United States: How Foreign-Controlled Companies Can Hold U.S. Security Clearances

U.S. Government Facility Security Clearances (“FCLs”) may not be issued to U.S. companies under foreign ownership, control or influence (“FOCI”) unless adequate safeguards are in place to protect U.S. national security.  The National Industrial Security Program Operating Manual (“NISPOM”) provides guidance for determining whether U.S. companies are under FOCI and implements U.S. Government policy for granting or continuing FCLs for U.S. companies operating under FOCI.

Consistent with U.S. policy, the NISPOM recognizes that foreign investment in the defense industrial base, when consistent with national security interests, is also, more broadly, in the national interest of the United States.  The National Industrial Security Program is designed, in part, to safeguard U.S. Government contractors against improper foreign influence or control.

A thorough review of a U.S. company’s relationship with foreign persons, including (but not limited to) investors, directors, management, lenders, and customers is conducted to determine whether the company is under FOCI.  Foreign influence is assessed in the aggregate, and the presence of multiple FOCI factors does not necessarily damage a company’s eligibility for an FCL.  On the other hand, the determination that a company is under FOCI renders the company ineligible for an FCL unless and until FOCI factors have been mitigated to the satisfaction of the U.S. Government.

It is important for U.S. companies to consult with counsel when contemplating a merger or acquisition with or by a foreign investor, or when planning to establish significant relationships (including strategic alliances) with a foreign partner.   Foreign investors contemplating acquisition of a U.S. contractor that possesses an FCL should review the impact of the acquisition on the target company’s U.S. Government contracts, to include an assessment of whether the government is likely to require FOCI mitigation and if so, whether a FOCI mitigation plan can be structured to the satisfaction of both the U.S. Government and the foreign investor.

Industrial security investigation procedures for mergers or acquisitions under review by the U.S. Government’s Committee on Foreign Investment in the United States (“CFIUS”) are prescribed by the NISPOM.  The Exon-Florio provision of the Defense Production Act of 1950, as amended, establishes CFIUS by statute and authorizes the President to investigate and—if the President determines that the transaction threatens national security—block mergers, acquisitions, and takeovers of U.S. companies by foreign interests.  CFIUS and industrial security reviews move on parallel, but separate, tracks with different time constraints and considerations.  The proposal of a satisfactory security arrangement, while significant, is only one factor considered in a Department of Defense (“DoD”) or other U.S. agency recommendation to CFIUS.  In cases where the industrial security arrangement is the remaining issue, DoD (or another applicable agency) may recommend suspending or blocking the transaction if there is an indication that further negotiations are not likely to result in a mutually acceptable plan. 

The NISPOM Describes Four FOCI Mitigation Plans That Permit Foreign-Owned Companies To Hold FCLs:

(1) Board Resolution -- Where foreign investment in a company is sufficient to raise national security concerns, but not sufficient to allow representation by the foreign investor(s) on the Board of Directors, it will generally be acceptable for the Board to adopt a resolution certifying that the foreign investor will be prohibited from access to classified information and will not be permitted to influence the cleared company’s performance of classified contracts, among other things.  If foreign ownership is sufficient to elect a member to the Board, a Board Resolution may not be acceptable FOCI mitigation, even if the foreign owner is not, in fact, represented on the Board.

(2) Voting Trust Agreement and Proxy Agreement -- Voting Trust Agreements and Proxy Agreements are applied in circumstances where a foreign investor is positioned to control a U.S. company.  Under these agreements, three trustees or proxy holders are typically vested with control of the company, except for a few, specifically identified matters such as mergers or bankruptcy, for which the consent of the stockholder may be required.  Proxy holders/trustees must be clearable U.S. resident citizens with no prior involvement with either company.  In practice, while the foreign interest may not influence the U.S. company under a Proxy Agreement, the U.S. Government generally permits the stockholder to consult with the proxy holders on matters of importance to the company, and the NISPOM expressly allows such interaction “where otherwise consistent with U.S. laws, regulations, and the terms of the Voting Trust or Proxy Agreement.”  Under both arrangements, there are no restrictions placed on the company’s eligibility to access classified information or to compete for classified contracts.  Although the U.S. Government generally views Voting Trusts and Proxy Agreements similarly for FOCI mitigation purposes, they impose different and significant legal constraints on the foreign owner.  For these reasons and others, consultation with U.S. counsel is advisable in structuring Proxy and Voting Trust Agreements.

(3) Special Security Agreements/Security Control Agreements -- A Special Security Agreement (“SSA”) may be used when a foreign interest owns or controls a U.S. company.  Although a company under an SSA may access classified information for the performance of classified contracts, it may only access proscribed information¹ with special authorization following a National Interest Determination (“NID”).  The standard for a NID is that the release of the proscribed information to the SSA company “is consistent with the national security interests of the United States.”² Under an SSA, the foreign interest may have minority representation on the Board of Directors if the directors representing the foreign investor are excluded from unauthorized access to classified and export-controlled information, among other restrictions. 

If a company is not effectively owned or controlled by a foreign shareholder, but a foreign shareholder is represented on the Board of Directors, the company may be cleared under a Security Control Agreement (“SCA”).  The SCA is similar to an SSA, except that access to classified information is not typically limited under an SCA.

(4) Limited FCL -- A Limited FCL may be available to a U.S. company under FOCI if the United States has entered into an Industrial Security Agreement with the government from which the foreign interest is derived, and the release of classified information is consistent with the U.S. National Disclosure Policy.  In extraordinary circumstances, a Limited FCL may also be available based on a statement provided by the U.S. Government Contracting Activity (“GCA”) identifying to the Cognizant Security Agency a compelling need that justifies the FCL and confirms that access to classified information is essential for contract performance.  Limited FCLs are only valid for contracts awarded by the initiating GCA.  Access limitations are inherent with the granting of a Limited FCL and apply to all of the cleared company’s employees, regardless of citizenship. 

The NISPOM requires any company operating under a Voting Trust, Proxy Agreement, SSA, or SCA to establish a permanent committee of its Board of Directors known as a Government Security Committee (“GSC”).  A GSC is composed of the voting trustees, proxy holders, or outside directors, as applicable, and directors who hold personnel security clearances and are also officers of the U.S. company (officer directors).  The GSC must ensure that the U.S. company maintains policies and procedures to safeguard classified information, ensure that the company complies with U.S. export control laws, and prevent improper control or influence from the foreign interest.

Under the NISPOM, all companies cleared under a Voting Trust, Proxy Agreement, SSA, or SCA must also establish a Technology Control Plan “to reasonably foreclose the possibility of inadvertent access by non-U.S. citizen employees and visitors to export-controlled information for which they are not authorized.”

The NISPOM provides for agreements that allow foreign investment in U.S. defense and national security contractors without jeopardizing the security clearances that make those companies valuable investments.  The NISPOM establishes an array of options that place varying degrees of restrictions on the foreign investor, based on the specific relationship that exists between the U.S. company and the foreign investor.  Careful attention to these requirements allows the foreign investor to address U.S. national security interests and provide significant protection for its investment.


1, Proscribed information is defined to include Top Secret information; Communication Security (COMSEC) material, excluding controlled cryptographic items when unkeyed or utilized with unclassified keys; Restricted Data; Special Access Program (SAP) information; and Sensitive Compartmented Information (SCI).

2. Absent a secretarial waiver, the U.S. Departments of Defense and Energy are prohibited, by statute, from entering into contracts with certain foreign government-owned or -controlled corporations if the contract requires access to proscribed information.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions