CIFUS for Indian IT Company - Web viewCIFUS for Indian IT Company. ... Even though the subsea cables that were the subject of the transaction were used primarily for non-military purposes,

CIFUS for Indian IT Company

November 6

2014A case study to sensitize potential acquirers about the various regulatory concerns, approval process and structuring issues. Ankur Aggarwal,

Table of Contents

Table of Contents.........................................................................................................................................................1

Synopsis................................................................................................................................................................................2

Few notable investments in United States.............................................................................................................................2

Case 1. Reversed Deals.....................................................................................................................................................2

Case 2. Conditional approvals...........................................................................................................................................3

Case 3. Potentially risky yet successful deals....................................................................................................................4

Case 4. Public Sentiments can derail.................................................................................................................................4

Case 5. Fiascos..................................................................................................................................................................5

Approving Agencies & Regulators........................................................................................................................................5

CIFUS...............................................................................................................................................................................5

Armed Export Control Act:...............................................................................................................................................6

EAR: Export Administration Regulations (EAR)..........................................................................................................6

International Traffic in Arms Regulation (ITAR)..........................................................................................................6

Federal Communications Commission (FCC)...................................................................................................................7

National Industrial Security Program Operating Manual (NISPOM)................................................................................7

Foreign Ownership Control or Influence (FOCI)..............................................................................................................7

Department of Defense......................................................................................................................................................7

Evaluation Criteria................................................................................................................................................................8

Potential National Security Threats that may arise due to foreign control:........................................................................8

Control Criteria.................................................................................................................................................................8

Scrutiny of the Acquirer........................................................................................................................................................9

CFIUS Review Process.......................................................................................................................................................10

Parameters on which CFIUS reviews transactions..........................................................................................................13

Foreign control of US Businesses that-........................................................................................................................13

Acquisition of control by foreign persons that:...........................................................................................................13

Mitigation measures............................................................................................................................................................14

Handling of Sensitive US Government Contract & technologies....................................................................................14

Proxy Board (Voting trust agreement and Proxy agreement)..........................................................................................15

Special Security Agreement and Security Control Agreement........................................................................................15

Board resolution..............................................................................................................................................................16

Options to reduce the regulatory risks.............................................................................................................................16

CIFUS Demystified for Indian IT company Page 1

Few Stats on FDI in USA....................................................................................................................................................17

Few takeaways....................................................................................................................................................................18

Key Recommendations.......................................................................................................................................................18

Appendix.............................................................................................................................................................................19

Comparison: Methods that can be applied to negate or mitigate the risk of FOCI..........................................................19

SynopsisIn 2011 AVIC Chinese SOE (State owned entity) that manufacturers fighter aircrafts for Chinese government bought Cirrus, which manufactures aircraft components for US Defense forces. However in 2013, Polaris Financial Technology Ltd. an Indian IT was asked to reverse its acquisition of 85.3 percent stake in IdenTrust. The approvals might look arbitrary but often it is not always so.

This case-study uses a 3 prong approach to demystifying the approvals. Firstly we have consulted five reputed consultants. Secondly we researched precedents and thirdly we reviewed the entire public information document available on the topic.

US are under increasing pressure to protect its technology leadership and acquisitions expose them to the threat of espionage and proliferation of cutting edge technology and products. Acquisitions in Financial sector, Telecom and IT are scrutinized for their potential threat to data privacy and exposure to sensitive databases. Investments in Ports and mining need to be vetted for customs and border security risks.

Organizations prefer to integrate the two companies swiftly in order to maximize the synergy and cross-pollination of best practices and technology. This is often not aligned with US interests to protect and manage its risk. Several structures have been proposed as mitigation measures.

A successful Acquisition is one that manages its stake-holders well. Many acquisitions are shrouded under confidentiality and under-estimate the importance of a well-defined clear communication strategy. There is too much emphasis on the other share-holders that the promoters often tend to ignore the reaction of Public, Senate, various federal and state agencies.


Few notable investments in United States

Case 1. Reversed DealsA good roll out strategy, structure and preparation is all that is needed to get the investment approved.

