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Comment: Foreign investor must understand CFIUS regulations to invest in the US wind energy


Richard Reinis, Michael Gershberg and Stewart Baker at Steptoe & Johnson

If you are a foreign investor contemplating investment in the burgeoning wind energy generation business in the United States, beware of CFIUS!! No, this is not a disease, but a regulatory provision of US law that has a direct impact on any foreign investment involving national security.

The Committee on Foreign Investment in the United States, known as CFIUS, was formed for the purpose of protecting United States national security, when a transaction results in foreign control of a US business. Foreign investors in domestic wind energy generation projects must be mindful that CFIUS has the power to impose conditions on such transactions, or even disrupt them.

Does CFIUS impact every foreign wind investment?

While CFIUS reviews transactions only for potential implications for national security, that concept includes effects on ‘critical infrastructure’, such as major energy assets.

‘Critical infrastructure’ refers to systems that are so vital to the country that their incapacity or destruction would have a debilitating impact on national security. Wind farms can be considered major energy assets, and like all energy systems, their incapacity could touch on issues of national security. Therefore, parties to foreign investment transactions in US wind farms or the wind energy industry should be mindful of the CFIUS process.

CFIUS generally has jurisdiction to review mergers and acquisitions that may result in foreign control of a US business in any industry. A US subsidiary controlled by a foreign entity is a ‘foreign person’ for CFIUS purposes.

‘Control’ is broadly defined as the “power, direct or indirect, whether or not exercised . . . to determine . . . important matters affecting an entity.” It is not necessary that the foreign person own more than 50% of the voting or equity interests of the entity or that the foreign investor may determine the strategic direction of the company. ‘Control’ does not require that foreign persons are directors or officers of the business.

Exemptions to the CFIUS regulations largely define Covered Transactions. These exemptions include loans, leases, or even a purchase of real estate. A simple purchase of an inventory of wind turbines, for instance, is not necessarily a purchase of a US business.

What is critical is what is done on the land or with the turbines. Two exemptions may offer comfort to wind energy companies. First, there is an exemption for a foreign investor who holds 10% or less of the voting interests of the entity solely for the purpose of passive investment. Second, and most notably for the wind energy industry, the review process specifically excludes start-up or ‘greenfield’ investments. Therefore, initial foreign investments in new US wind farms may fall entirely outside the scope of the CFIUS regime.

Under what circumstances should application to CFIUS be made?

The CFIUS filing decision is voluntary. Assuming the transaction is covered by the CFIUS process, the parties still may not need to file with CFIUS. The parties may wish to discuss the matter with CFIUS before making the filing decision. The risks of opting not to file must be weighed carefully, and the parties must then decide whether it is in their best interests to make the filing.1

A foreign investor intent upon controlling a US wind energy company is not likely to leave unresolved the potential undoing of a deal by the US Government, and domestic partners, developers, or others involved in the transaction will be reluctant to indemnify such an investor against the inherent risk. Approval by CFIUS offers safe harbour to investors.

Therefore, as a general rule, it makes sense to file a notice unless resources (e.g., time, financial, or human) are particularly short or other compelling reasons exist. The filing process is not onerous and a notice can be prepared relatively quickly.

If the parties are not inclined to file voluntarily on this basis, however, it is still recommended that parties notify CFIUS of any deals that may reasonably have national security implications.

While few if any wind farm investments are likely to encounter turbulence from CFIUS, for peace of mind, an investor might decide to seek CFIUS clearance for investments in an offshore wind farm where undersea mapping, radar shadow or navigation issues are involved, an elevated wind farm in US Air Force or commercial flight patterns, a wind farm within observation distance of a sensitive, national security installation, or in proximity of any other significant national security site.

Another factor is the identity of the foreign investor. If a foreign government (or entity controlled by a foreign government) is involved, then it would be more advisable to file a CFIUS notice. Also, CFIUS would be more interested in acquisitions in the energy sector by certain countries (e.g., China, Russia, Middle Eastern countries) than by traditional allies such as Canada or the United Kingdom.

Finally, parties should consider exactly what opportunities the wind farm offers – or more specifically – what a foreign owner of the particular wind farm can do with that project that might negatively affect national security. For example, there have been recent press reports that foreign spies have infiltrated the US electricity grid and may have the ability to disrupt the power supply at will. If a foreign owner of a US wind farm could use that system to engage in espionage, obtain sensitive technology, or disrupt other energy transmission or distribution channels, then national security might be an issue. On the other hand, if the wind farm is solely capable of providing power generation (that at worst could be shut off), then there seems to be little risk.

All that said, it is prudent to explore the reaction of national and homeland security agencies to the particular wind farm project being acquired by calling CFIUS. CFIUS employs people knowledgeable about the process and the enabling legislation. Informal discussions can be carried out without triggering an obligation to file.

Plan in advance to avoid deal turbulence

Due to the new Administration’s support of alternative energy in the Stimulus package and otherwise, new wind energy projects are expected to be underway this year and for years to come, often fuelled by non-domestic financing. The American Wind Energy Association (AWEA) estimates that in 2008, wind energy accounted for an investment in the US economy of US$17 billion. Much of this funding came from Europe, where wind plays a much more important role in electricity supply.

Two years ago, European utilities, with a large assist from easy credit and a strong Euro, were very active in the American market, acquiring development companies at high multiples just to gain a foothold in this market. That has changed dramatically, but interest continues, especially in small, high quality wind energy projects.

Such investments require an understanding of CFIUS regulations. You may remember that CFIUS was most notably in the public eye in the wake of the Dubai Ports World deal. The CFIUS statute authorises the President to assess the impact on US national security of deals involving foreign investors.

If a transaction would result in any risk to national security, CFIUS may place conditions on the deal or even block the transaction or order divestiture of an already completed deal. This might occur when unwinding a deal would be very costly. The probability of such a disturbing outcome is low, however, and the President has only once blocked a transaction under this provision.

Concluding remarks

Why hesitate to file, with such a low risk of CFIUS deal interference? The Conference Report to the 1988 law authorising this review process declared that Congress in no way intended to impose barriers to foreign investment in general when it created this process.

The focus is on the incremental impact on national security as the multinational aspect of worldwide investment increases, but it is tempered. If renewable energy and green technology are to become the engine of economic recovery, then the US has a vested interest in fostering capital investment in such projects, provided national security is not placed at risk.

Wind energy generation is an economic bright spot offering solutions to the nation’s issues of joblessness, as well as addressing issues of oil dependency. The regulatory regime recognises the need for more of such projects, which explains why it does not cover true greenfield investments in US wind farms.

CFIUS focuses on national security and this should give comfort to investors that application to the Committee is the most prudent course of action. If there is any reason to believe that the subject of the deal or any party involved would raise a red flag with the US Government for national security reasons, then any debate as to whether or not to apply to CFIUS should be favourably resolved.

There are few situations where the urgency to close a deal warrants the uncertainty created by not filing. In an era of risk abatement, the offer of safe harbour from the US Government is hard to resist.


1 CFIUS has the right to require parties to file in certain situations. It does so only rarely and in particularly sensitive cases, but it is not a good thing for a foreign investor to be called and asked why its transaction has not been the subject of a filing.

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