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Throughout this presentation, “Cleary Gottlieb” and the “firm” refer to Cleary Gottlieb Steen & Hamilton LLP and its affiliated entities in certain jurisdictions, and the term “offices” includes offices of those affiliated entities.

Paul Marquardt

Committee on Foreign Investment in the United States (CFIUS): Recent DevelopmentsSeptember 2013

Created and governed by a statute known as the “Exon-Florio Amendment” and its implementing regulations

Charged with reviewing the national security implications of transactions that involve the acquisition of a U.S. business by a foreign person

Consists of 16 representatives from various government agencies and offices

• Staff is part of the Treasury Department

Committee on Foreign Investment in the United States (CFIUS)

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Any merger, takeover, or other acquisition that results in control of a U.S. business, even if the U.S. business is acquired from a foreign entity

Any foreign national, entity, or government, or any entity over which a foreign national, entity, or government has “control”

The power to determine, direct, or decide important matters affecting an entity, including the power to block a decision

• Control is a case-by-case determination that rests upon both the acquirer’s level of ownership (with no set threshold) and the rights exercisable by the acquirer

• More like “significant influence” than formal control

Includes the U.S. operations of foreign companies

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Transaction

Foreign

Person

Control

U.S. Business

CFIUS Jurisdiction: “Covered Transactions”

CFIUS has authority to review “Covered Transactions,” which include any “transaction” by or with any “foreign person,” which could result in “control” of a “U.S. business” by a foreign person

CFIUS notification is technically voluntary

• The law does not require parties to file a notice with CFIUS prior to a transaction

• CFIUS notification does not suspend the transaction

– Parties may close before a CFIUS review is complete, though this is uncommon, as it shifts all risk to the acquirer

CFIUS can compel a review

• On the Committee’s recommendation, the CFIUS Staff Chair may initiate a review

• Any CFIUS member may initiate a review by filing an agency notice of a transaction

• CFIUS has subpoena authority

CFIUS may initiate a review post-closing

• If the parties do not file a notice, CFIUS retains the right to review the transaction in the future, even after the transaction closes

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CFIUS Review as a “Voluntary” Process

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Advantages of Voluntary Notification Disadvantages of Voluntary Notification

May reduce vulnerability to political criticism

Eliminates the risk that the target, a rival bidder, or another interested party will seek to encourage CFIUS review at a late stage to delay the transaction

Eliminates the risk of a post-closing review and an order of divestiture

May draw attention to a transaction that would otherwise go unnoticed

Notification imposes burdensome requirements to produce information

May lead to pressure from U.S. agencies to alter the transaction

Advantages and Disadvantages of Voluntary Notification

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Filing Process: Overview

Pre-Filing Submission

Formal Filing &

AcceptanceBy CFIUS

CFIUSClears

orInitiates

Additional Investigation

CFIUSClears

or Refers to President

PresidentClears

or Blocks

5+ Day Pre-Filing Review

30-Day Review 45-Day National Security Investigation

15-Day Presidential

Review(Rare)

Timeline may be varied by requests for “voluntary” extensions

Timeline may be restarted if there is a material change to the

transaction or if any information request is not answered within three business days

Voluntary notices are required to include:

• Details about the transaction and foreign entities involved

• Organizational chart showing all entities in foreign acquiror’s ownership chain, including the percentage of shares held by each entity

• Details about the target’s business, products, services and market share and the acquiror’s future plans for the target’s business

• Details on the target's U.S. government contracts

• Detailed "personal identifier information" for all board members, senior management, and shareholders holding 5% or more of the acquiror, its intermediate parent or its ultimate parent.