In April 2011, Chennai-based Polaris Financial Technology Ltd. acquired an 85.3 percent stake for $20 million in IdenTrust Inc., a California-based company providing digital identification authentication services including to U.S. government agencies, without filing notice with CFIUS. CFIUS initiated a post-closing review of the deal. In September 2012, Polaris announced that it had been directed to divest its stake, likely due to concerns relating to cyber security and the target’s government contracts.

Case 2. Conditional approvalsUS are getting increasingly paranoid about data security & surveillance. This is one of the primary reason for detailed review & scrutiny of any IT and telecom deal. However with the right structure and roll out strategy this risk can be mitigated.

Videsh Sanchar Nigam Limited’s (VSNL) acquisition of Tyco Global network. CFIUS’ interest was aroused by the fact that the Indian government owned 25% of VSNL and because the transaction involved US strategic infrastructure. Even though the subsea cables that were the subject of the transaction were used primarily for non-military purposes, CFIUS viewed them as critical pieces of the US communications network.

To alleviate its concerns, CFIUS insisted on a number of mitigating measures. - facilitate US government surveillance of communications originating or ending in the

US; - store saved data from such communications solely in the US; store personal information

about American consumers solely in the US; - adopt special procedures to safeguard sensitive US government communications; restrict

visits by non-US citizens to VSNL’s US facilities; obtain approval from the US Department of Justice before complying with any foreign government request for access to communications data or other company information;

- seek US government approval before adopting a personnel screening plan; - and facilitate US government background checks of VSNL security personnel.

Reliance communication acquisition of Yipes Holdings. Reliance Communications Ltd. received approval from the Federal Communications Commission (FCC) for the merger of U.S.-based Yipes Holdings, Inc. Yipes became a wholly owned subsidiary of the Flag


Global Network, which is a wholly owned subsidiary of Reliance Communications. Yipes operates as a strategic business unit of Flag Telecom. CFIUS approval was conditioned on Reliance consenting to a host of mitigation measures, including that Yipes’ domestic communication infrastructure would be supervised within the United States and that its transactional data, subscriber information, and billing records would also be kept in the United States. Reliance further agreed to configure its U.S. network to enable authorized interception of communications by the U.S. government; restrict access to Yipes’ domestic network and data by foreign persons; and allow the U.S. government inspection and audit rights. Additionally, Reliance agreed to restrict access to Yipes’ domestic network and data by foreign persons and prohibit access to, and the disclosure of, domestic communications and data to foreign governments; to appoint a US-citizen security officer and implement personnel screening procedures; to configure its US network to enable authorized interception of communications by the US government; and to provide annual reporting on mitigation compliance and allow the US government inspection and audit rights.

Case 3. Potentially risky yet successful dealsAcquirer’s track record, its intentions and commitment is very important for CIFUS approval. With the right communication & commitment to respect US technology & strategic interest any deal can be approved.

In 1990, India based CMC Ltd. sought to acquire California-based UniSoft Group Corp., which designed customized applications for commercial and military use. Although UniSoft Corp. had no classified contracts at the time of the CMC’s proposal, its digital encryption standard technology was integrated into classified military products and subject to U.S. munitions control laws. Both the Departments of Commerce and Defense requested an investigation and CFIUS made a unanimous recommendation to the president not to intervene in the acquisition.

AVIC, a Chinese state-owned entity that designs & manufactures combat aircraft for China’s military, acquired Cirrus, a U.S. maker of all-composite piston & jet aircraft that supplies the US Air Force. AVIC acquired Continental Motors, U.S. maker of aircraft piston engines. AVIC also has co-production deals to make Citation business jets, Grand Caravans & Cessnas in China.

Case 4. Public Sentiments can derailM&A deals are shrouded in secrecy and underestimate the importance of right communication. The public opinion, non-promoter management, customers, employees, have a huge impact on the deals.CIFUS Demystified for Indian IT company Page 4

Dubai Port World (DPW) bid for six ports in USA. CIFUS approved the transaction and US President Bush openly supported the deal. However due to unfavorable public opinion and pressure from local authorities US Congress had to intervene and get the sale process stalled. Even though all the necessary approvals were obtained, DPW had to cancel the deal and sell its interests in USA to American International Group.

