The Committee on Foreign Investment in the United States (CFIUS) released December 20, 2012, the unclassified version of its Annual Report to congress for CY 2011. For the first time CFIUS made a finding that the U.S. Intelligence Community "judges with moderate confidence that there is likely a coordinated strategy among one or more foreign governments or companies to acquire U.S. companies involved in research, development, or production of critical technologies for which the United States is a leading producer." The "critical technologies" at issue are defined with reference to U.S. export control regulations, and include (1) defense goods and services controlled on the U.S. Munitions List; (2) certain items on the Commerce Control List that are controlled for reasons of national security, chemical and biological weapons proliferation, nuclear nonproliferation, or missile technology, as well as those that are controlled for reasons of regional stability or surreptitious listening; (3) specially designed nuclear equipment, technology, software, etc.; and (4) select agents and toxins. CFIUS views a "coordinated activity" as "a plan of action reflected in directed efforts developed and implemented by a foreign government, in association with one or more foreign companies, to acquire U.S. companies with critical technologies. CFIUS does not consider the efforts of a single company in pursuit of business goals (such as entry into the U.S. market; increased market share; increased sales; access to new technologies; and diversification out of mature industries), absent indications of specific government direction, to be a coordinated strategy.
The unclassified report does not identify any entities believed to be engaged in a coordinated strategy to acquire critical technologies, though the classified version may identify such entities. As the first of its kind, it is difficult to anticipate the impact of this new CFIUS finding. It is likely that future transactions involving entities suspected of being engaged in a coordinated strategy to acquire critical technologies will be under greater scrutiny and mitigation requirements, or be blocked entirely. Mitigation refers to a means of alleviating a national security concern arising from a proposed transaction. Such mitigations measures can include requiring the businesses involved to establish a Corporate Security Committee, security officers, and other mechanisms to ensure compliance with all required actions (including annual reports and independent audits); mandate that a proxy entity perform certain functions and activities of the U.S. business; create compliance programs to ensure compliance with established guidelines and terms for handling existing or future government contracts and government customer information; to agree and ensure that only U.S. persons will handle certain products and services, and that certain activities and products will be located only in the United States; notify relevant government parties in advance of foreign national visits to the U.S. business or of any material introduction, modification, or discontinuation of a product or service (as well as any awareness of any vulnerability or security incidents). etc.
Contractors who are involved with the critical technologies described above should be vigilant whenever a potential acquisition, merger or takeover is under consideration that involves a foreign government, company, or person. While the national security issues at stake may not prevent the transaction from moving forward, it may yet impact your operations through a stiff mitigation plan. That CFIUS now for the first time has found that the U.S. Intelligence Community believes at least to some measurable degree that there likely is a coordinated strategy to acquire U.S. companies involved in research, development, or production of critical technologies, approval of such ventures are presented with even more risks and possible challenges.
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