– This information includes each individual’s passport number and details about the individual’s foreign military and government service

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Contents of a Voluntary Notice

CFIUS is only concerned with transactions that impair the “national security” of the United States

• “National security” is left undefined by the Exon-Florio Amendment and its implementing regulations, though it does include “homeland security” and “critical infrastructure”

– “Critical infrastructure” Systems or assets so vital to the U.S. that their incapacitation or destruction would have a debilitating impact on national security

• CFIUS’s view of national security is broad and flexible, and it goes well beyond military matters

CFIUS utilizes a two-stage analysis to determine the degree to which a transaction may impair national security

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Focus of CFIUS Review: “National Security”

Stage 1: Vulnerability

Stage 2:

Threat

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National Security: Two-Stage Analysis

CFIUS identifies all national security considerations to determine whether the U.S. business creates a vulnerability in U.S. national security

• Key Issue: Whether a foreign person in control of the business could take action that threatens to impair U.S. national security

CFIUS determines whether the particular foreign acquirer poses a threat

• Key Issue: Whether the acquirer has the capability or intention to exploit any vulnerability or to cause harm

CFIUS has identified sensitive sectors that may raise concerns, including:

• Government contractors (especially for defense, security, and national security)

• Weapons and munitions manufacturing

• Aerospace

• Critical infrastructure

– Telecommunications

– Energy

– Transportation

– Financial institutions

• Advanced technology

• Strategic resources

• Potential terrorism targets (e.g., chemical facilities)

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National Security: Sensitive Sectors

CFIUS staff has been more formal and rigid in following procedures than under prior administrations

• Very difficult to obtain meaningful informal guidance

• Not sensitive to timing concerns, even in public transactions

Lower transaction volume means more time to spend on review

• Inquiries into non-notified transactions and investigations of closed transactions becoming more frequent

Heightened concern over cyber-security

• The U.S. government has become increasingly concerned about potential cyber attacks aimed at government computer systems and those of U.S. companies, particularly from China

– The Pentagon’s 2013 Annual Report to Congress publicly accused China of a role in cyber attacks

– Congress has issued a number of reports accusing Huawei and ZTE of involvement in cyber warfare

Less focus on sovereign wealth funds

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CFIUS Review: Recent Developments

"Regulation by CFIUS"

• Security agencies are using CFIUS review to regulate industries they don't have direct authority over, especially telecommunications

– Offshoring, choice of suppliers

Geographic proximity to sensitive U.S. government facilities

• Ralls – Transaction involved wind farm projects located near a U.S. Navy flight training area in Oregon

• Northwest NonFerrous International Investment / Firstgold – Acquisition involved a mine located near Fallon Naval Air Base in Nevada

• Procon Resources / Lincoln Mining – Acquisition involved another mine near Fallon Naval Air Base

• FEGRI / Nevada Gold – FEGRI required to divest its interest due to the proximity of Nevada Gold’s primary mining operation to Fallon Naval Air Base

• CNOOC / Nexen – Security agreement involved rigs in the Gulf of Mexico

Certain industries highly scrutinized

• Critical technologies, telecommunications and energy sectors continue to receive greater scrutiny from CFIUS

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CFIUS Review: Recent Developments

CFIUS has closely scrutinized deals involving Chinese acquirors and challenged several:

• SoftBank / Sprint (2013) – Obtained CFIUS clearance, but security agreement involved restrictions on the use of Huawei and ZTE equipment in the Sprint network

• Procon Resources / Lincoln Mining (2013) – CFIUS required Procon to divest its interest in Lincoln, a Canadian mining company with U.S. subsidiaries

• China Superior / Hawker (2012) – Deal failed in part due to concerns about CFIUS objections and difficulties separating Hawker’s defense operations

• Ralls (2012) – Acquisition of wind farm project companies was blocked post-closing

• Tangshan Caofeidian Investment Corp / Emcore (2010) – TCIC withdrew notification of its bid for Emcore’s fiber optics division in light of CFIUS objections

• Huawei

– 3Leaf (2010) – CFIUS opened a post-closing investigation of Huawei’s acquisition of a small server-network company’s assets

– 3Com (2008) – Huawei abandoned its bid to acquire a 19% stake in 3Com after coming under politically-charged CFIUS scrutiny

• Northwest Nonferrous International Investment / Firstgold (2009) – Northwest Nonferrous abandoned its bid to acquire Firstgold after CFIUS indicated it would recommend that the President block the deal

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Challenges Faced by Chinese Acquirors

Deals involving Chinese acquirors have obtained CFIUS clearance despite political and protectionist interests

