense, Ash Carter U.S. Trade Rep, Michael Froman Sec. of Homeland Security, Jeh Johnson Sec. of State, John Kerry Director of Science and Technology Policy, Dr. John Holdren Sources: Congressional Research Service, The Committee on Foreign Investment in the United States (CFIUS), James K. Jackson, February 19,

4 The Merger Request Process has Five Overall Steps that Involve the CFIUS and the White House Overview of the CFIUS Merger Request Process CFIUS PRIMER Covered Informal Talks between the CFIUS and company File Acquisition With CFIUS CFIUS conducts 30 Day Review CFIUS conducts 45 Day Security Investigation President has 15 days to make a decision Not Covered Merger Can Go Through

5 The Informal Review Step Allows Companies to Address Outstanding Issues Before the Formal Talks Begin Overview of the Informal Talk Process in the CFIUS Merger Request Process CFIUS PRIMER Informal Talks between the CFIUS and company File Acquisition With CFIUS Informal Review Not an official step of the CFIUS process but a step that has become a part of the process overtime Allows companies to have an unspecified length of time where they work with the CFIUS staff to identify potential issues before the review process formally begins Allows firms to work out any national security concerns privately with individual CFIUS members before those concerns become public through administrative, judicial action, or legal proceedings Allows CFIUS members to negotiate with firms without time constraints This step allows firms to avoid risky potential negative publicity

6 Once the Company Files for a Merger, then CFIUS conducts a 30 Day Review on the Transaction Overview of the 30 Day CFIUS Merger Request Process CFIUS conducts 30 Day Review Not Covered Covered CFIUS conducts 45 Day Security Investigation Merger Can Go Through Covered Transactions In order for a transaction to be considered covered, one of the three requirements must be met 1. The transaction may threaten to impair national security. 2. The foreign entity is controlled by a foreign government 3. The transaction would result in a foreign person controlling an entity that is considered to be critical infrastructure 30 Day Review Once the company formally submits the merger request, CFIUS will conduct a 30 Day review to determine whether or not the transaction is covered. If the transaction is considered to be covered, then CFIUS is required to conduct a 45 Day National Security investigation If the transaction is considered to be not covered, then the process ends and the merger can go through If one CFIUS member determines the investment impairs national security, then it proceeds to a 45 Day Security Investigation

7 CFIUS Will Conduct the 45-Day National Security Review if One of the Critical Sectors is Involved The 12 Industries CFIUS Labels as Critical Infrastructure Chemical Defense Food and Agriculture Manufacturing Commercial Facilities Emergency Services Information Tech Nuclear Communication Energy Healthcare Transportation Dams Financial Services Government Facilities Water 6

8 If CFIUS Determines the Transaction to be Covered then CFIUS will Undertake a 45 Day Review Overview of the CFIUS Merger Request Process CFIUS conducts 45 Day Security Investigation 45 Day Review If the transaction is labelled as covered during the 30 Day Review, then CFIUS will undertake a more thorough 45 Day Review of the transaction During the review or investigation, CFIUS and a designated lead agency has the authority to negotiate, impose, or enforce any agreement or condition that mitigates the threat of national security of the United States through a risk based analysis After the investigation or the 45 Day review period, CFIUS can recommend whether or not the President should suspend, prohibit, or allow the investment If the transaction is withdrawn before any review or investigation is completed, CFIUS has the authority to require the company to create time frames in order for the company to address outstanding national security issues

9 If the CFIUS Merger Process Reaches the White House, the President has 15 Days to Reach a Decision Overview of the White House s Role in the Merger Request Process President has 15 days to make a decision White House Decision After the 45 Day Review, CFIUS offers a recommendation to the President on how to handle the foreign acquisition The President is under no obligation to follow the recommendation that CFIUS makes on the foreign acquisition The President has the authority to either suspend the acquisition or allow it to proceed If the President suspends the acquisition, he must be able to conclude that other U.S. laws are inadequate or inappropriate to protect the national security and there is credible evidence that the foreign investment will impair national security When deciding whether or not to block the acquisition, the President must consider 12 factors

