Recent Developments in CFIUS

1. Recent Developments in CFIUS IAKL 2019 Conference YongSang Kim • O’Melveny & Myers

2. Committee on Foreign Investment in the United States (“CFIUS”)

3. Evolution of CFIUS • Created by Executive Order in 1975, in response to wave of investments from the Middle East • 1980s: Japanese acquisitions sparked fear of foreign takeovers of U.S. advanced technology companies (e.g., Fujitsu/Fairchild Semiconductor) • 1988: Congress broadly authorized the President to block foreign investments on national security grounds • Section 721 of the Defense Production Act of 1950 • 2007: Congress extensively amended Section 721 • Response to several controversial transactions, including CNOOC’s bid for Unocal and Dubai Ports World transaction • 2018: Foreign Investment Risk Review Modernization Act (FIRRMA) • Response to concerns about Chinese investment, especially in critical technologies

4. CFIUS Membership • Chaired and administered by the Department of the Treasury • Other members: • Departments of Commerce, Defense, Energy, Homeland Security, Justice, and State; Labor (ex officio) • Office of the U.S. Trade Representative • Office of Science and Technology Policy • Director of National Intelligence (also ex officio) • National Security Council, National Economic Council, Homeland Security Council, Office of Management and Budget, and the Council of Economic Advisors (Observer status) • Other agencies on an ad hoc basis

5. Historic CFIUS Experience • CFIUS reviews relatively few in-bound deals – 147 filed in 2014; 143 in 2015; 172 in 2016 • Unofficial estimate of 238 cases in 2017 • During the past five years, the total number of in-bound M&A transactions that were potentially reviewable likely exceeded 2,000 annually • Since 1988, the President has officially blocked only five transactions out of 2,000+ CFIUS cases • But three since December 2016 • In several cases, CFIUS or Presidential orders occurred post-closing, forcing divestitures • In numerous cases, parties either have withdrawn transactions or restructured deals in response to CFIUS objections (12 withdrawals in 2014, 13 in 2015) • It is common to resolve issues through mitigation measures embodied in enforceable agreements

6. CFIUS Caseload 2011 - 2015

7. Treasury CFIUS Stats 2014-2016

8. Committee on Foreign Investment in the United States • CFIUS reviews “covered transactions” and assesses national security risks • CFIUS does not “approve” transactions • CFIUS may: • Clear transactions with or without “mitigation agreements” to address national security concerns • Issue orders requiring interim action by the parties while review is pending • Permit parties to withdraw with no action • Refer to the President for decision (with its recommendation to block the transaction) • Presidential orders can be issued post-closing and may require divestiture

9. What Kind of Transactions are Covered? • CFIUS only reviews transactions in which a foreign person acquires “control” of an existing “U.S. business” • - Except for the Non-Controlling Investments in Pilot Program U.S. Business • “Control” may result from minority investments, regardless of percentage stake • Only a few assets may constitute a “business” • Covered transactions • Investments under 5% if coupled with other indicia of control (e.g., board seat) • Joint ventures if one party contributes a U.S. business • Acquisition of a foreign company with U.S. subsidiaries (review limited to the U.S. business)

10. Other Financing Structures • Loan transactions are not covered unless the lender obtains unusual governance rights • CFIUS determines whether convertible debt is a covered transaction on a case-by-case basis, taking into account – • (1) The imminence of conversion; • (2) Whether conversion depends on factors within the control of the acquiring party; and • (3) Whether the amount of voting interest and the rights that would be acquired upon conversion can be reasonably determined at the time of acquisition. • Long-term leases: Depends upon facts • Greenfield investments generally are not covered transactions • Technology licenses alone are not covered transactions, but may be a factor in determining whether a minority investment is covered

11. Three-Phase Process • Statute provides for decision in three stages, within total of 105 calendar days: • First: Initial 45-day review. Most cases are completed at the end of this stage. • Director of National Intelligence delivers threat assessment at Day 30 • Second: At end of the initial review stage, CFIUS may initiate a full investigation, lasting up to another 45 days. • Presumption of investigation if case involves government-controlled acquirer or critical infrastructure • Third: If case remains unresolved, then CFIUS may refer the matter to the President, who has 15 days to act. • CFIUS itself may take action at end of second stage, without referral to the President

12. Illustrative CFIUS Timeline 1 – 2 months 3-4 months Day 90: CFIUS deadline for investigation – CFIUS clears, parties withdraw, or CFIUS refers to President File formal CFIUS notice Deal announce-ment day File draft CFIUS notice Brief CFIUS and customer agencies Day 105: Deadline for President to act if CFIUS refers case CFIUS initiates review: Day 1 Day 45: CFIUS clears or starts investigation

13. CFIUS Focus: Sensitive Sectors • CFIUS analyzes the “threat” posed by the investor and the “vulnerability of the target • “Threat” analysis considers elements of the buyer’s identity and business reputation • Nationality, government control, corporate compliance record • For Chinese investments, government ownership, cooperation, and funding are subject to intense scrutiny • “Vulnerability” encompasses a broad range of factors relating to the target’s business, customers, technology, location, and other characteristics • Critical technologies: Telecommunications carriers and equipment manufacturers • Critical infrastructure: Transportation facilities and utilities • Data: U.S. citizen data and personally identifiable information (“PII”) • Supply chain, cybersecurity vulnerabilities, and proximity to U.S. military and government facilities • “Economic security” ‒ Preservation of the “National Security Innovation Base” (e.g., semiconductors) • Emerging technologies (e.g., Artificial Intelligence, virtual/augmented reality, robotics, Internet of Things)

