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A Primer for the U.S. Business on the Required Information for the CFIUS Filing

A previous post described what the foreign party needs to disclose in its filing to the Committee on Foreign Investment in the United States, or CFIUS, when it wants to merge with, acquire or otherwise take over a U.S. business. Today’s post summarizes the information required from the U.S. business.

From the perspective of the U.S. business, the filing should provide a thorough presentation of those aspects of its business and operation that could raise what CFIUS deems to be national security considerations. In the case of the acquisition of some, but not all, of the assets of an entity, the U.S. business is to provide the requested information only with respect to those of its assets that have been or are proposed to be acquired. In all events, the notice that the U.S. business files should cover six general areas:

1.         What’s your business? The U.S. business must describe its business activities, including:

•  product and service categories;
• market share estimates;
• a list of direct competitors; and
• the address of facilities manufacturing certain products or services. 

2.         Really, what’s your business? The U.S. business must further respond to detailed questions regarding its business operations and critical technologies (as defined by FINSA) that it owns or licenses. If the U.S. business responds affirmatively to any of those questions, it also must provide additional disclosures. The questions include whether the U.S. business:

• supplies products or services to the U.S. government and whether it is the single qualified source for those products or services;
• manufactures or provides services for other parties that it knows are rebranded by the purchaser or incorporated into the products of another entity;
• produces products or provides services subject to various defense-related statutes or regulations;
• holds other licenses, permits or authorizations from the U.S. government; and
• has any technology with military applications.

3.         Have You Any Government Contracts? The U.S. business must state whether it:

• is or has been a party to contracts with the U.S. government involving classified information or technology or with agencies with responsibility for national defense, homeland security or other aspects of national security; and
• is or has been a party to any priority-rated contracts or orders under the Defense Priorities and Allocations System (DPAS regulations).

These questions require information going back three years in some cases and five years in others.

4.         What’s the CyberPlan? CFIUS requires that the U.S. business indicate whether it has a cyber-security plan. If so, it must attach a copy of the plan.

5.         Attach your Reports. The U.S. business must attach its most recent annual report. If the financial results of the U.S. business that is the target are consolidated with the results of its parent, the report of the parent may, in some cases, be sufficient. If the U.S. business does not prepare an annual report and its results are not included elsewhere, the filing need only include the business’s most recent audited financial statements. If there is none, then the business must attach its most recent unaudited financial statements.

6.         Jointly Presented Information. The CFIUS regulations require that, except for a hostile takeover, the U.S. business and all other parties to the covered transaction must disclose certain information, which is best accomplished when all parties file one notice. The information includes:

• general identifying information about the parties, and their parent entities;
• a description of the transaction in sufficient degree to permit CFIUS to determine whether the transaction’s structure brings it within the definition of “transaction” for purposes of its regulations;
• the anticipated completion date;
• the approximate value of the transaction;
• the identities of all financial advisors, underwriters and financing sources for the transaction; and
• the history of prior dealings between the parties and CFIUS, including whether any party is or has been a party to a prior mitigation agreement with CFIUS.

Of course, the descriptions of the six items above are summaries only. Reference should be made to the CFIUS regulations for the complete and definitive requirements. The assistance of a competent legal advisor in responding to these requirements is recommended.

More complete information about the filing can be found in our white paper, “Complying with the Voluntary Review Process When Investing in or Acquiring a U.S. Business.”

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A Primer for the Non-U.S. Party on the Required Information for the CFIUS Filing

Mergers, acquisitions and other takeovers of U.S. businesses by non-U.S. parties may require that the parties file a notice with the Committee on Foreign Investment in the United States, or CFIUS. Though much of the information required in the filing by the foreign party and its parent entities is quite detailed and technical, it can be organized into eight general areas.

