Foreign Ownership, Control, or Influence: Effect on Facility Security Clearances
Foreign entities that wish to invest in or acquire U.S. government contractors must consider the effects of such investment or acquisition on the target’s facility security clearances (“FCL”’s). Briefly put, a U.S. company that is determined to be under foreign ownership, control, or influence (“FOCI”) is ineligible for an FCL, and the investor or acquirer must take steps to negate the FOCI in order for the FCL’s to remain in force.
Although the U.S. has several industrial-security regimes, the Defense Security Service (“DSS”) is responsible for administering the largest such regime - covering the Department of Defense and many other agencies. The DSS’s National Industrial Security Program Operating Manual (“NISPOM”) mandates a holistic analysis for determining FOCI in which no single factor is dispositive. The following factors, among others, are suggestive of FOCI:
- Ownership or beneficial ownership, direct or indirect, of five percent or more of the target company’s voting securities by a foreign person;
- Ownership or beneficial ownership, direct or indirect, of 25 percent or more of any class of the target company’s nonvoting securities by a foreign person;
- Management positions, such as directors, officers, or executive personnel of the target company held by non-U.S. citizens; and
- Foreign-person power, direct or indirect, to control the election, appointment, or tenure of directors, officers, or executive personnel of the target company and the power to control other decisions or activities of the target company.
Where FOCI is found, the NISPOM authorizes a number of FOCI-negation action plans:
- Board resolution: used when a foreign person does not own voting stock sufficient to elect - or otherwise is not entitled to representation on - the target company’s board of directors.
- Voting trust agreements and proxy agreements: vests the voting rights of the foreign-owned stock in cleared U.S. citizens approved by the Federal Government; by definition, therefore, the foreign shareholder is not represented on the target’s board of directors.
- Special Security Agreements and Security Control Agreements: impose substantial industrial-industry and export-control measures on the target (including the establishment of a Government Security Committee) but preserve the foreign shareholder’s right to be represented on the target’s board of directors.
Because of the complexity of the DSS’s requirements, foreign entities that wish to invest in or acquire U.S. government contractors should consult government contracts counsel who are well versed in these requirements.