Case 5. FiascosAlthough this did not happen in USA, this deal has sent a chill across all governments and their FDI approving agencies.

In 2012 a private real estate transaction for a bunch of uninhabited islands Senkaku. Diaoyu escalated into a border dispute between China, Japan and Taiwan.

Approving Agencies & RegulatorsBelow is a list of some of the agencies that one would encounter during the CIFUS

CIFUSFormed in 1975, CIFUS (pronounced as “Sifus”) is an inter-agency committee of 16 departments including Defense, State, Commerce and Homeland security. This committee is chaired by Unites States Secretary of Treasury and is the final approving authority for all transactions in United States.• CFIUS reviews any transaction that could result in “control” of a U.S. business by a

foreign person to determine the transaction’s effect on national security• CFIUS review of the transaction considers:

• Threat: A function of the acquirereg.: ties to a countries intelligence services/military; business in sanctioned countries; ties to bad actors; parent country’s track record of espionage/proliferation; transparency about the acquirer and business rationale for the transaction

• Vulnerability – a function of the asset being acquiredeg:. Potential to affect U.S. critical infrastructure, technological leadership, domestic defense production; vulnerability to espionage, intrusion; proximity to sensitive USG locations

• Risk to national security – the product of threat and vulnerability• If CFIUS finds the risk to national security, will determine if the risks could be

mitigated:• Of so, parties may be required to enter into an agreement with the USG spelling out

the steps that will address the risks• If not, CFIUS may block the transaction


• To clear a transaction, CFIUS must conclude that there are “no unresolved national security concerns”

• CIFUS is insulated from political forces. Congress is informed only after a decision is taken

Armed Export Control Act:The Arms Export Control Act of 1976 gives the President of the United States the authority to control the import and export of defense articles and defense services. This control is exercised through Export Administration Regulations (EAR) and International Traffic in Arms Regulations. (ITAR)

EAR: Export Administration Regulations (EAR)The U.S. Department of Commerce has export control jurisdiction over the export of dual use items and items which have strictly civilian or commercial uses under the Export Administration Regulations (EAR). EAR controls the export of so called “dual use” items, i.e., goods and related technology designed for commercial purposes but which could have military applications. The list of EAR controlled items is called the Commerce Control list. The export control provisions of the EAR are intended to serve the national security, foreign policy, non-proliferation, and short supply interests of the United States and, in some cases, to carry out its international obligations. Some controls are designed to restrict access to dual use items by countries or persons that might apply such items to uses inimical to U.S. interests. These include controls designed to stem the proliferation of weapons of mass destruction and controls designed to limit the military and terrorism support capability of certain countries. The EAR also includes some export controls to protect the United States from the adverse impact of the unrestricted export of commodities in short supply.

International Traffic in Arms Regulation (ITAR)The U.S. Department of State has export control jurisdiction over the export of defense items under the International Traffic in Arms Regulations (ITAR). ITAR regulations control the export and import of defense-related articles and services on the United States Munitions List (USML). All manufacturers, exporters and distributors of defense articles, related technical data and defense services as defined by ITAR are required to register with the Directorate of Defense Trade Controls (DDTC) in order to be ITAR compliant and must have export control license.

Export Controls prohibit exports to certain countries and individuals, requiring licenses to export certain items, and requiring licenses to export technology, including software. The purpose of export controls is to protect national security, prevent terrorist activities, protect U.S. commercial interests and implement foreign policy. Unauthorized transfers of even low-level articles can potentially jeopardize national security.


Federal Communications Commission (FCC)The Federal Communications Commission regulates interstate and international communications by radio, television, wire, satellite and cable in all 50 states, the District of Columbia and U.S. territories. An independent U.S. government agency overseen by Congress, the commission is the United States' primary authority for communications law, regulation and technological innovation.

National Industrial Security Program Operating Manual (NISPOM)It prescribes the requirements, restrictions, and other safeguards to prevent unauthorized disclosure of classified information. The Manual controls the authorized disclosure of classified information released by U.S. Government Executive Branch Departments and Agencies to their contractors. It also prescribes the procedures, requirements, restrictions, and other safeguards to protect special classes of classified information, including Restricted Data (RD), Formerly Restricted Data (FRD), intelligence sources and methods information, Sensitive Compartmented Information (SCI), and Special Access Program (SAP) information.

