CHAPTER 3 REGULATORY ROULETTE: PREPARING FOR POTENTIAL FILINGS UNDER HSR AND CFIUS
| Jurisdiction | United States |
(Sept 2018)
REGULATORY ROULETTE: PREPARING FOR POTENTIAL FILINGS UNDER HSR AND CFIUS
Davis Graham & Stubbs LLP
Denver, CO
Kevin Johnson
Parsons, Behle & Latimer, P.C.
Salt Lake City, UT
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JOEL BENSON is a partner with Davis Graham & Stubbs LLP, in Denver. Mr. Benson focuses on domestic and international debt financings, acquisitions and divestitures, commercial transactions, and project development, with specialized expertise working with mining and natural resources companies and private equity investors. He has been selected to The International Who's Who of Mining Lawyers each year since 2011 and has earned an AV Preeminent® Peer Review RatingTM from Martindale-Hubbell® since 2006. In 2016, Who's Who Legal named Mr. Benson as one of the ten "most highly regarded individuals" in the Northern Hemisphere for mining law and as one of the ten "thought leaders" in North American for mining law in 2017 and 2018. He also has been named in The Best Lawyers in America© for Oil & Gas Law. Mr. Benson is also an adjunct professor of mining law at the University of Denver Sturm College of Law (since 2012). He frequently advises private equity funds and mining company clients on their acquisitions, investments, joint ventures, project development, and other business activities. He has extensive experience with structuring and documenting complex credit arrangements and associated multi-jurisdictional collateral security arrangements involving a variety of industries, in the United States and around the world. Mr. Benson's debt financing practice involves representing both borrowers and lenders (including banks, private equity funds, merchant banks, and other financial institutions) in international project finance, mezzanine debt, corporate credit facilities, senior secured facilities, royalty financings, streaming transactions, gold loans, senior and subordinated note offerings, and other financing arrangements. His international transactional practice has involved projects and companies in over twenty-five countries, including the U.S., Australia, Bolivia, Brazil, Cameroon, Canada, Chile, China, Colombia, Ghana, Honduras, Kenya, Mexico, Peru, Portugal, Romania, Slovak Republic, Spain, Thailand, and Turkey, and has covered numerous minerals, including gold, silver, rare earths, platinum/palladium, uranium, cobalt, nickel, iron ore, zinc, copper, and other metals, industrial minerals, thermal and metallurgical coal, and oil and gas. His work with international projects has led to counseling clients with respect to the Committee on Foreign Investment in the United States (CFIUS) and the Foreign Corrupt Practices Act (FCPA).
KEVIN W. JOHNSON is a member of the firm's Corporate Transactions & Securities, and Environmental, Energy & Natural Resources departments. While Kevin has significant experience in a number of industrial sectors, he tends to focus his practice on assisting clients to devise structures to create value through transactions related to the purchase, sale, development, financing and commercialization of infrastructure and natural resources projects on a global basis. He has represented both national and international clients in a wide variety of transactions. When dealing with infrastructure and natural resources projects, Kevin likes to say that he helps clients turn dirt into cash.
Prior to joining the firm, Kevin was the Executive Vice President and General Counsel of Molycorp, Inc., a publicly traded international rare earth mining and processing company with corporate offices in Denver, where he was responsible for all aspects of Molcorp's legal affairs on a global basis. Before joining Molycorp, Kevin was a partner at Holland & Hart in Denver, Colorado. Kevin began his legal career at The Dow Chemical Company, where he had the opportunity to live and work in Europe for five years. Kevin speaks Spanish.
Introduction
Due diligence exists both to confirm known facts and to try to uncover facts previously not known or at least poorly understood. It's a little bit like the classic board game Clue®,1 in which you methodically gather various pieces of evidence and try to deduce the correct answer, though in due diligence you typically work together with a coordinated team rather than each member acting separately, secretly and against each other. In the game of due diligence, the winner is the one that gathers the most, and best, information and properly analyzes and characterizes that information in a manner that allows the client to pursue its transaction in a fully informed manner. Leaving secrets behind and jumping to conclusions on insufficient information may lead to an early and unsatisfactory exit from the game.
