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Regulatory Considerations Relating to the Acquisition of U.S. Government Contractors by Foreign Buyers
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By Gene Schleppenbach and Peter Farrand*
 
          As the global economy continues to recover from the “Great Recession” of 2008, businesses, especially those with significant cash reserves or the ability to borrow funds at favorable rates, are once again pursuing acquisitions to fuel growth. In the U.S., merger and acquisition activity increased significantly in 2010 as compared with 2009,1  and early signs indicate this upward trend in merger and acquisition activity is likely to continue through 2011.2  For several reasons, this trend appears particularly likely to continue in the government contracting industry in the United States, an industry less affected by the recent global economic downturn and, according to many experts, one poised for substantial consolidation in the coming years. 
 
             According to a recent report, there are over 79,000 prime government contractors providing goods and services to the U.S. government,3  and these companies enter into approximately eight million contracts each year with the U.S. government.4  The U.S. government contracting industry is a highly competitive industry and for good reason: contracting with the U.S. government can provide a consistent and reliable source of revenue. Even as the U.S. Congress and President struggle with the U.S. debt ceiling and consider austerity measures to reduce the U.S. federal deficit and national debt, there are several strategic areas of U.S. government procurement where spending is actually expected to increase over the course of the next decade. These include the procurement of information technology-related goods and services in the healthcare, intelligence, smart power (i.e., non-military foreign assistance initiatives, typically under State Department programs) and environmental efficiency sectors. 
 
             Furthermore, given certain trends in the U.S. government contracting industry, including the expected flattening of, and in some cases the reduction in, U.S. government spending in non-strategic areas of procurement, as well as the uncertainties caused by U.S. government “insourcing,”5  it is expected that many smaller and middle market government contractors will look to be acquired by larger businesses, including companies looking to enter into the U.S. government contracting industry.
 
             The next few years may present an ideal opportunity for foreign businesses to enter the U.S. government contracting industry by acquiring a U.S. government contractor. The U.S. government contracting industry is highly regulated, so foreign buyers considering acquiring a U.S. government contractor must be prepared to address many regulatory issues. The purpose of this article is to provide an overview of various regulatory considerations especially relevant to foreign buyers of U.S. government contractors, as well as to provide some practical advice for how best to ensure compliance.6
 
REGULATORY CONSIDERATIONS
 
             The acquisition of a U.S. government contractor (sometimes referred to in this article as the “target company”) by a foreign (non-U.S.) person or entity (sometimes referred to in this article as the “foreign buyer”) requires consideration of and, as applicable, compliance with, a number of U.S. federal regulations. The purposes of these regulations are primarily concerned with protecting U.S. national strategic and security interests.7
 
1.            National Security Review – Exon-Florio.
 
            The Exon-Florio Amendment to the Defense Production Act of 1950, as amended (“Exon-Florio”), gives the President of the United States broad authority to review all “mergers, acquisitions, and takeovers [that] could result in foreign control of persons engaged in interstate commerce in the United States” and, if necessary, suspend or block such a transaction if it is determined that the transaction will threaten to impair U.S. national security interests.8  The provisions of Exon-Florio are intentionally broad in order to provide the President with wide discretion in determining what constitutes a threat to U.S. national security interests. In general, transactions involving products, services or technologies that are critical to U.S. national defense, intelligence or homeland security agencies are likely to result in close scrutiny with respect to any U.S. national security concerns.
 
             The President’s review of transactions covered by Exon-Florio is initiated through the Committee on Foreign Investment in the United States (“CFIUS”), an inter-agency committee9  vested with broad authority.  CFIUS is only concerned with “covered transactions,” which are transactions in which a U.S. business will be acquired by a foreign buyer or that will result in the foreign buyer having control over a U.S. business. A foreign buyer will be deemed to have control over a U.S. business if, as a result of the transaction, the foreign buyer will hold majority control of the U.S. business (e.g., ownership of a majority of the voting securities of the U.S. business or the ability to appoint a majority of the directors of the U.S. business), or have the power to direct or make decisions regarding key aspects of the U.S. business’ management or operations (e.g., decisions relating to the sale of critical assets or properties of the U.S. business, or to merge or dissolve the U.S. business). Control is generally not present where, as a result of the transaction, the foreign buyer would own ten percent (10%) or less of the voting securities of the U.S. business and such securities are held by the foreign buyer as a passive investment.
 