• Shuanghui / Smithfield Foods (2013) – CFIUS recently cleared Shuanghui’s acquisition of Smithfield despite significant political opposition by farming interests citing food security concerns

• Wanxiang Group / A123 Systems (2013) – CFIUS cleared Wanxiang Group’s purchase of battery manufacturer A123 even though critics argued the acquisition would transfer technology developed with U.S. stimulus money to China

• Anshan Steel / Steel Development Company (2010) – The Congressional Steel Caucus unsuccessfully lobbied CFIUS to block Anshan’s purchase of a minority stake in Steel Development's Mississippi rebar facility

Deals have obtained CFIUS clearance despite attacks from rival bidder

• SoftBank / Sprint (2013) – Rival bidder Dish Networks attacked the deal on national security grounds, but it ultimately obtained CFIUS clearance

• BGI-Shenzhen / Complete Genomics (2012) – CFIUS cleared BGI's acquisition despite efforts by rival bidder Illumina to highlight national security concerns in gene sequencing technology

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Most Chinese Acquirors Obtain CFIUS Clearance

Transactions involving sensitive sectors and state-owned entities have received approval from CFIUS, even when political challenges were mounted

• CNOOC / Nexen (2013) – CNOOC’s acquisition of Nexen, a Canadian oil and gas company with assets in the U.S., was cleared with conditions despite opposition by some in Congress

• Sinopec / Devon Energy (2012) – Acquisition of a one-third stake in five Devon Energy oil and gas projects approved

• CNOOC / Chesapeake Energy Corporation (2010, 2011) – Acquisition of one-third interests in two Chesapeake Energy oil and gas projects approved

• AVIC

– Cirrus (2011) – Acquisition of U.S. aircraft manufacturer Cirrus by AVIC's subsidiary approved

– Teledyne (2010) – Acquisition by AVIC of two U.S. subsidiaries of aircraft engine manufacturer Teledyne approved

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Most Chinese Acquirors Obtain CFIUS Clearance

Additional Chinese investments approved in recent years include:

• Lenovo / EMC (2012) – Joint venture between Lenova and data-storage provider EMC to develop and sell servers and network storage

• China Three Gorges / EDP (2011) – Acquisition of a 21% stake in Portuguese power group EDP, which operates a significant number of wind farms in the U.S.

• Canon / Altair (2011) – Acquisition of a 51% stake in Altair, a U.S. manufacturer of lithium-ion energy systems and batteries

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Most Chinese Acquirors Obtain CFIUS Clearance

Transparency

• Transparent governance and ownership

• Supplement self-disclosure with external audit and verification

• Independent external advisors/board members

• Consider whether public listing outside China is feasible/desirable from a business perspective

• Participation in industry and standard-setting bodies

Political and public engagement

• Channels to CFIUS and its agencies should remain open

• Consider retaining public relations and government relations advisors to work as a team with legal advisors

• Public image needs to support strategy

• Try to engage critics in Congress where possible

• Take a leadership role in global efforts to cooperate with industry and government

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Risk Mitigation Strategies

Avoid or divest sensitive businesses

Consider separating sensitive operations

• Approaches such as “firewalls” and security monitoring by the U.S. Government may be accepted

• Structure to avoid operational control of sensitive U.S. assets

• Spin off problematic business to a second buyer

Pursue non-controlling investments

• Under 10% and passive is safe, but clear minority investments can work

• Non-ownership joint ventures, R&D/marketing agreements, sales of individual assets

• Pursue influential U.S. partners

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Risk Mitigation Strategies (continued)

Avoid or divest sensitive businesses

Consider separating sensitive operations

• Approaches such as “firewalls” and security monitoring by the U.S. Government may be accepted

• Structure to avoid operational control of sensitive U.S. assets

• Spin off problematic business to a second buyer

Pursue non-controlling investments

• Under 10% and passive is safe, but clear minority investments can work

• Non-ownership joint ventures, R&D/marketing agreements, sales of individual assets

• Pursue influential U.S. partners

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Risk Mitigation Strategies (continued)

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