by Tara Giunta
Over the past several years, the satellite industry has seen consolidation that has resulted in a stronger industry, an industry that is, once again, expanding networks, services and operations. These, in turn, require further investment, which often arrives from outside the satellite operators domestic borders. Satellite networks are also recognized as fundamental, both to national (and global) economies and, given our collective dependence on these networks, to a countrys national security.
The United States has taken an increasingly proactive approach to analyzing the national security of its telecommunications infrastructure, including satellite systems. That oversight has intensified with the passage of new legislation this past summer. Foreign investors in U.S. satellite businesses should carefully consider the evolving landscape of national security in the U.S. They should plan for the additional time and resources required to navigate the investment process before acquiring a US satellite operator or applying for a license or other authorization from the U.S. Federal Communications Commission (FCC).
Under the U.S. federal statutory provision commonly known as Exon-Florio, the President has the authority to suspend or prohibit any foreign acquisition, merger or takeover of a U.S. corporation that is determined to threaten the national security. The Committee on Foreign Investment in the United States (CFIUS) is an inter-agency committee (comprised of 12 agencies led by the Department of the Treasury) charged with implementing Exon-Florio. While CFIUS review is voluntary, if the parties to an acquisition do not seek CFIUS review and, in the future, it is deemed of concern to national security, then the parties can be ordered to undo the transaction.
This summer, the US Congress modified Exon-Florio in a manner designed to strengthen CFIUS national security review. While no significant changes were made to the procedures used by CFIUS, there is now increased scrutiny. The changes have already caused delay in the review and clearance of transactions.
There are several reasons for the delay. First, the CFIUS agencies are in the process of drafting regulations to implement the new law. This has distracted some of the key agencies from reviewing and clearing transactions. Further, the legislation expanded the definition of critical infrastructure warranting national security review, as systems or assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems or assets would have a debilitating impact on national security.
While implementing regulations are expected to provide guidance as to what constitutes critical technologies, telecommunications (including satellite systems) are already inviting detailed scrutiny and are expected to be included in some fashion. Additionally, given the criticism of the CFIUS agencies by the US Congress and the public regarding their handling of the CNOOC/Unocal and Dubai Ports transactions, CFIUS agencies are erring on the side of broadly applying their mandate.
Prior to clearing transactions, CFIUS may require an agreement designed to mitigate any national security concerns. The lead agency with expertise in the area affected by the transaction will take the lead in negotiating and enforcing these agreements. The expert agencies overseeing national security reviews of acquisitions of U.S. satellite companies consist of a smaller subset of the CFIUS agencies: the Departments of Homeland Security, Justice (including the FBI) and Defense. Referred to as Team Telecom, these agencies take the lead in negotiating national security agreements (or for transactions involving less perceived risk, letters of assurance) involving satellite companies.
Importantly, Team Telecom review is not limited to a proposed acquisition of a U.S. satellite business by a foreign entity, as with CFIUS. Rather; Team Telecom reviews any application or action by the FCC to license or otherwise authorize an entity where there is foreign involvement. As a result, if there is foreign ownership, even authorizations historically viewed as standard or low risk will require national security review and pre-clearance by Team Telecom before the FCC will act. Further, while there are statutory time periods that apply to CFIUS review, there is no such mandated timeline for Team Telecom review. Therefore, an acquisition or application to the FCC can be held up indefinitely until Team Telecom completes its review and notifies the FCC that it has cleared the particular transaction.
Consequently, when an entity is acquiring a US-licensed satellite operator, applying for a space station or earth station license, seeking approval to transfer control of a satellite licensee or to assign its licenses to a third party, it must take into consideration the national security review that will be undertaken by Team Telecom. The parties must be prepared to complete a comprehensive questionnaire disclosing information covering ownership and affiliations, details on the networks including location of facilities and type of equipment deployed, and major customers contracts. Team Telecom will then assess whether there are national security concerns requiring an agreement prior to notifying the FCC that it may issue the requisite authorization or approvals.
In short, the national security review is comprehensive and the agreements negotiated can be extensive, particularly if common carrier services are provided. Therefore, satellite companies must factor into their planning the time and resources needed to analyze their potential areas of exposure, compile all information requested and negotiate with Team Telecom, and potentially with CFIUS. While the procedures appear straight forward, the process can be arduous and time consuming.
Tara Giunta is a partner of the Washington, DC office of Paul, Hastings, Janofsky & Walker LLP. Ms. Giunta has extensive experience in advising clients operating in, providing services to, and/or financing companies in the satellite sector. She has expertise in structuring international satellite projects and developing and implementing strategies for commercializing those projects on a global basis. This includes structuring strategic alliances, partnerships and joint ventures; negotiating the full range of commercial contracts; structuring projects to accommodate legal and regulatory requirements and obtaining required licenses and authorizations; and conducting due diligence, internal audits and compliance investigations and advising clients and their officers and directors on compliance in a broad range of areas, including regulatory and licensing and the foreign corrupt practices act and related laws.
Ms. Giunta received her J.D. at Columbus School of Law, Catholic University in 1986 and her B.A., cum laude, at Tufts University in 1980. Ms. Giunta is Legal Council to the Pacific Telecommunications Council (PTC) and is active in many other industry organizations.