Foreign Ownership Control or Influence (FOCI) Foreign investment can play an important role in maintaining the vitality of the U.S. industrial base. Therefore, it is the policy of the U.S. Government to allow foreign investment consistent with the national security interests of the United States. A U.S. company is considered under FOCI whenever a foreign interest has the power, direct or indirect, whether or not exercised, and whether or not exercisable through the ownership of the U.S. company's securities, by contractual arrangements or other means, to direct or decide matters affecting the management or operations of that company in a manner which may result in unauthorized access to classified information or may adversely affect the performance of classified contracts. Whenever a company has been determined to be under FOCI, the primary consideration shall be the safeguarding of classified information.

Department of DefenseThe Department of Defense is an executive branch department of the federal government of the United States charged with coordinating and supervising all agencies and functions of the government concerned directly with national security and the United States Armed Forces. The mission of the Department of Defense is to provide the military forces needed to deter war and to protect the security of our country.

AT&L (US Under-secretary for of Defense for Acquisition, Technology & Logistics) is a key stakeholder in any FDI involving Aerospace and Defense.


Evaluation Criteria“Rules are intentionally ambiguous to afford regulators maximum discretion” - Jose W Fernandez (Former CIFUS Board Member)

Potential National Security Threats that may arise due to foreign control: shutting down or sabotaging a critical facility in the United States; impeding a US law enforcement or national security investigation; accessing sensitive data, or becoming aware of a federal investigation or methods used by

US intelligence and/or law enforcement agencies, including moving transaction data and records offshore;

limiting US government access to information for surveillance or law enforcement purposes;

denying critical technology or key products to the US government or US industry; moving critical technology or key products offshore that are important for national

defense, intelligence operations, or homeland security; unlawfully transferring technology abroad that is subject to US export control laws; undermining US technological leadership in a sector with important defense, intelligence,

or homeland security applications; compromising the security of government and private-sector networks in the United

States; facilitating state or economic espionage through acquisition of a US company; and Aiding the military or intelligence capabilities of a foreign country with interests adverse

to those of the United States.

Control Criteria Control is power – direct or indirect, whether or not exercised – through voting interest,

board rep, special share, contract, or other means to decide important matters or cause decisions regarding:

o Transfer of any assets; significant contract entry or exit o Substantial alteration of facilities; major expenditures or approval of operating budget o Selecting new business lines; reorganization, merger, dissolution o Policies/procedures for proprietary information o Appointment or dismissal of officers or senior managers o Appointment or dismissal of employees with access to sensitive technology or

classified information CFIUS assessment of control considers all relevant factors – no formula or “bright line” Passive investor: CFIUS provides that a foreign person does not control an entity if it holds

10% or less of voting interest and holds it solely for the purpose of passive investment:


o An investor with the right to appoint a director is not passive o An investor who plans over time to increase his stake and/or role in the entity may not

be passive even if at present ownership is less than 10% Terms of investment are critical to whether CFIUS will determine that there is control by a

foreign person

Scrutiny of the AcquirerDuring the price negotiations, synergy projections, due diligence etc. we spend so much time analyzing the target that we neglect the importance of analyzing the acquirer. In the words of CIFUS officials: CIFUS review filing is not a deposition but a confession.

Country risk is critical for approval. CFIUS reviews transactions involving sensitive U.S. businesses regardless of the identity of the purchaser. Acquirers from countries with which the US government has tense security relations create more CFIUS risk.

Along with the acquirer’s profile, CFIUS also assesses the profile of acquirer’s parent, acquirer’s promoters, key management personnel, past track record, profile of acquirer’s customers and suppliers, etc.

The Board members and key executives of the acquirer could be subject to criminal charges in the event of any breach of compliance or deviation from the mitigation strategy and roll out plan

Publically listed acquirer might have significant share-holding of government due to ownership/control of stock by Public Sector banks, Financial Institutions, Mutual funds, insurance firm or sovereign wealth firms. Even though these investment are passive they need to be disclosed

Any joint venture with local government, foreign government (no matter how small and not directly relevant to the transaction) needs to be disclosed.