             While compliance with the notification and filing procedures established under Exon-Florio is technically voluntary, if the parties to a proposed transaction determine that it may fall within the scope of Exon-Florio, voluntary compliance with the statute’s requirements is highly advisable. This is because CFIUS has the authority to initiate its own review of any “covered transaction” that was not pre-cleared through the Exon-Florio process and, if necessary, to order the parties to unwind the transaction or divest certain assets or voting securities relating to the transaction. This authority is not subject to any time limitation or “statute of limitations.” 
 
             Exon-Florio sets forth numerous factors that may be considered by CFIUS when determining whether a transaction may threaten to impair U.S. national security interests.  The following are those factors most likely to result in increased scrutiny of the transaction by CFIUS:
 
  • The foreign buyer is from a nation that presents particular U.S. national security concerns, including China, Russia and certain Middle Eastern nations.
  • The foreign buyer is owned or controlled by a foreign government.
  • The target company is engaged in an industry that participates in critical U.S. infrastructure, such as utilities, natural resources, telecommunications, transportation (including commercial aviation), and information technology (particularly cyber security).
  • The target company is engaged in an industry that is critical to U.S. national security, such as the national defense, intelligence and homeland security sectors.
  • The target company has contracts with the U.S. government, particularly sole or single source contracts in the national defense, intelligence or homeland security industries, or contracts that require the target company to have a facility security clearance or to have access to sensitive or classified information of the U.S. government.
 
             The Exon-Florio process is typically initiated by submitting a voluntary notification to CFIUS.10  Upon CFIUS’s determination that the notice filing is complete, CFIUS has 30 days within which to authorize the transaction or begin a more formal and in-depth statutory investigation of the transaction based on its concern that the transaction may present a threat to U.S. national security interests. If CFIUS initiates a formal statutory investigation, it will have an additional 45 days to investigate the transaction and decide whether the transaction should be approved or blocked. CFIUS will then submit its recommendation to the President of the United States for his review and decision. Any such review by the President must be completed within 15 days. As a practical matter, parties often choose not to proceed with the Exon-Florio process if the review becomes subject to a formal statutory investigation by CFIUS and there are significant concerns that must be resolved. In such instances, the parties withdraw the notice, take steps to resolve the concerns that have prompted the need for a formal statutory investigation, and, upon successful resolution of those concerns, re-file the revised notice with CFIUS.
 
CFIUS’s review of a proposed acquisition transaction will have one of four outcomes:
 
  • CFIUS may determine that it has no jurisdiction over the transaction because the transaction is not a “covered transaction” under Exon-Florio. Upon such determination, the parties may proceed with the transaction.
  • CFIUS may determine that the proposed transaction is a “covered transaction,” but that it does not threaten to impair U.S. national security. Upon such determination, the parties may proceed with the transaction.
  • CFIUS may determine that the proposed transaction is a “covered transaction” and that it does threaten to impair U.S. national security, but that such threat can be mitigated. In such an instance, the parties to the transaction, in order to obtain CFIUS clearance of the transaction, will enter into a “mitigation” agreement (commonly referred to as a national security agreement) that establishes certain conditions that the parties must meet in order to lessen the impact that the transaction will have on U.S. national security interests. Such mitigation arrangements may address how the acquired business will be operated or conducted following the closing of the transaction, require the foreign buyer to make certain commitments or assurances to the U.S. government regarding foreign management of the acquired U.S. business, or require the foreign buyer to not relocate the acquired U.S. business’s operations outside the United States. It should be noted that pursuant to the U.S. Foreign Investment and National Security Act of 2007 (which amended Exon-Florio), CFIUS has the authority to reopen its review of a “covered transaction” if the parties intentionally breach the mitigation agreement.  
  • CFIUS may determine that the proposed transaction is a “covered transaction” and that it does threaten to impair U.S. national security, and that such threat cannot be mitigated. In such an instance, the President of the United States has the authority to suspend or block the transaction. 
 