1. Are You a Foreign Government? The foreign party must state whether a foreign government or a person controlled by or acting on behalf of a foreign government:
   • holds or controls any of the acquirer’s ownership interests;
   • holds the right to appoint any of its principal officers or any members of its board of directors;
   • holds any rights that relate to control; or
   • has any arrangements with other foreign persons that hold any interests in the acquiring foreign person.
2. Are You Planning On Materially Altering the U.S. Business? The notice must include any plans of the foreign party and its parents to materially alter the U.S. business in certain aspects, including any plans to:
   • reduce or sell research and development facilities;
   • change product quality;
   • shut down facilities or remove them from the U.S.;
   • consolidate or sell any product lines;
   • modify or terminate contracts involving classified information or contracts with certain governmental agencies; or
   • eliminate domestic supply.
3. Whose Deal Is This? CFIUS wants to know whether the actual party in interest is the named party to the transaction or a parent of the named party.
4. Who Are Your Directors, Officers and Substantial Shareholders?  Each acquiring foreign party must provide detailed information as to:
   • each member of its board of directors, including non-affiliated directors;
   • each executive officer; and
   • each individual owning more than five percent or more of the foreign party.
5. Who Is Your Parent? Each immediate, intermediate and ultimate parent (defined as an owner of fifty percent or more) is required to provide the same information as to its directors, officers and owners.
6.  What Is Your Name, Rank and Serial Number? The information to be disclosed by individuals is name, address, date and place of birth and national identity number, plus a curriculum vitae or an equivalent. In an effort to determine national security ramifications, individuals must also provide the dates and nature of service with a foreign government and foreign military service. CFIUS permits this information (other than the curriculum vitae) to be contained in a separate appendix.
7. Don’t Forget the Attachments! The completed notice requires the foreign party to submit several attachments:
   • annual reports, in English (with a certified translation), of the acquiring foreign party, unless its results are consolidated with those of a parent;
   • annual reports, in English (also with a certified translation), of the intermediate and ultimate parents of the foreign party;
   • organizational charts that illustrate all of the entities above the foreign party, up to and including the ultimate control person, including ownership percentages;
   •  the opinion of the filer as to whether it is a foreign party or is controlled by a foreign government and whether the transaction could result in foreign control of a U.S. business; and
   • any documents or agreements setting forth any arrangements among foreign parties that hold ownership interests in the foreign party to act in concert on matters affecting the U.S. business.
8. Have There Been Any Critical Changes? While the matter is pending before CFIUS, each filing party must promptly advise of any critical changes in the plans, facts and circumstances addressed in the notice and in the information that was provided. Each filing party must also file amendments to the notice describing those material changes. This requirement presents a significant challenge for a foreign party to “freeze” the affairs of its corporate parents and to be aware of (a) all material changes in ownership, (b) certain changes in the management of businesses over which the filing persons may have no control and no knowledge and (c) any other proceedings before CFIUS in which any other member of the corporate family may be engaged. Therefore, best practices for the filing parties are to involve each of their ultimate parents fully in the preparation of the filing and its processing, to ensure that all relevant changes are properly communicated and advised to CFIUS.   

Of course, the descriptions of these 8 items are summaries only. Reference should be made to the regulations for the complete and definitive requirements. The assistance of a competent legal advisor in responding to these requirements is recommended.  

Later posts to this blog will address the information that a U.S. business who is a party to a covered transaction must provide in its notice filed with CFIUS, as well as other tips for filing. More complete information about the filing can be found in our white paper, “Complying with the Voluntary Review Process When Investing in or Acquiring a U.S. Business.” 

Many thanks to summer associate Michael Litrownik from the Washington University School of Law for his assistance with this post. 

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As of yesterday evening, the U.S. Supreme Court allowed the purchase of Chrysler’s business to proceed as part of Chrysler’s Chapter 11 proceedings. The sale now has closed. A consortium that includes Italy’s Fiat SpA will acquire key assets of Chrysler’s international operations, including the core U.S. business, within a matter of days. The deal has been prominent in the news, particularly when the appeal by pension funds and consumer groups generated some uncertainty. The deal also is historic because of the extent of the U.S. government’s direct involvement as a party and as a dealmaker.

The sale of Chrysler provides a case study for applying the Foreign Investment and National Security Act of 2007 (FINSA) and its implementing regulations, administered by the Committee on Foreign Investment in the United States (CFIUS). 