Acquirer’s profile risk with respect to certain risks is as follows:

# Criteria Assessment

1. Exposure to Indian defense, military and nuclear sector.

2. Exposure to countries under US embargo

3. Exposure to US/Indian government’s classified contracts

4. Track record of ITAR, EAR compliance


5.Exposure to US federal Government agencies and US state and local Government agencies

6. Ownership, control or significant business from Indian government

Dealings with sanctioned countries may weigh on CFIUS assessment of the likelihood that, under the control of this foreign entity, technologies, other intellectual property, products and services of the US business would be used to aid the sanctioned countries. Even though it is possible for a foreign entity’s dealings in these countries to be in full compliance with all US laws and treaties (as well as the laws and treaties of its home country and any other applicable nations), this information could affect CFIUS’s analysis of the national security threat of allowing the proposed transaction to proceed, and whether conditions should be required in a mitigation agreement. Regulations do not require the parties to a CFIUS notice to file information regarding business with sanctioned countries, but CFIUS often issues supplemental information requests covering the foreign acquirers’ business dealings in US-sanctioned countries, particularly in Iran. Several problems emerge due to lack of clarity from CFIUS, like the risk of uncertainty.

o Will any dealings at all by the foreign entity in sanctioned countries yield a high probability of CFIUS recommending that the president block a proposed transaction?

o Parties to a covered transaction might reasonably be concerned about the larger implications of disclosing these dealings to the US Government in connection with a proposed acquisition.

o Might the Departments of State and Commerce launch investigations on possible violations of US export licenses, and withhold new licenses while these investigations are pending?

o Could US government entities decide not to buy from the foreign entity, whether or not it is allowed to acquire the US business?

CFIUS Review ProcessAlthough CIFUS is totally a voluntary process, it is increasingly becoming

Parties may consult with CFIUS prior to filing a voluntary notice or submit draft notice. A review period of up to 30 day begins. In the review, CFIUS members examine the

transaction in order to identify and address, any national security concerns that arise as a result of the transaction. CFIUS members may request additional information from the


parties. Parties must respond to such follow-up requests within three business days of the request

After this review, in certain CFIUS may initiate a subsequent investigation, which must be completed within 45 days. In certain circumstances, CFIUS may also refer a transaction to the President for decision. President is required to announce a decision with respect to a transaction within 15 days of CFIUS’s completion of the investigation.

If CFIUS finds that the covered transaction does not present any national security risks or that other provisions of law provide adequate and appropriate authority to address the risks, then CFIUS will advise the parties in writing that CFIUS has concluded all action with respect to such transaction.

If CFIUS finds that a covered transaction presents national security risks and that other provisions of law do not provide adequate authority to address the risks, then CFIUS may enter into an agreement with, or impose conditions on, parties to mitigate such risks or may refer the case to the President for action.

Where CFIUS has completed all action with respect to a covered transaction or the President has announced a decision not to exercise his authority under section 721 with respect to the covered transaction, then the parties receive a “safe harbor” with respect to that transaction.


Parameters on which CFIUS reviews transactions

Among the considerations presented by transactions reviewed by CFIUS are the following-

Foreign control of US Businesses that-

Provide products and services to an agency or agencies of the U.S. Government, or state and local authorities that have functions that are relevant to national security.

Provide products or services that could expose national security vulnerabilities, including potential cyber security concerns, or create vulnerability to sabotage or espionage. This includes consideration of whether the covered transaction will increase the risk of exploitation of the particular U.S. business’s position in the supply chain.

Have operations, or produce or supply products or services, the security of which may have implications for U.S. national security, such as businesses that involve infrastructure that may constitute critical infrastructure; businesses that involve various aspects of energy production, including extraction, generation, transmission, and distribution; businesses that affect the national transportation system; and businesses that could significantly and directly affect the U.S. financial system.

Have access to classified information or sensitive government or government contract information, including information about employees

Are in the defense, security, and national security related law enforcement sectors. Are involved in activities related to weapons and munitions manufacturing, aerospace,

satellite, and radar systems. Produce certain types of advanced technologies that may be useful in defending, or in

seeking to impair, U.S. national security, which may include businesses engaged in the design and production of semiconductors and other equipment or components that have both commercial and military applications, or the design, production, or provision of goods and services involving network and data security.

