Foreign Ownership, Control or Influence and g p, Government - PowerPoint PPT Presentation

Presenting a live 90 ‐ minute webinar with interactive Q&A Foreign Ownership, Control or Influence and g p, Government Contractor Security Clearance Mitigating FOCI and Meeting Requirements for National Interest Determinations TUES DAY, OCTOBER 26, 2010 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: T d ’ f l f Farhad Jalinous, Partner, Kaye Scholer , Washington, D.C. G. Christopher Griner, Partner, Kaye Scholer , Washington, D.C. Dr. Paul Halpern, AT&L CFIUS Coordinator, U.S. Dept. of Defense , Arlington, Va. S tephen F . Lewis, Deputy Director, Industrial S ecurity Policy, U.S. Dept. of Defense , Crystal City, Va. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .

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Foreign Ownership, Control or Influence Foreign Ownership, Control or Influence and Government Contractor Security and Government Contractor Security and Government Contractor Security and Government Contractor Security Clearance Clearance G. Christopher Griner , Partner, Kaye Scholer LLP cgriner@kayescholer.com Farhad Jalinous , Partner, Kaye Scholer LLP fjalinous@kayescholer com fjalinous@kayescholer.com Stephen F. Lewis , Deputy Director, Industrial Security Policy Office of the Under Secretary of Defense (Intelligence), Security Directorate, U.S. Dept. of Defense Stephen.Lewis@osd.mil @ Dr. Paul Halpern , AT&L CFIUS Coordinator, Office of the Under Secretary of Defense (Acquisition Technology & Logistics), U.S. Dept. of Defense paul.halpern@osd.mil October 26, 2010

What is FOCI? What is FOCI? • A US company is considered to be under foreign ownership, control or influence (“FOCI”) when a foreign interest has the power, direct or indirect, whether or not exercised, to direct or decide matters affecting the , g management or operations of the company in a manner which may result in unauthorized access to classified information or may affect adversely the performance of classified contracts. (NISPOM, paragraph 2-300a) • The National Industrial Security Program Operating Manual (“NISPOM”) lists the following factors to be considered in the aggregate in determining whether a company is under FOCI: et e a co pa y s u de OC – Record of economic and government espionage against US targets, – Record of enforcement and/or engagement in unauthorized technology transfer, – Type and sensitivity of information requiring protection, yp y q g p , – The source, nature and extent of FOCI, – Record of compliance with pertinent US laws, regulations and contracts, – Nature of bilateral and multilateral security and information exchange agreements, and y g g , – Ownership or control, in whole or in part, by a foreign government. 5

What is FOCI? What is FOCI? • A company under FOCI is not eligible to be issued a Facility Security Clearance (“FCL”) or continue to hold an FCL unless its FOCI is mitigated in accordance with the NISPOM and in a manner acceptable to the US in accordance with the NISPOM and in a manner acceptable to the US Government • The Defense Security Service (“DSS”) administers the Department of Defense (“DoD”) FOCI program and is responsible for examining foreign Defense ( DoD ) FOCI program, and is responsible for examining foreign involvement in US companies that are in the process of obtaining a DoD FCL or that hold a DoD FCL • The Department of Energy (“DoE”) fulfills this role for DoE FCLs • The Department of Energy ( DoE ) fulfills this role for DoE FCLs – The DoD FOCI program is significantly larger than the DoE’s 6

Deal Implications Deal Implications • Purchase Agreement Terms – Reps & Warranties Reps & Warranties – Covenants – Conditions Precedent • Customer Briefings – Buyer information y – FOCI mitigation proposal • DSS Notification & Engagement g g – Under the NISPOM, when a contractor with an FCL enters into negotiations for the proposed merger, acquisition, or takeover by a foreign interest the contractor must submit notification to DSS of the foreign interest, the contractor must submit notification to DSS of the commencement of such negotiations 7

FOCI Mitigation FOCI Mitigation • In minority foreign investment cases, the available FOCI mitigation mechanism hinges on whether the foreign investor is entitled to board representation or not. • Board Resolution: Available in cases with no foreign investor representation on the board • Security Control Agreement (“SCA”): Available in cases of minority foreign investor representation on the board of directors • Requires appointment of at least one independent, DSS-approved Outside Director to the SCA company’s board • In majority foreign ownership cases, FOCI is mitigated via a Proxy Agreement, Voting Trust or a Special Security Agreement Special Security Agreement. • Proxy Agreement/Voting Trust: Premised on the concept of risk avoidance • Foreign representation on board prohibited • Proxy Holders/Trustees approved by DSS control the company, subject to limited authority of foreign owner • US target must be financially self-sufficient g y • Requires establishment of a Government Security Committee (“GSC”) • Imposes no restrictions on the Proxy company’s eligibility to have access to classified information or to compete for classified contracts • Requires procedures governing visits and communications between Proxy company and the Proxy company’s parent and affiliate companies outside of the Proxy parent and affiliate companies outside of the Proxy • Special Security Agreement (“SSA”): Premised on the concept of risk mitigation • Minority foreign representation on the board (“Inside Directors”) • Requires the appointment of independent Outside Directors approved by DSS • National Interest Determinations required for access to “proscribed” classified information • Requires establishment of a GSC and a Compensation Committee • Requires procedures governing visits and communications between SSA company and the SSA company’s non-SSA parent and affiliate companies 8

National Interest Determinations (NIDs) National Interest Determinations (NIDs) – Government Contracting Activity (“GCA”) must issue NID for company cleared under SSA to have access to proscribed classified information, which includes: • Top Secret (TS) • Sensitive Compartmented Information (“SCI”) • Special Access Program (SAP) • Communications Security (“COMSEC”) – Excluding controlled cryptographic items when unkeyed or utilized with unclassified keys Excluding controlled cryptographic items when unkeyed or utilized with unclassified keys • Restricted Data (“RD”) – NIDs may be contract-, project-, or program-specific – Requires a determination by the Program Executive Office of the relevant GCA Requires a determination by the Program Executive Office of the relevant GCA that “…release of proscribed information is consistent with the national security interests of the United States” – Concurrence of the Office of the Director of National Intelligence required for SCI DoE for RD and National Security Agency (“NSA”) for COMSEC SCI, DoE for RD and National Security Agency ( NSA ) for COMSEC. – New Information Security Oversight Office (ISOO) timeline requirements for NID decisions • 30 days if GCA owns or controls proscribed information, 60 days if concurrence of y p , y another agency is required (e.g., NSA for COMSEC) • GCAs can get extensions in 30-day increments if there are “special circumstances” 9