             The CFIUS filing process is a confidential one: information disclosed to CFIUS is not made publicly available and filings under Exon-Florio are exempt from disclosure under the U.S. Freedom of Information Act, the statute that makes certain U.S. executive branch information available to the public.  Further, while CFIUS is required to release an annual report on its activities, this report sets forth aggregate information only and is of limited value in terms of shedding light on CFIUS’s internal review process or the issues that are of greatest concern to CFIUS. For example, in 2009 (the latest year for which data is available),11  CFIUS investigated 65 transactions, of which 25 transactions (or 39%) were subject to a full statutory investigation. Interestingly, while there was a sharp drop-off in the number of cases noticed to CFIUS in 2009,12  the percentage of transactions that CFIUS subjected to a full statutory investigation increased dramatically in 2009.13  Although the reasons for this increase in the percentage of transactions subjected to a full statutory investigation are not apparent from the CFIUS Report,14   it is clear that foreign buyers contemplating acquisitions of U.S. businesses in sensitive areas must be prepared for close scrutiny by CFIUS.
 
2.             Security Clearance Issues - Foreign Ownership, Control or Influence.
 
             In general, government contractors requiring access to classified information must hold a facility security clearance (“FCL”) and personnel requiring access to classified information must hold personnel security clearances (“PCL”). The need for access classified information is not limited to contractors that provide goods and services to U.S. defense, homeland security or intelligence agencies. Contractors providing goods or services to any other U.S. governmental agency may also require access to classified information.  
 
             Early in the transaction process, foreign buyers of U.S. government contractors should determine whether the target company performs classified contracts. If such a contractor becomes subject to foreign ownership, control or influence (“FOCI”), it may have its FCL revoked, thereby impairing its ability to perform contracts requiring access to classified information. The National Industrial Security Program Operating Manual (“NISPOM”) sets forth guidance for determining whether a contractor is under FOCI.  A U.S. company is considered to be operating under FOCI if the foreign buyer has “the power, direct or indirect (whether or not exercised, and whether or not exercisable through the ownership of [the target company’s] securities, by contractual arrangement or other means), to direct or decide matters affecting the management or operations of the company in a manner that may result in unauthorized access to classified information or may adversely affect the performance of classified contracts.”15
 
             The U.S. government also has a strong policy of fostering and encouraging foreign investment in the United States, provided that such investment is consistent with U.S. national security interests.16  In order to protect U.S. national security while permitting foreign investment in the United States, the NISPOM also addresses FOCI mitigation procedures and measures that allow a government contractor subject to FOCI to maintain its security clearances. In general, these FOCI mitigation procedures and measures are designed to prevent foreign persons from gaining unauthorized access to U.S. classified information, data or technology while allowing the government contractor that is otherwise qualified to continue to perform classified contracts. 
 
             When a target company holding a FCL begins acquisition negotiations with a foreign buyer, the NISPOM requires the target company to provide the Defense Security Services (“DSS”) with a notice that includes information with respect to: (a) the type of transaction (e.g., stock or asset acquisition, etc.), (b) the identity of the foreign buyer, and (c) the proposed plan for mitigating or negating the FOCI consistent with the provisions of the NISPOM. This industrial security review process is separate from the CFIUS review, but is a key consideration in CFIUS’ determination concerning the potential impact of the transaction on U.S. “national security.” As a result, where there are significant security issues implicated by FOCI, it is advisable that the parties prepare a mitigation plan and reach agreement, at least in principle,17  with DSS with respect to that plan prior to filing an Exon-Florio notification with CFIUS.  
 