Engage in the research and development, production, or sale of technology, goods, software, or services that are subject to U.S export controls.

Are in proximity to certain types of USG facilities.

Acquisition of control by foreign persons that:

Are controlled by a foreign government. Are from a country with a record on nonproliferation and other national security related

matters that raise concerns? Have historical records of taking or intentions to take actions that could impair U.S. national

security

Summary of the CIFUS transactions over the past 5 years

Year No of Notices No of Investigation No of withdrawals2008 155 23 232009 65 25 72010 93 35 12


2011 111 40 62012 114 45 23Total 538 168 71

70% of the transactions have been approved without any need of further investigation Majority of the transactions that were investigated were approved

Although CIFUS approves most of the transactions without any further investigation, 71 transactions were reversed or withdrawn after an official filing to CIFUS. Proper planning will help your transaction escape the same fate.

Mitigation measures

Handling of Sensitive US Government Contract & technologiesMitigation measures negotiated and adopted in 2012 required the businesses involved to take Specific and verifiable actions, including, for example: Ensuring that only authorized persons have access to certain technology and information. Establishing a Corporate Security Committee and other mechanisms to ensure compliance

with all required actions, including the appointment of a USG approved security officer or member of the board of directors and requirements for security policies, annual reports, and independent audits.

Establishing guidelines and terms for handling existing or future USG contracts, USG customer information and other sensitive information

Ensuring only U.S. citizens handle certain products and services, and ensuring that certain activities and products are located only in the United States.


538 formal filings

370 approved without

investigation71 withdrawn

Notifying security officers or relevant USG parties in advance of foreign national visits to the U.S. business for approval

Notifying relevant USG parties of any awareness of any vulnerability or security incidents. Termination of specific activities of the U.S. business. Having a FCL (Facility Clearance) and handling classified US Military projects is a great

asset to have when pitching for projects by US federal/local government or to any A&D clients. Hence it is better to carve them out into a separate entity

By moving classified projects to a separate entity derisks the rest of the business from CIFUS mitigation measure also reinforces Acquirer’s commitment to protect US national interests

The executive management of the SSA/Proxy board should be made part of the Target’s board as well

Proxy Board (Voting trust agreement and Proxy agreement)The Voting Trust Agreement and the Proxy Agreement are arrangements whereby the foreign owner relinquishes most rights associated with ownership of the company to cleared U.S. citizens approved by the U.S. Government. Establishment of a Voting Trust or Proxy Agreement involves the selection of Trustees or Proxy Holders, all of whom must become members of the company’s governing board. The foreign owner transfers legal title in the company to the Trustees. In a proxy agreement, the foreign owner’s voting rights are conveyed to the Proxy Holders. The Trustees or Proxy Holders assume full responsibility for the foreign owner’s voting interests and for exercising all management prerogatives relating thereto in such a way as to ensure that the foreign owner shall be insulated from the company, thereby solely retaining the status of a beneficiary. Neither arrangement imposes any restrictions on the company’s eligibility to have access to classified information or to compete for classified contracts.

Special Security Agreement and Security Control AgreementThe SSA and SCA are arrangements that, based upon an assessment of the FOCI factors, impose various industrial security and export control measures within an institutionalized set of company practices and procedures. They require active involvement in security matters of senior management and certain Board members (outside directors), who must be cleared U.S. citizens; provide for the establishment of a Government Security Committee (GSC) to oversee classified and export control matters; and preserve the foreign owner’s right to be represented on the Board (inside directors) with a direct voice in the business management of the company while denying unauthorized access to classified information. When a company is not effectively owned or controlled by a foreign interest and the foreign interest is nevertheless entitled to


representation on the company’s governing board, the company may be cleared under an SCA. A company that is effectively owned or controlled by a foreign interest may be cleared under an SSA arrangement.

