16 November 2009
As US-based wind companies continue to be acquisition targets for foreign investors, buyers and sellers in these deals should be prepared for some unique cross-border issues.
The US wind sector has witnessed an influx of investment from foreign companies in the last few years. Despite challenging market conditions, the drivers of this trend remain in place.
Specific factors driving recent foreign investment into the US wind sector have included the size and growth potential of the US renewable energy market; major tax incentives from federal and state governments to support renewable development; other US regulatory and legislative policies favoring renewables, such as state renewable energy portfolio standards; and a relatively weak US dollar.
A number of events this year have further strengthened these drivers, including strong support of renewable energy by the Obama administration and consideration by Congress to the creation of a carbon cap-and-trade system and a federal renewable electricity standard. All of these factors mean that US wind companies and their assets will remain appealing targets to foreign investors. This makes it a good time to review some special deals challenges that arise when a foreign investor seeks to acquire or invest in a US wind company or US wind assets to create.
The transfer of ownership of a US renewable company typically requires antitrust, securities and various energy regulatory approvals. Most domestic purchasers are subject to some or all of these approvals, but in the case of a foreign buyer, there can be additional approvals or filing requirements that would not apply to a domestic purchaser.
Under the Exon-Florio Amendment to the Defense Production Act of 1950, the president, through the Committee on Foreign Investment in the United States (CFIUS), is authorized to review transactions in which a foreign person acquires, or could acquire control of, a US company or its assets, and may block the transaction if there is evidence that, in the exercise of such control, such foreign person could impair US national security. Filings with CFIUS are voluntary, but CFIUS can initiate review of a covered transaction unilaterally, and the president retains the power indefinitely to nullify the transaction. If parties file within 30 days, the CFIUS must review and clear the transaction or conduct a 45-day investigation, after which it makes a recommendation to the president.
Factors considered by CFIUS include the potential for national security-related effects from the foreign acquisition of US critical technologies and/or infrastructure, including major energy assets. This process still does not mandate notification to CFIUS or mean that, if notified, CFIUS is certain to follow the initial review to investigate every energy transaction. For example, investment in a greenfield or startup concern is excluded from coverage. However, parties to a transfer of control in any energy concern should at least consider notifying CFIUS given the uncertainty that CFIUS could later initiate review and require the completed deal be dissolved.
US Export Control Laws
Under the Trading with the Enemy Act and several other laws, the US government can block a transaction by a US company with specified countries, individuals and companies on lists maintained by the US Treasury Department, the Commerce Department and the State Department and may seize assets that are the subject of such a transaction. Since the lists can be updated at any time, any US company contemplating a sale to any non-US person should require the buyer to provide satisfactory evidence that the buyer and its affiliates are not on these lists.
US export control laws also prohibit the unlicensed transfer to anyone overseas of information related to certain products and technologies on alert lists published from time to time by the State Department, the Commerce Department and the Department of Energy (DOE). The products and technologies on the most current alert lists have military applications or civilian and military dual-use applications and do not include products and technologies that are commonly used in wind projects.
Still, parties considering the acquisition by a foreign person of a US wind company that manufactures or is developing innovative or pilot technology, or that uses specialty materials, should, at a minimum, check the most current technology alert lists prior to the prospective transaction.
Foreign Ownership of US Land
There are federal laws pertaining to foreign ownership of US land that potentially impact foreign investment in US renewable companies.
The Agricultural Foreign Investment Disclosure Act requires a foreign person who acquires or transfers any interest in US agricultural land to file a report with the US Agriculture Department within 90 days. The International Investment and Trade in Services Survey Act requires a report to be filed with the US Department of Commerce within 45 days if any foreign person acquires 10 percent or more in a US business enterprise (including business enterprises that own real estate in the United States).
The Foreign Investment in Real Property Tax Act of 1980 generally permits the United States to impose a tax on the amount realized by a foreign person with respect to the sale of a US real property interest (which includes real property located in the United States and stock of certain US corporations).
The tax generally is collected, in part, by requiring the purchaser of the US real property interest to withhold 10 percent of the sales price. Thus, in addition to the possibility of having to withhold proceeds from the seller on the initial acquisition by a foreign investor, the foreign investor may have proceeds withheld from it when it sells the US real property interest. In addition, there may be tax-filing requirements.
In addition to federal requirements, some US states restrict ownership of agricultural land to US citizens and permanent residents and require that a company owning land zoned for agricultural use be at least majority-owned by US citizens or permanent residents. Treaties between the United States and a foreign country may override such state laws. Prospective foreign buyers should carefully check the relevant state and local laws where the target owns real property.
Retention of Seller’s Management Team
Unless a foreign buyer already has a suitable local team in place through a prior acquisition, it will likely desire to retain key members of the seller’s US management team. If these are at-will employees, or if they benefit from change-of-control provisions in their employment agreements that would be triggered by a sale, the prospective buyer may need to negotiate with key members of target management to make sure they are willing to stay post-sale. This dynamic is also present in many domestic merger and acquisition transactions, but cultural differences may be more pronounced with a foreign buyer.
Local Stakeholder Issues
Most wind projects are located in rural communities; they provide jobs, extra income for farmers and ranchers, and local property tax revenue. In turn, the development of these projects is dependent on support from local and state governmental authorities, farming and ranching interests and economic development commissions. A change in ownership of a project may require some form of local consent or approval.
Even if a change in ownership does not require a formal local consent or approval, local stakeholders may seek other ways to hold up development of a project if there is concern that a new owner may change plans in a manner that reduces benefits to the host community.
Again, this is not different from the dynamic of a deal involving a domestic purchaser, but there could be enhanced suspicion in rural communities of a non-US owner.
Other Significant Cross-Border Issues
In addition to the issues mentioned above, there are other considerations for prospective foreign acquirers of US wind companies that are common not just to wind transactions but to all cross-border purchases of US companies or assets. These include navigating tax constraints of multiple countries to structure a transaction for maximum tax gains/losses; bridging divergences between IFRS and GAAP accounting rules; and the impact of securities laws and anti-trust regulations as applied across multiple jurisdictions. Foreign bidders should also be aware that the relevant transaction agreement and execution tactics will likely vary from similar documentation and tactics in the buyer’s home country. Fortunately, the basic documentation for acquisition transactions is becoming more standardized around the globe, but new US market entrants should still be prepared for some differences.
Cross-border transactions for the acquisition of wind companies can be challenging. However, the drivers are in place for more deals, and with planning and attention, parties to these deals can efficiently overcome these challenges.