The U.S. Department of the Treasury’s Committee on Foreign Investment in the United States (CFIUS) reviews transactions involving foreign ownership in the U.S. for national security concerns. The committee should be on the radar of foreign buyers of wind projects, as well as of domestic wind developers seeking to sell their projects to foreigners. The CFIUS’ rules specifically mention “major energy assets” as a type of U.S. critical infrastructure that could raise national security concerns about a transaction. The rules also say that a deal’s effect on long-term U.S. energy needs is relevant in the CFIUS’ review. Whether these rules mean a wind deal should be reported to the committee depends on the facts and circumstances.
Notifying the CFIUS of a transaction is voluntary. However, the committee can initiate reviews in some cases and is also known to request voluntary filings from parties to a transaction that raises national security considerations.
If the CFIUS is notified of and approves a transaction, then the transaction is in the clear, assuming there were no material misstatements in what was submitted to the committee. If the CFIUS finds that the deal could impair U.S. national security, then it can involve the U.S. president, who has the power to prohibit the transaction or order a divestiture if the deal has already closed.
The regulations governing the CFIUS are opaque and purposefully broad, leaving many companies with questions about whether to notify the committee about a transaction.
One of the most common questions that arise is whether the nationality of the acquirer is relevant in determining whether a CFIUS filing should be made. People assume that acquirers from friendly or allied nations would get a pass. However, the CFIUS may review a transaction regardless of the acquirer’s origin. From 2009 through 2011, more than half of CFIUS filings dealt with acquirers from Canada, France, the U.K. and the Netherlands. During that period, one-quarter of the transactions had a U.K.-based acquirer. In 2009, the CFIUS approved the acquisition by Électricité de France of a 49.99% interest in Constellation Energy’s nuclear assets.
However, although the acquirer’s nationality does not matter when determining whether the committee has the authority to review a transaction, the nationality of the buyer could be an important factor when analyzing whether the transaction raises national security considerations. For example, Chinese companies have received heightened attention from the CFIUS in recent years. Committee filings for transactions involving a Chinese acquirer have increased from one filing in 2005 to 10 filings in 2011. Several of the filings have been submitted at the committee’s request.
In fall 2012, in a rare move, President Barack Obama issued an executive order that said the acquisition by the Ralls Corp. of four wind projects located near a U.S. naval facility in Oregon threatened to impair national security and ordered Ralls to divest itself of the wind farms. Ralls is owned by executives at Chinese manufacturer Sany Group, a Chinese state-owned entity. Other Chinese companies have abandoned deals, divested assets or instituted other mitigation efforts before deals have reached the point of a presidential decision.
That is not to say that all deals involving a Chinese acquirer will face problems. Early this year, the CFIUS approved the acquisition of lithium-ion battery manufacturer A123 Systems Inc. by a U.S. subsidiary of Wanxiang Group, a Chinese auto parts manufacturer. A123 had military and government contracts and had been awarded a U.S. Department of Energy grant of approximately $250 million.
For these reasons, some politicians opposed the deal. Despite political opposition to the acquisition, the CFIUS approved the deal. Reports indicate that the deal was structured so that A123 divested its government and military contracts and Wanxiang would not have access to A123’s technology or assets. Such structuring helped alleviate the anticipated national security concerns. Recently, the CFIUS approved the largest-ever takeover of a U.S. business by a Chinese company: ShUanghui International Holdings Ltd. acquired U.S. pork processer Smithfield Food Inc. for $7.1 billion. Reports indicate that the CFIUS approval was not conditioned on any mitigation requirements.
Another common question is what characteristics of a company or transaction raise a red flag to the committee. National security is not defined for the CFIUS purposes. However, the enabling statute lists factors considered by the committee in determining whether a transaction poses a national security risk. Such factors include the potential national security effects on U.S. critical technologies, the long-term projections of U.S. requirements for sources of energy, other critical resources and critical infrastructure. Critical infrastructure means a physical or virtual system or asset so vital to the U.S. that its incapacity or destruction would have a debilitating impact on national security. It includes major energy assets. However, the rules do not specify what constitutes a major energy asset.