             There are a number of FOCI mitigation plans that are identified in the NISPOM. Although the extent of the FOCI and the level of classified information accessed by the target company are often determinative of which plan or security measures are necessary to mitigate or negate the FOCI, the background and nationality of the foreign buyer are also significant or, in some instances, dominant factors. The most commonly used FOCI mitigation plans are as follows: 
 
            Board Resolution. FOCI may be sufficiently mitigated through the adoption of a board resolution by the target company where the foreign buyer does not have the power to elect or appoint a member to the target company’s governing board. This board resolution must, among other things, acknowledge that the foreign buyer will comply with all industrial security and export control requirements and certify that the foreign buyer “does not require, shall not have, and can be effectively precluded from unauthorized access to classified and export controlled information entrusted to or held by the [target company].”
 
            Special Security Agreement (“SSA”). An SSA, which imposes certain industrial security and export control measures within the target company, may be sufficient to mitigate FOCI where a foreign buyer owns or has the power to control the target company. Under an SSA, the foreign buyer may be represented on,18  but not control, the target company’s board and the target company (i.e., the company under FOCI) may access all classified information, provided that access to proscribed information19  may require approval through a National Interest Determination (“NID”).20  NIDs are not insubstantial undertakings and as a result, while it may be possible for a NID to cover an entire project or program (thereby avoiding the need to obtain a NID for each contract), the parties should carefully examine the implications to the target company’s business, as having to obtain a NID can put the target company at a competitive disadvantage, even if it is needed only at the program level.  
 
             Under an SSA, the company under FOCI must establish a government Security Committee (“GSC”), consisting of cleared officers and directors (“outside directors”), that is responsible for overseeing compliance with U.S. laws governing classified and export controlled information. 
 
             Security Control Agreement (“SCA”). SCAs are similar to SSAs and are utilized to mitigate FOCI where the target company is not owned or effectively controlled by the foreign buyer. As is the case under an SSA, the foreign buyer is entitled to representation on, but not control of, the target company’s board and a GSC must be established. Unlike an SSA, however, there are typically no restrictions on the target company’s access to classified information.    
 
             Proxy Agreement. Proxy Agreements are utilized to negate FOCI where the foreign buyer will own or have the power to control the target company, the target company requires access to proscribed information and an SSA is not desirable given the practicalities of obtaining NIDs. Under a Proxy Agreement, the foreign buyer conveys its voting rights to proxy holders.21  The proxy holders cannot have any prior involvement with either the target company or the foreign buyer, and each must be cleared (or capable of being cleared) U.S. citizens who reside in the United States. The company under the Proxy Agreement must be organized, structured and financed in a manner that enables viability apart from the foreign buyer, and the proxy holders, who must each serve on the company’s board, must have complete freedom to act independently from the foreign buyer except as provided in the Proxy Agreement. The Proxy Agreement may limit the proxy holders’ power to act without the foreign buyer’s consent with respect to such fundamental actions as the sale of the target company or its assets, encumbering the target company’s assets or filing bankruptcy. As with SSAs and SCAs, the target company is required to establish a GSC, which must include each of the proxy holders.
 
           Voting Trust. Voting Trusts are utilized to negate FOCI in the same circumstances as are Proxy Agreements. Further, a Voting Trust is substantially the same agreement as a Proxy Agreement except that, rather than conveying voting rights in the acquired target company shares to proxy holders (as is the case under a Proxy Agreement), the foreign buyer transfers legal title to those shares to trustees. The requirements identified above with respect to proxy holders and the proxy-cleared company applies equally to the trustees and the cleared company under a Voting Trust. As is the case with companies under a Proxy Agreement, there are no restrictions on the target company’s eligibility to receive classified information and compete for contracts requiring access to classified information.  
 
             In addition to negotiating an appropriate mitigation agreement, companies under an SSA, a Proxy Agreement or a Voting Trust will be required to submit an “Electronic Communication Plan” and a “Technology Control Plan” within 45 days after the effective date of such agreement.  
 