Board resolutionWhen a foreign interest does not own voting interests sufficient to elect, or otherwise is not entitled to representation on the company's governing board, a resolution(s) by the governing board shall normally be adequate. The governing board shall identify the foreign shareholder and describe the type and number of foreign-owned shares; acknowledge the company's obligation to comply with all industrial security program and export control requirements; and certify that the foreign owner does not require, shall not have, and can be effectively precluded from unauthorized access to all classified and export-controlled information entrusted to or held by the company.

Options to reduce the regulatory risks# Option Implication for Target Implication for acquirer

1 Carve out of ITAR/EAR - Addl. Paperwork to handle the split

- Addl cost & issues regarding shared management & assets- More difficult to find buyer for residual part of business

- Reduced risk & faster approval due to reorg- How to handle projects/clients with both ITAR/ normal work- Non-compete clauses between the new entities

2 Carve out of classified business

3 Carve out of US govt direct business

4

JV approach(3 phased transfer 51-49% to 74-26% to 100%)

- How to handle residual equity- Promoter exit takes longer time- Potential upside due to better market scenario in future- Unlike carve-out little recourse options are available post transfer of management control

- Takes longer time due to milestone based transfer- Unlike subsidiary JV needs stricter governance, allocation basis of common assets, reporting & compliance requirements

5 Phased acquisition

Hive off normal business, followed by ITAR/EAR to pvt contractors, then US govt. direct business and finally classified business- Carved out business are self-sustaining and independent

Needs to handle 4 acquisition instead of 1Getting approvals for each milestone is expensive & time consuming

6 One shot transfer - All or nothing approach- Easier & cleaner approach The entire deal is risked


Few Stats on FDI in USA In 2013, US received $ 193.4 billion FDI inflows. Manufacturing and Finance/IT

constitutes majority of the transactions

U.S. Government actively solicits and facilitates FDI from India. U.S. Government signed an MOI with India’s Export-Import Bank (July 2014) to jointly facilitate increased Indian FDI into the U.S.

Modi & Obama created Defense Trade and Technology Taskforce for “enduring partnership” in A&D- Sept 2014

Country 2010 2011 2012 TotalChina 6 10 23 39UK 26 25 17 68India 1 1 4 6Total

(including ROW) 93 111 114 318

Indian FDI in U.S. grew at 41% compound annual growth rate from 2006 to 2011. Confederation of Indian Industries survey (2013) found that 68 Indian companies had invested $17 billion in the U.S. in 2013

Foreign Direct Investment into the United States has been an important factor in the U.S. economy for a number of years

U.S. Defense Department (DOD) is actively seeking to deepen defense industrial ties to Indian private sector firms through co-development & co-production programs.


Few takeaways The process can take as much as six months hence plan accordingly

o Seek pre-consultation from CIFUS and relevant agencieso The sellers might get jittery due to the long drawn process. Break-up fee, equity swap

are good measures to keep their interest aligned. Hire good advisors that include should include law firm, a strategy consultancy firm, a

lobbyist and a security consultant Have a clear deal Risk mitigation structure and roll out strategy

o Have the right structure to address the risk & security concernso Show how the local community and the stake holders benefit from the transactiono Have a roadmap to back your vision

Protect the American Brand & jobs If necessary split the business into entities based on the level of risk and derisk the rest of the

business from regulations Communicate with the stake holders this includes

o Key customers: who may be asked to vouch for youo Management of the target who can scuttle the dealo Manage public relations and try to steer away from controversy

Market yourselfo Highlight your track record of compliance, security and discretiono Show how it reinforces ties between the two countries

Key Recommendations Start preparation early Structure the deal in such a way that CFIUS concerns are addressed.

o However one should be prepared for Onerous restrictions and judgments by government agencies

Exposure to restricted countries & agencies which are under US Embargo is a serious concern


Appendix

Comparison: Methods that can be applied to negate or mitigate the risk of FOCI

BOARD RESOLUTION SECURITY CONTROL AGREEMENT

SPECIAL SECURITY AGREEMENT

PROXY/VOTING TRUST

Bound by all the requirements of any cleared firm in the NISP

Bound by all the requirements of any cleared firm in the NISP Bound by all the requirements

of any cleared firm in the NISP

Bound by all the requirements of any cleared firm in the NISPUS Company must be organized, structured and financed as a viable business entity independent from the foreign investor