Guidance issued by the Treasury makes clear that the concept of national security should be broadly interpreted and that it include acquisitions of U.S. businesses outside of the traditional defense sector. The guidance focuses on two characteristics of a deal: the nature of the U.S. business being acquired and the identity of the foreign person acquiring control of the business. The committee does not focus on any particular U.S. business sector. The CFIUS has found that transactions present national security considerations because the transaction involves a U.S. business that provides goods or services that directly or indirectly contribute to U.S. national security. The acquirer’s identity is particularly relevant if the buyer is controlled by a foreign government.
A more in-depth review is required if the deal is a foreign-controlled transaction or the transaction would result in foreign control of any critical infrastructure in the U.S. if the committee determines that the transaction could impair national security and the risk has not been mitigated. However, there is no mandatory investigation if the Treasury or the lead agency determines that the transaction will not impair national security.
Recent reports of CFIUS actions suggest that the proximity of the acquired assets to military or defense installations is relevant. The wind turbines in the Ralls case were located near a naval facility where drones are tested. Several Chinese companies have divested or abandoned acquisitions of mining assets near U.S. military bases in Nevada and Arizona due to CFIUS concerns.
Questions also arise regarding a covered transaction, which is when a foreign person will acquire control of a U.S. trade or business. Control is broadly defined in the CFIUS regulations but, essentially, means the power to direct or decide important matters affecting the business. For example, the power to appoint and dismiss officers, select new lines of business or control the finance of the company are indicative of control. The control can be direct or indirect. Side agreements or disproportionate voting rights could cause a minority interest holder to control the business. However, the regulations specify certain minority shareholder protections that do not convey control, such as the power to prevent the sale of all – or substantially all – of the company’s assets.
At a basic level, companies often wonder how long the process will take. Although there are statutory deadlines for certain phases of the process, the exact timing of the process is hard to predict.
The CFIUS process breaks down into four phases. First, there is a pre-filing stage during which the parties to a transaction prepare the notice and preliminary consultations with committee staff may occur. Such early engagement of CFIUS staff is advisable, including the submission of a draft filing. The CFIUS does not issue advisory opinions. However, the pre-filing period gives the committee staff an opportunity to familiarize itself with the transaction and ask questions, which helps submitters prepare and file a complete notice.
The second phase, a 30-day review period, begins once parties submit the notice and the CFIUS decides it is complete enough to disseminate to committee members. If unresolved national security issues remain after the initial review period, then there is a 45-day investigation. An investigation is mandatory in certain circumstances.
If a company files a notice and the CFIUS concludes that there are no unresolved national security considerations, then the transaction is cleared. If national security concerns remain, the CFIUS may enter into mitigation agreements with the parties or impose conditions on the transaction to address the national security risks. Following an investigation, the CFIUS may send a report to the president recommending that he suspend or prohibit the transaction. Such a report may also be sent when committee members are unable to reach a decision on whether to recommend blocking the transaction.
If the CFIUS refers a transaction to the president, he has the authority to block the transaction if he has credible evidence that the foreign investment could impair national security. However, to invoke this authority, the president must determine that other U.S. laws are inadequate or inappropriate to protect the national security. The president’s decision must be made within 15 days after the CFIUS completes its investigation.
If the review process or investigation is not going well, then the parties will often voluntarily withdraw their notice rather than risk presidential suspension or prohibition. Thus, it is rare for the CFIUS to complete its review with a recommendation that the president block a transaction. From 2009 through 2011, 269 transactions were reported to the CFIUS. Of those, 12 were withdrawn during the initial review. There were investigations of 100 transactions, with 13 notices withdrawn during the investigation.
All information submitted to the CFIUS, including during the pre-filing stage, is confidential.
Although no assurances can be given when it comes to a CFIUS review, analyzing and weighing these issues and engaging CFIUS counsel early will help parties navigate the complicated process. w
Industry At Large: Foreign Investment
Meet The Agency Responsible For Approving Foreign Ownership
By Amanda Forsythe
A little-known committee within the U.S. Department of the Treasury could have a big impact on deals involving foreign acquisitions of U.S. businesses.
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