Fiat and its wholly-owned subsidiary--the buyer that will carry on Chrysler’s business--have entered into a “Master Transaction Agreement” with Chrysler and most of its subsidiaries. The U.S. Treasury, the Canada Development Investment Corporation and an independent health care trust have entered into agreements to subscribe for equity membership interests and become Class A members of the buyer. The buyer will apply the proceeds of those subscriptions to pay its $2 billion cash acquisition price to Chrysler. Fiat has agreed to contribute to the buyer certain rights to Fiat technology--including product platforms, powertrains and other key technology, management services, access to international markets and other distribution enhancements--and retains a 20% membership interest. The buyer can increase its 20% interest to 35% in three tranches of 5% each by satisfying certain performance metrics. Fiat also has the option to own a 51% membership interest in the buyer. Fiat and the buyer will be cooperating in the development of joint purchasing programs, the sale of Fiat products in North America and the sale of the buyers products elsewhere through Fiat’s network, R&D activities and branding opportunities. 

According to the White House’s initial announcement of the deal on April 30

• The U.S. Treasury will receive 8% of the equity of the new Chrysler and also has the right to select the initial group of four independent directors of the buyer; and
• The Canadian participant will receive 2% of the buyer’s equity of the buyer and will have the right to select one independent director on the same basis as the four independent directors initially chosen by the U.S.

Analyzing these parties and their relationship to each other under the U.S regime for regulating foreign investment leads to a conclusion that their deal is a “covered transaction.” Covered transactions are subject to the voluntary notice procedures that CFIUS administers and to unilateral CFIUS review if no filing has been made. If a deal is a “transaction” with “foreign person,” and if as a result the foreign person acquires “control” or could acquire “control” of a U.S. business, then the transaction is a covered transaction. The FINSA regulations give the words in quotation marks special meanings. Applying those special meanings to the facts of the deal determines whether the voluntary filing requirement apples. 

• First, since the transaction among Chrysler and the other parties is an acquisition, it is a “transaction.”
• Second because Chrysler is a business entity engaged in U.S. interstate commerce, it is a “U.S. business.”
• Third, is the buyer a “foreign person”? Under the rules, a “foreign person” is any entity over which a foreign person exercises control. Fiat is a foreign person. Before the deal it owns 100% of the buyer. After the deal it owns 20% of the buyer with the right to own 51%. The rules define control to mean the power to “determine, direct or decide important matters affecting an entity.” The basis for the right need not be a majority position; a “dominant minority” is sufficient. Fiat’s business arrangements with the buyer, the board members it presumably will be able to appoint and its ability to achieve 51% ownership satisfy the requirements for control to exist.  The public's perception, expressed by Carcorner, is that Fiat is in control.
• Fourth, the buyer--a foreign person--is conclusively acquiring control of Chrysler.

If the parties have entered into a covered transaction, have they filed with CFIUS? Although their agreement details what antitrust filings the parties will make, it uses general, non-specific language for all other governmental filings. The receipt of governmental approvals was a condition to closing for all parties. Was the condition met or was it waived to close ASAP? The details of what filings were being made are in annexes to the agreement that do not appear to be publicly available. 

It may be interesting to speculate here. In all likelihood, the parties have made their CFIUS filing. If Chrysler and Fiat have not filed, however, it may be because they perceive no national security aspect to their deal and therefore no risk that, because of the absence of a filing, CFIUS will challenge their deal--a risk that few others might take. In its December 2008 Annual Report, CFIUS provided data on filed transactions in the transportation segment of the manufacturing sector. This means that other parties in the industry concluded that there was sufficient connection between the segment and U.S. national security to justify the time, expense and delay of filing a notice with CFIUS. The Report also points out that CFIUS monitors surface transportation and industrial automation as “critical technologies.” 

Since all CFIUS filings are shielded from public access, until CFIUS issues its next annual report the public may not know whether Fiat and Chrysler filed. If they haven’t, could CFIUS challenge the deal when a different administration is elected? 

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