Foreign interest does not own voting interests sufficient to elect, or otherwise is not entitled to representation on the company's governing board

Company is not effectively owned or controlled by a foreign interest and the foreign interest is nevertheless entitled to representation on the company’s governing board

Prerogatives of ownership retained by foreign investor with decisions monitored by US Outside Directors

Prerogatives of ownership surrendered by foreign investor to US Proxy Holders/Trustees

Proxy Holders exercise all prerogatives of ownership with complete freedom to act independently from the foreign investor with the following exceptions:- Sale or disposal of US company's assets or a substantial part thereof- Pledges, mortgages, or other encumbrances on the capital stock- Mergers, consolidations or reorganizations- Dissolution of the US company- Filing of a bankruptcy petition

Foreign owner’s right to be represented on the Board (inside directors) with a direct voice in the business management of the company while denying unauthorized access to classified information

Foreign investor Board member may have direct voice in business management through Board representation while denying unauthorized access to classified and export-controlled information

Outside Directors must be Outside Directors must be Proxy Holders/Trustees


cleared to level of facility clearance

cleared to level of facility clearance

must be cleared to level of facility clearance

No Access Limitations (Can access proscribed information)


Access Limitations- Proscribed Information (TS, SCI, SAP, COMSEC & RD) may require National Interest Determination


3 cleared U.S. citizens as Outside Directors

3 cleared U.S. citizens as Proxy Holders/Trustees

1 or 2 US citizen cleared Officers/Directors

Uncleared Inside director representing foreign investor

1 or 2 uncleared Inside Directors representing foreign investor

Only Proxy Holders/Trustees may elect other board members

Government Security Committee (GSC) to oversee classified and export control matters; and preserve the foreign owner’s right to be represented on the Board (inside directors) with a direct voice in the business management of the company while denying unauthorized access to classified information

Government Security Committee (GSC) to oversee classified and export control matters; and preserve the foreign owner’s right to be represented on the Board (inside directors) with a direct voice in the business management of the company while denying unauthorized access to classified information

Government Security Committee (GSC)- Outside Directors- Cleared Officer/Directors

Government Security Committee (GSC)- Outside Directors- Cleared Officer/Directors

Government Security Committee (GSC)- Proxy Holders/Trustees- Cleared Officer/Directors

Facility Security Officer and Technology Control Officer advisors to GSC

Facility Security Officer and Technology Control Officers advisors to GSC

Visit Approval Procedures for visits with representatives of foreign investor- Routine Business Visits. DSS defers to the GSC to determine the appropriate advance notice required.

Visit Approval Procedures for visits with representatives of foreign investor- No Routine Business Visits for foreign investor/affiliates. DSS defers to the GSC to determine the appropriate advance notice required.

Electronic Communication Plan- E-mail- Telephone- Video teleconferencing- Facsimile, etc.

Electronic Communications Plan- E-mail - Telephone- Video teleconferencing


- Facsimile, etc.SCA Operating Procedures SSA Operating Procedures Proxy/Voting Trust

Operating ProceduresCertification by GSC of Administrative Services, as required

Certification by GSC of Administrative Services, as required

Certification by GSC of Administrative Services, as required

Technology Control Plan Technology Control Plan

Annual certifications to the CSA acknowledging the continued effectiveness of the resolution.

Annual SCA Compliance Report Annual SSA Compliance Report

Annual Proxy/Voting Trust Compliance Reports

Annual Compliance Review Annual Compliance Review Annual Compliance ReviewAnnual Proxy/Voting Trust Compliance Review

Annual Certifications by GSC Members

Annual Certifications by GSC Members

Annual Certifications by GSC Members & Outside Directors

Annual Certifications by GSC & Proxy Holders/Trustees

Subject to security oversight as any other cleared firm in the NISP

Subject to security oversight as any other cleared firm in the NISP

SSA expires 5 years from date of execution

Proxy/Voting Trust Agreement expires 5 years from date of execution


Documents

CIFUS for Indian IT Company - Web viewCIFUS for Indian IT Company. ... Even though the subsea cables that were the subject of the transaction were used primarily for non-military purposes,