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National security concerns have prompted a new law giving the U.S. government a seat at the deal table in a growing number of acquisitions of U.S. firms by foreign entities � a move that has increased the role of attorneys in the complex transactions. President George W. Bush signed the Foreign Investment and National Security Act of 2007 on July 26, but lawyers have already helped clients respond to increased government scrutiny since the Dubai-based DP World incident 18 months ago. Port operator DP World’s early 2006 announcement of plans to buy a British port operator that runs several major U.S. ports created a U.S. national security firestorm. DP World agreed to separate U.S. operations into a U.S.-operated subsidiary when its closed its acquisition in March. But it ultimately sold its U.S. assets to New York-based AIG Investments in December 2006 amid continuing controversy. Lawyers say the new law codifies the government’s changing attitude and approach toward foreign investment in security-sensitive sectors since the DP World controversy. The new law and the fallout from the DP World matter have combined to create a flood of new work for law firms as they help companies assess the national security implications of proposed deals. Law firms are shepherding them through an increasingly complex and politicized process, and they expect government scrutiny to lead to more official investigations and so-called mitigation agreements or concessions by the foreign buyer. A 40% jump Since the DP World matter, Greenberg Traurig’s work on filings for the interagency governmental panel that reviews the transactions � the Committee on Foreign Investment in the United States (CFIUS) � has jumped 40%, said Fred Shaheen, a Washington lawyer who chairs the firm’s government contracts group. “People became more sensitive,” Shaheen said. “It has absolutely resulted in more work for us in this particular area.” Companies are erring on the side of submitting a deal for CFIUS review, said Noel Francisco, a Washington partner at Jones Day. “Transactions marginally related to national security previously were not submitted,” Francisco said. “Now they are.” Covington & Burling in Washington has 10 to 12 lawyers working on CFIUS reviews for deals. The firm’s work on one case five years ago grew into a practice group that combines technical legal expertise with policy and legislative work for the clients, said David Marchick, vice chairman of Covington’s international trade and finance practice group. “It fell into a sweet spot in the firm,” Marchick said. “We had the technical competence and we have people who have worked in senior levels in half of the CFIUS agencies, including the Office of the U.S. Trade Representative, the Treasury Department and the Justice Department.” Marchick recently helped two American aviation services companies, Standard Aero and Landmark Aviation, navigate a CFIUS filing and investigation prior to their Aug. 1 acquisition by Dubai Aerospace Enterprise. Complex oversight The Foreign Investment and National Security Act generally authorizes the president to review foreign acquisitions of U.S. companies through the CFIUS. The committee includes the secretaries of the departments of State, Commerce, Defense, Energy, Homeland Security and Treasury, as well as the U.S. attorney general. The secretary of labor and the director of national intelligence also sit on the committee as nonvoting members. A key provision calls for the committee to conduct a formal, 45-day investigation into a deal if the proposed buyer is controlled by a foreign government. The law also requires the national intelligence director to analyze so-called covered transactions, or anything that causes foreign control of “any person engaged in interstate commerce.” Under the new rules, the secretary of the treasury can name a lead agency to review each covered transaction and negotiate mitigation agreements with the companies. The oversight extension also includes an additional assistant treasury secretary for international affairs, who will have CFIUS duties. Although covered transactions have yet to be fully hashed out, the law talks about critical infrastructure, energy assets and critical technologies. In practice, lawyers say transactions involving infrastructure, energy, chemicals, transportation and technology are likely to face increasing scrutiny. CFIUS filings spiked from 65 in 2005 to 113 last year during the DP World controversy, according to Treasury Department statistics. So far this year, CFIUS filings have hit the 100 mark. Investigations are also on the upswing, ranging from zero to two from 2002 to 2005 to seven last year and two so far in 2007. Almost all mergers or acquisitions involving foreign investment now trigger questions from the parties about the CFIUS process, said Christopher Corr, a lawyer in the Washington office of White & Case. Corr recently fielded a CFIUS question about a Latin American acquisition in the banking sector. “That’s something I would not have gotten two years ago,” Corr said. In one example of CFIUS’ wide usage, Morrison & Foerster’s represented webMethods Inc. in a review that preceded the software company’s June acquisition by German-based Software A.G. “[webMethods] had some contracts with government agencies, that was their only national security nexus,” said Tom Eldert, an associate in Morrison & Foerster’s Washington office. Security sensitive matters When the acquisition is in a security-sensitive sector, CFIUS filings often spawn intense government pressure for mitigation agreements, prompting intense lawyer negotiations to protect the clients’ business interest. Mitigation agreements run a huge gamut all the way up to requiring separate U.S. subsidiaries and boards, said Paul Gagnier, a Washington partner at Bingham McCutchen. In the telecommunications sector, the agreements often include provisions to protect the physical security of the network, limit access to the network to particular people, and agreements to allow U.S. government access to calls made on the network for criminal investigations. “It’s essentially a negotiation,” Gagnier said. Language in the new law concerning mitigation agreements, including designating a lead agency to review each sensitive transaction and negotiate the agreements, is likely to increase such arrangements, Corr said. “They’re going to feel compelled, if there’s any doubt, to get involved in the transactions,” Corr said. “To investigate it more . . . and require more conditions.” Sidley Austin Washington partner Jim Mendenhall said government scrutiny of filings, not just the total number of filings, is increasing the CFIUS workload. “Given the political profile, the process is getting much higher level of attention in the government,” Mendenhall said. “Senior officials are taking a much more hands-on role than they ever did before.” Filings involve collecting a wide range of information about the acquirer, target company, deal and industry, but there’s a parallel track of government notification, said Ron Oleynik, a lawyer in the Washington office of Holland & Knight. Oleynik often talks to individual agencies, such as the Justice Department and the Federal Bureau of Investigation in the telecommunications area or the Department of Defense when the U.S. company is a defense contractor. During the run-up to the CFIUS review, the companies may also meet with representatives and senators from the target company’s geographical area and key staff members from the relevant committees, he said. “It’s a very intensive six-week process to prepare and get the filing in,” Oleynik said. The climate shift even affects the earliest stages of deal talks, said Francisco. Foreign companies bidding on U.S. companies in competitive auctions need a CFIUS strategy well before a deal is inked, so that both parties are comfortable moving forward, Francisco said. “The buyer wont be able to negotiate a strong price, and seller won’t be able to choose your client, if there’s not a level of confidence that you’ll be able to negotiate it through this process,” Francisco said.

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