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.
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