10 When Making his Decision on Blocking the Acquisition, the President Considers 12 Factors Overview of the 12 Factors the President Considers when Deciding to Block an Acquisition Factors the President Considers 1. Domestic production needed for projected national defense requirements 2. The capability and capacity of domestic industries to meet national defense requirements, including the availability of human resources, products, technology, and other supplies and services 3. The control of domestic industries and commercial activity by foreign citizens as it affects the capability and capacity of the U.S. to meet the requirements of national security 4. The potential effects of the transactions on the sales of military goods, equipment, or technology to a country that supports terrorism or proliferates missile technology or chemical and biological weapons and transactions identified by the Secretary of Defense as posing a regional military threat to the interests of the United States 5. The potential effects of the transaction on U.S technological leadership in new areas affecting U.S. national security 6. Whether the transaction has a security-related impact on critical infrastructure in the United States 7. The potential effects on U.S. critical infrastructure 8. The potential effects on U.S. critical technologies 9. Whether the transaction is a foreign government-controlled transaction 10. In cases involving government-controlled transaction a review of the country s policies toward nonproliferation, policy and actions towards countering terrorism, and the potential military uses with these pieces of technology 11. The long-term projection of the U.S. requirements for sources of energy and other critical resources and materials 12. Other factors the President and CFIUS deems appropriate

11 While Many CFIUS Merger Forms are Filled Out, Many Do Not Get Investigated or have Presidential Action Foreign Investment Transactions Reviewed by CFIUS from 2008 to 2014 Year Number of Notices Notices Withdrawn During Review Number of Investigations Notices Withdrawn During Investigation Presidential Decisions

12 The Main Industry to Have a CFIUS Review Conducted is the Financial Information Industry Industry Composition of Foreign Investment Transactions Reviewed by CFIUS from 2008 to 2014 Year Manufacturing Finance, Information, and Services Mining, Utilities, and Construction Wholesale and Retail Trade

13 When Making his Decision on Blocking the Acquisition, the President Considers 12 Factors Potential Risks and Political Pressures Involving CFIUS Merger Requests Potential Risks and Political Pressures Based on CFIUS Foreign Investment Transaction report from 2008 to 2014, there is very little risk in filing a CFIUS merger request form Out of the 782 notices requested in the past six years, only around 30% of those notices required an investigation and ultimately only one called for a Presidential decision The mergers most likely to be considered covered are mergers involving manufacturing companies. From 2008 to 2014, around 42% of the companies reviewed were from manufacturing companies One political factor that plays a major role in the Review process is the origin of the company. Recent foreign relations with China make mergers involving Chinese companies more likely to be investigated than mergers involving other countries Overall, there is little publicity risk in filing a CFIUS merger form. Each year, CFIUS provides Congress with a classified report that details a list of all reviews and investigations that have been conducted,, information on the business activities of the parties involved, information on the current status of the review, information on any withdrawal of a merger request, and any presidential decision taken by the President or under the Exon-Florio provision. In addition to the classified report, the informal stage of the merger request form allows both the CFIUS and the company to privately address any issues before a formal request is filled out However, potential negative determination by the CFIUS had led to some companies withdrawing their application

14 The Acquiring Entity and the Target Company Should Take a Detailed Analysis of their Holdings Checklist Both Companies Should Go Through Pre-CFIUS Review The Acquiring Entity Who owns or controls the foreign acquirer (including all companies in the ownership chain)? Is the foreign acquirer directly or indirectly owned or controlled by a foreign government? What are the foreign person s plans for the business and its strategic purpose for the acquisition? The name, address, date of birth, place of birth, nationality, national identification number, and passport number for each member of the Board of Directors, senior executives of all companies in the ownership chain, and any shareholder with 5% or more equity in the foreign acquirer The Target Company Does it have a Facility Security Clearance or access to classified data? Does it have U.S. government contracts? If so, do any of those contracts involve government agencies with national security responsibilities? Does it produce technology, software or goods listed on a U.S. control list? Does it own/have access to/operate critical infrastructure? Does it have significant holdings in sensitive resources Could foreign control of the domestic industry in question affect the capability and capacity of the U.S. to meet national security requirements? What potential effect will the acquisition have on U.S. technological leadership in areas affecting national security? Does it have or operate any facilities near U.S. defense facilities