In Deal Note® 111, we discussed the Committee on Foreign Investment in the United States (CFIUS), which may review foreign acquisitions of U.S. companies for national security risk. In Deal Note® 228, we noted that Foreign Ownership, Control or Influence (FOCI) is one of the government approvals that can follow an LOI. This week, we look more closely at FOCI, a separate review that can catch sellers of cleared A&D companies by surprise.
Many middle-market A&D companies hold a Facility Security Clearance (FCL) from the Defense Counterintelligence and Security Agency (DCSA), which allows them to perform classified work. A FOCI review may determine whether the company can keep that clearance under its new owner. If the buyer has foreign ownership, control or influence, the company may be unable to keep its clearance unless the foreign interest is mitigated under a DCSA-approved plan. If the deal closes before that plan is in place, the clearance could be at risk. With a foreign buyer, the company may need to notify DCSA when negotiations begin, rather than after closing. FOCI can also come into play with a U.S. buyer, such as a private equity fund with foreign investors.
Size may not matter. Unlike Hart-Scott-Rodino antitrust filings, CFIUS and FOCI generally do not have a size threshold. A small cleared machine shop could face the same FOCI review as a large defense prime.
For a seller, the risk is often timing. If FOCI is first raised after the LOI is signed, it could delay the closing, add conditions to the Purchase Agreement, or in some cases end the transaction.
If your company holds an FCL, we suggest discussing FOCI with your M&A counsel and sell-side deal team before launching a sale process, and having your banker review each potential buyer for foreign ownership. That way, FOCI can be addressed early in the process, rather than near the end, when options may be more limited.
Have a great day everyone,
Troy Medeiros
Vice President