14. CFIUS Analytical Approach • Threat posed by the investor • Nationality, government control, corporate compliance record, etc. • Vulnerability of target • Critical infrastructure, defense supplier, sensitive technology, proximity to sensitive assets, etc. • DNI threat assessment addresses threat plus vulnerability • National security consequences of foreign control • If a national security risk exists, how can it be resolved? • Existing statutory authorities (e.g., export controls) • Mitigation agreements • Blocking transaction is least-favored option

15. Mitigation • National security issues may be addressed through “mitigation agreements” • Wide range of possible measures: • Divestiture of sensitive businesses • Structures to isolate foreign influence, creating passive investment position • Simple technology control plans and procedures • Third-party audit requirements • Appointment of “security directors” • Mitigation agreements are principally a problem for the investor or acquirer, not the seller

16. CFIUS Reform – Motivated by Trade Tensions • Recent CFIUS reform legislation passed both houses of Congress with bipartisan support and signed into law by President Trump • Rhetoric focused on trade tensions with China • “[The CFIUS] review process was not originally designed and is now insufficient to address today's rapidly evolving threats to our national security. Perhaps most alarmingly, many transactions that could pose a national security risk often go unreviewed altogether. As we speak, China is turning our own technology and know-how against us and seeking to erase our national security advantage little by little. But they're doing it relentlessly and strategically.” Sen. John Cornyn, Senate Lead Sponsor (R-TX), 3/8/2018 • “The global economy presents new security risks, and so our bipartisan legislation provides Washington the necessary tools to better track and evaluate Chinese investment.” Rep. Robert Pittenger, House Lead Sponsor (R-NC), 11/8/2017 • “It is the sense of Congress that, when considering national security risks, [CFIUS] may consider . . . whether a covered transaction involves a country of special concern that has a demonstrated or declared strategic goal of acquiring a type of critical technology or critical infrastructure that would affect United States leadership . . . .” Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA)

17. Highlights of FIRRMA • New export control focus on “emerging” and “foundational” technologies • Extends jurisdiction to include “other investments” involving critical infrastructure, critical technology, or sensitive personal data of U.S. citizens, and transactions “designed or intended to evade CFIUS review” • Creates short form “declarations” that will be mandatory for certain transactions and available to expedite review of straightforward transactions • Mandatory if foreign government has a “substantial interest” in foreign person acquiring a “substantial interest” in a U.S. business • Authorizes filing fees (lesser of 1% of the total value of the transaction or $300,000) • Changes to review of notices • Requires CFIUS to comment on draft notices within 10 days of receipt • Extends review period from 30 to 45 days, and allows investigation to be extended from 45 to 60 days under “extraordinary circumstances” (i.e., total review cycle extended from 75 to 105 days) • Authorizes CFIUS to suspend transactions pending its review without a Presidential order

18. Interim FIRRMA Regulations and Pilot Program • Changes in current rules to conform to certain FIRRMA-mandated process changes (e.g., new deadlines, definitions) • Announcement of “Pilot Program” took effect on November 10, 2018 • Full implementation of FIRRMAno later than February 2020. • Expands CFIUS jurisdiction to certain “other investments” involving “critical technology” in 27 U.S. industries • “Other investments” are: • Access to material nonpublic technical information; • board representation or observership; • other involvement in substantive decision-making

19. FIRRMA Pilot Program – Mandatory Declarations • Mandatory declarations for “control” and “other investment” transactions covered by the Pilot Program • U.S. business that produces, designs, tests, manufactures, fabricates, or develops a critical technology that is either utilized in connection with the U.S. business’s activity in one or more Pilot Program industries, or designed by the U.S. business specifically for use in one or more Pilot Program industry • Pilot Program industries defined by 27 NAICS codes

20. Critical Technology • Critical Technologies are: • Defense articles or services subject to ITAR controls • Items on the Commerce Control List subject to Export Administration Regulations for reasons relating to national security, chemical and biological weapons, nuclear proliferation, missile technology, or regional stability. • Certain nuclear equipment, materials, parts and components regulated by the Department of Energy and the Nuclear Regulatory Commission • Select agents and toxins • “Emerging and foundational” technologies: • Interagency process is underway to identify “emerging and foundational technologies” “essential to national security” not currently captured by Commerce Control List • No public action has been taken yet but expected soon

21. About O’Melveny & Myers

23. 김용상 (YongSang Kim) 김용상 미국 변호사는 O’Melveny & Myers 서울 사무실의 대표로서 지난 십 수 년 간 국제소송, 반독점법(Antitrust), 부패방지법 (FCPA), 국제중재 및 기업 소송(Int’l Arbitration and Litigation)을 주로 담당하고 있습니다. 반독점법 소송에서의 활약을 높이 평가 받아 DC Super Lawyers로부터 2014년과 2015년에 “Antitrust Rising Star”로, 2016년에는 “Washington DC Rising Star”로 인정 받았고, 2008년에는 Capital Area Immigrants’ Rights Coalition Pro Bono Attorney로 선정 받는 영예도 안았습니다.  또한 김 변호사는 미국과 한국 기업들을 위해 반독점법 및 투자자 국가간 분쟁에 관하여 꾸준히 논문을 발표하고 강연을 해 왔습니다.   학력 • Cornell University Law School, 2006 - Juris Doctor (J.D.) cum laude • Yale University Divinity School, 1999 - Master of Divinity (M.DIV.) • 연세대 졸업 (신학, 법학), 1996 변호사 자격 • Washington D.C. (2007), New York (2007) 경력 • O’Melveny & Myers Seoul Office (2016 – present) • O’Melveny & Myers DC Office (2015-2016) • Arnold & Porter LLP DC Office (2005, 2006-2015) 대표 (Representative) OMM 서울사무실Office 02.6281.1733 Cell 010.5014.4802 yskim@omm.com