             The Electronic Communications Plan includes a detailed description and diagram of the network and communication systems (including telephone, teleconference, video conferences, facsimile, cell phones, PDAs and all computer communication such as emails and server access) that will be shared by the target company and its foreign buyer and affiliates, as well as an indication of which networks will be shielded from foreign access. It is designed to prevent (a) unauthorized disclosure of classified or export controlled information, (b) violation of any applicable operational security (“OPSEC”) requirement, and (c) undue influence or control by the foreign parent or affiliates that could compromise performance of classified contracts. 
 
             While Electronic Communication Plans are designed to protect against unauthorized access by foreign nationals to classified and export controlled information through communications systems, the Technology Control Plan is focused primarily on physical security, addressing access to cleared facilities, badging, visitation controls and the like.
 
             With respect to FOCI mitigation, the following are a few practical considerations to keep in mind as a foreign buyer when considering the acquisition of a target company:
 
  • FOCI mitigation is a very technical and complex process that requires significant time and expertise to implement. In the context of a proposed acquisition transaction involving a target company, therefore, as soon as reasonably practicable the foreign buyer should (i) determine whether the target company has facility security clearances, handles classified information or performs classified contracts for the U.S. government, and, if so, (ii) identify security issues that will exist as a result of the FOCI so that steps can be taken to formulate and implement appropriate FOCI mitigation measures.
  • Where significant security issues are likely to result from the FOCI, the parties should consider arranging a meeting among representatives of DSS, the target company and the foreign buyer prior to formal notification to discuss the proposed transaction, timing and the FOCI mitigation plan that will be proposed. 
 
            3.         Export Controls.22  United States export control laws regulate both physical shipments of products out of the country as well as the disclosure of information or technology relating to those products to foreign nationals. If information and technology relating to a product is “controlled” for purposes of the export control laws, a license may be required to make it available or disclose it to a foreign national, whether inside or outside the United States, and whether by electronic or physical means. A disclosure of technology or information to a foreign national who is in the U.S. at the time of the disclosure is referred to as a “deemed export” because it is deemed to be exported to the foreign national’s home country even though the disclosure is made within the U.S. Not only are actual and deemed export violations possible where the foreign buyer and the target company are not vigilant in their export controls due diligence efforts, but the foreign buyer can succeed to the pre-closing export violation liabilities of the target company.  
 
               U.S. export control laws apply to a wide variety of products and technologies. Although the U.S. government is taking affirmative steps to simplify the “export control lists,” these lists currently are complex, lengthy, and full of potential pitfalls. Some of the “controlled” products and technologies are obvious, such as equipment or software made, engineered, adapted, or configured for military or intelligence purposes. Other “controlled” products and technologies are less obvious.23
 
             The two primary U.S. agencies tasked with administering export control laws are the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) with respect to products and technologies that have both military and civilian uses, and the U.S. Department of State’s Directorate of Defense Trade Controls (“DDTC”) for products and technologies intended for military use. BIS administers rules known as the Export Administration Regulations (“EAR”), and DDTC administers rules known as the International Traffic in Arms Regulations (“ITAR”). The U.S. government imposes a wide array of sanctions for violations of the EAR and ITAR, including civil and criminal penalties ranging up to a million U.S. dollars and ten years in jail per individual violation, loss of export privileges, and debarment or suspension from government contracting and subcontracting. The U.S. government vigilantly enforces these laws, with an increasing trend of prosecutions against corporate executives and other individuals.
 
             A target company engaged in the export of any “controlled” products or technologies may be required to register with or obtain a license from BIS or DDTC. In the context of an acquisition transaction, therefore, it is important that a foreign buyer’s due diligence of the target company include a review of its products and technologies to determine whether its products and technologies are “controlled” for purposes of U.S. export control laws and, if so, whether the target company is in compliance with, and (if applicable) has obtained the proper licenses under, U.S. export control laws. Further, a target company that is registered with DDTC is required under the ITAR to notify DDTC at least 60 days prior to the closing of a foreign buyer’s acquisition of the target company. The foreign buyer is also expected to provide 60 days advance notice to DDTC of the transaction, and both parties are required to separately file a “material change” notice with DDTC within five days of the closing date.
 