An often overlooked, but increasingly important and prominent clue, involves the potential role of the Committee on Foreign Investment in the United States ("CFIUS"). CFIUS monitors and attempts to balance two important national policy goals that periodically conflict: (1) encouraging foreign direct investment in the United States, which tends to fuel economic growth and vitality while also encouraging reciprocity for U.S. companies making acquisitions in foreign countries, and (2) protecting vital U.S. national security interests.
While the Hart-Scott-Rodino Antitrust Improvements Acts of 1976, as amended (the "HSR Act") is better known, at least on a superficial level, it is often poorly understood by natural resources practitioners pursuing a mining, oil and gas or energy transaction. Failing to account for HSR Act issues at the due diligence stage may lead to unpleasant results.
CFIUS
The President of the United States has the authority to block and unwind certain acquisitions when they raise national security risks or to impose mitigation measures to ameliorate those risks, sometimes in a manner that may defeat the investment expectations of a buyer and a seller. Although this may on its face strike the natural resources practitioner as an esoteric oddity not worthy of worry, CFIUS and the President have on several occasions exercised this authority to block and unwind natural resources transactions that on their face seem ordinary and unremarkable. Transactions that have encountered resistance, leading to the scuttling of the parties' business intentions, after spending significant sums of money in pursuit of closing a deal, include a proposed acquisition of (i) a majority ownership of a defunct, previously bankrupt, non-producing gold mine; (ii) a majority ownership of unremarkable precious metals exploration properties; and (iii) a wind farm along the Columbia River.
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Just like the acquisitions that they support, due diligence projects range from large to small; and from covering basic topics like land title, environmental compliance and corporate records to more esoteric, but potentially consequential, topics like the alphabet soup of CFIUS and the HSR Act addressed by this paper. For the uninitiated, while some due diligence projects may lead to the need to revise deal terms, CFIUS and HSR may lead to the United States government prohibiting the transaction. Without adequate diligence and attention, CFIUS and the HSR Act may turn into traps that derail the best laid plans, leading to an early, and costly, exit from the game.
CFIUS is a federal interagency committee charged with reviewing foreign direct investment into the United States to identify, analyze and address the potential effect of such transactions on the national security of the United States. On August 13, 2018, as this paper was being finalized, the President signed into law the John S. McCain National Defense Authorization Act, which included, as one of its many provisions, the Foreign Investment Risk Review Modernization Act of 2018 ("FIRRMA"), which will substantially modify the CFIUS process. Given the timing, this paper will primarily address CFIUS as it existed prior to the enactment and effectiveness of FIRRMA, though it will also summarize several key provisions of FIRRMA and note areas of practice that are expected to change as FIRRMA becomes effective and as the Department of the Treasury begins to issue regulations implementing FIRRMA.
CFIUS is covered as part of this Due Diligence Special Institute since a careful practitioner must consider the effect of the CFIUS process any time a foreign party acquires a U.S. business or makes an investment in a U.S. business. In an increasingly globalized world, potential purchasers of assets and businesses located in the U.S often ultimately have foreign ownership. Typically, a seller merely wants to maximize the purchase price and is indifferent as to whether the buyer is U.S.-based or based in another country. The presence of a foreign buyer interjects particular concerns and considerations for the seller to analyze prior to accepting a bid from a foreign buyer, since a foreign buyer may introduce additional risk and uncertainty into the transaction, and particularly into the process and timing for closing a transaction.
Through the CFIUS process, the President has the authority to review and assess specified transactions involving a foreign buyer, and pursuant to this authority, the President may suspend or prohibit transactions that have been proposed and to unwind transactions that have been completed, all in the name of protecting U.S. national security. While the casual observer may incorrectly assume that this must only apply to transactions involving military contractors and suppliers or other related industries that similarly come to mind when contemplating national security, in fact, a number of the transactions that have been suspended, blocked or unwound, or at least subject to close and special scrutiny, have involved ordinary course natural resources transaction involving mining, oil and gas and wind farms.
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