CONCLUSION
 
              Foreign businesses interested in pursuing an acquisition strategy aimed at diversifying their business holdings while securing consistent and predictable revenue streams should consider acquisition opportunities in the U.S. government contracting industry. Although macroeconomic uncertainties persist in the U.S. and global economies, empirical data suggests that merger and acquisition activity in the U.S. will continue on an upward trend. Further, while budgetary and long-term deficit challenges facing the U.S. government will most likely lead to significant cuts in overall U.S. government procurement spending in the coming years, U.S. government procurement spending in certain high-priority sectors will remain strong and even grow, as will the business prospects for contractors operating in those sectors.
 
             While the laws and regulations governing the acquisition and operation of a U.S. government contractor by a foreign business are complex and technical, experienced counsel can successfully guide the foreign buyer through this process, ensuring not only compliance with these laws and regulations, but also appropriate consideration, through the due diligence process, of the impact of these laws and regulations on the successful operation of the target company by the foreign buyer following closing. 
 
 
1Bloomberg Finance reported a 12% increase in the value of M&A transactions in North America in 2010 as compared with 2009. See Bloomberg 2011 M&A Outlook (Uvarshanie Nandram, Mariana Trindade, Iyan Adewuya, and Carol Chuang eds.), available at about.bloomberg.com/pdf/manda.pdf. See also Michael J. De La Merced and Jeffrey Cane, Confident Deal Makers Pulled Out Checkbooks in 2010, THE NEW YORK TIMES, January 3, 2011, available at http://dealbook.nytimes.com/2011/01/03/confident-deal-makers-pulled-out-checkbooks-in-2010/ (“In the United States, merger volume [in 2010] rose 14.2 percent, to $822 billion.”).
2According to the website moneycontrol.com, during the first half of 2011 M&A activity in the United States increased by 38% compared to the first half of 2010. See Global M&A Deal Volume Hits $1.5 Trillion So Far in 2011, available at http://www.moneycontrol.com/news/world-news/global-ma-deal-volume-hits-3615-trillion-so-far2011_560548.html. See also Anupreeta Das, Gina Chon and Dana Cimilluca, Deals Declining as Worries Weigh, THE WALL STREET JOURNAL, Friday, July 1, 2011, at C7 (“Global M&A volume hit $741.3 billion during the second quarter [of 2011], with the number of deals falling by 7% from the first quarter [of 2011] according to Dealogic. Still, the volume of deals for the second quarter [of 2011] globally was up 23% compared with the same period [in 2010], and up 51% from the second quarter of 2009, indicating deal making has clambered back from the troughs of the recession.”).
3The website usaspending.gov, available at http://www.usaspending.gov, provides comprehensive data on U.S. government procurement activities. Government contractors may also provide goods and services to state and local governments throughout the United States. This article, however, focuses on the regulations and procedures governing the acquisition of a government contractor that provides goods and services to the U.S. federal government.
4See V. Dion Haynes, Big Businesses Winning Contracts for Small Ones, Groups Charge, THE WASHINGTON POST, April 12, 2010, at A15.
5“Insourcing” is when a U.S. government agency, in an effort to save costs, handles certain functions or tasks internally that once may have been, or might otherwise be, procured through a government contractor.
6This article does not address general merger and acquisition considerations, such as the many issues associated with a purchase agreement, antitrust compliance and tax implications, or the various rules and regulations that apply to the operations of the U.S. government contractors (e.g., the Federal Acquisition Regulation).  In addition, certain issues that are unique to the U.S. government contracting industry  in the context of a merger and acquisition transaction, such as the novation of government contracts, the U.S. government’s right to terminate certain contracts for convenience, the U.S. government’s rights in intellectual property developed under a government contract, anti-corruption compliance, funding earmarks, recertification of small business status, and organizational conflicts of interest, are beyond the scope of this article.  
7The compliance regimes established under each of the regulations discussed in this article are both technical and complex; in the event a proposed acquisition of a target company by a foreign buyer falls within the scope of any of the following regulations, the parties to the transaction should anticipate the need to dedicate significant time, effort and expense in order to comply with the notice, reporting and other requirements of such regulations.
850 U.S.C. § 2170.
9Chaired by the Secretary of the Treasury, CFIUS includes representatives from 16 U.S. departments and agencies, including the Defense, State, Commerce, Homeland Security, Justice and Energy departments, the U.S. Trade Representative, the White House Office of Science and Technology, the Office of Management and Budget, the Council of Economic Advisers, the National Security Council, the National Economic Council, the Homeland Security Council, the Director of National Intelligence, and the Secretary of Labor.  
10While pre-filing is not required, CFIUS encourages parties to pre-file with CFIUS five to seven days prior to the formal notice filing. 
11CFIUS Annual Report to Congress, filed November, 2010, covering calendar year 2009.
12Sixty-five cases in 2009, versus 155 in 2008, and 138 in 2007.  This drop-off in cases noticed to CFIUS likely reflects the general decline in transactions in 2009, rather than a decline in the percentage of transactions subject to CFIUS review.
13Thirty-nine percent of noticed transactions were subjected to full statutory review in 2009, versus 15% in 2008, and 4% in 2007.
14Even if specific facts of filed cases were disclosed, CFIUS decisions have no precedential effect, as CFIUS’s clearance of a prior transaction does not bind it to clear a similar transaction in the future.
15See Directive-Type Memorandum 09-019 – “Policy Guidance for Foreign Ownership, Control or Influence (FOCI),” available at www.dtic.mil/whs/directives/corres/pdf/DTM-09-019.pdf. 
16See U.S. Department of Defense, Defense Security Service FOCI Policy, available at www.dss/mil/isp/foci/foci_policy.html.
17A security agreement will not be executed by DSS until the transaction has closed, but the form of agreement and other mitigation measures can and should be agreed to prior to closing.
18The foreign buyer’s representative on the board (each an “inside director”) must be prohibited from receiving unauthorized access to classified information. 
19Proscribed Information includes (1) Top Secret information, (2) COMSEC (Communications Security) information, except classified keys used for data transfer, (3) RD (Restricted Data – as defined in the U.S. Atomic Energy Act of 1954, as amended) information, (4) SAP (Special Access Program) information and (5) SCI (Sensitive Compartmented Information) information.
20A NID is a determination that access to the proscribed information “shall not harm the national security interests of the United States.”
21There are typically three proxy holders.
22This section provides a partial overview of U.S. export control laws and regulations relevant to an acquisition, as a full discussion of the complexities of such laws and regulations is beyond the scope of this article.
23A non-exhaustive list includes: lasers, high power robots, machine tools, computers, microchips and integrated circuits, various types of software, satellites, space launch and ground control items, certain GPS, telecom, encryption, nuclear power-related items, high power cameras and image interpretation equipment, aerospace products and parts, high tech materials such as super alloys and composites, as well as handcuffs and electric cattle prods. 
 
 
 
*Gene Schleppenbach is managing principal of and Peter Farrand is a senior associate in the Northern Virginia (Tysons Corner) office of Miles & Stockbridge P.C., which is located just outside of Washington, D.C., in heart of one of the largest concentrations of technology and government contracting companies in the U.S. Mr. Schleppenbach is co-chair of the firm’s government contracts practice and member of the firm’s corporate and securities practice group. He has represented multinational and domestic buyers and sellers of U.S. government contractors, ranging in size from multi-billion dollar to under one hundred million dollar companies, and guided clients through the Exon-Florio and FOCI mitigation process for over 20 years. Mr. Farrand is a member of the firm’s corporate and securities practice group and frequently represents buyers and sellers in M&A transactions involving U.S. government contracting businesses. The authors would like to thank Robert Cattaneo, a principal in the firm’s corporate and securities practice group and one of its most experienced M&A attorneys, and Nathanael Hartland, a senior associate in the firm’s government contracts and export controls practice, for their contributions to this article.
 
The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or TerraLex.  This article is for general information purposes and is not intended to create an attorney-client relationship and is not to be taken as legal advice for any specific situation.
Thursday, August 18, 2011
Government Procurement / Government Contracting

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