GWI/Brookfield: Limbo Or Purgatory?

Brookfield/GWI Exemption Still Uncertain as BIP’s Belated “CFIUS Update” Filings Reveal that Foreign Investment Review has Only Just Begun. STB Keeps the Reins as 09/15 “Deadline” Passes Without a Decision.

27 September, Darien CT – The Brookfield Infrastructure Partners (BIP) acquisition of Genesee & Wyoming, Inc. continues to hang on STB approval of the exemption claimed in BIP’s 09.July Verified Notice of Exemption (“VNE”), and which the Board delayed in a 22.July Decision to allow for public comment. The submission deadline for comments and replies officially concluded 05.Sept. As of this publication, the Board has taken no action. In the meantime, three more oppositional comments were posted on the docket, expanding a pool of critical protest filings, whose arguments have been publicized in the Financial Times {John Dizard, FT 30.Aug.2019}.

In its 16.Aug Reply to Comments (“RC”), BIP urgently requested the Board’s approval by 15.Sept, arguing that any delay beyond that would impose “additional regulatory burdens and complexities [that] will create undue delays,” and “change the timing and structure of [the Applicants’] work plan for implementing the acquisition, which was developed based on an expectation that the Proposed Transaction was exempt from lengthy STB procedures” {STB #248336}.

STB abeyance ruling of 22.July
{STB Decision #47128}.

It is ordered:

  1. The exemption that is the subject of this proceeding will not become effective until further order of the Board.
  2. To the extent this transaction is subject to review by the [CFIUS], Brookfield and DJP are directed to provide updates regarding the status and outcome of such review. Brookfield and DJP are directed to provide these updates periodically as appropriate and to provide an update within seven days after they are notified of the outcome of such review.
  3. Comments are due by August 21, 2019, and replies are due by September 5, 2019.
  4. Notice of this decision will be published in the Federal Register.

  5. This decision is effective on its service date.

On 24.Sept, BIP filed CFIUS UPDATE (“CU”). Approximately half of the CU’s text is redacted from public view, in accord with the concurrently filed “Motion for Protective Order” (MPO1 to avoid disclosure of “certain highly confidential, competitively sensitive, and commercially sensitive information regarding the CFIUS review process and the financing arrangements associated with the transaction at issue here” {CU cover letter, STB #248508}. What remains starkly visible in the CU is that, nearly three months after the BIP/GWI deal was struck 2 , the CSIUS review had not even begun, let alone come close to conclusion.

From the CU:

“[C]omments that Applicants filed […] stated that they would notify the Board when CFIUS commenced a formal review of the Proposed Transaction. [… T]hat has not yet occurred (although Applicants expect CFIUS to act any day) […] “Applicants will supplement this update as soon as CFIUS formally commences its review” {STB #248508}.

On 26.Sept, BIP submitted a “further update requested by the [STB] regarding the status and outcome of the CFIUS review of the transaction at issue in this proceeding” {STB Document #248513}. The meat of the letter is redacted, but based on the CU, it is clear that the CFIUS review had finally commenced.

Why did it take three months?

The CFIUS closely guards the confidentiality of its investigation process, and it is unlikely that any news will emerge before the conclusion of the investigation. Companies that have emerged from the process don’t post user reviews or “likes.”

The CFIUS voluntary notification process comprises four escalating stages, each of a fixed duration ( see CFIUS review procedure, below ), any one of which can conclude the investigation by a grant of clearance for the transaction to proceed. If a stage concludes without such grant, the review proceeds to the next stage. The process is intended to be deliberate yet efficient, balancing the security of vital economic interests, while avoiding approval delays for compliant transactions. It also encourages and abets early action by applicants.

Pushback fills the void

While the CFIUS notification lingered, another challenging comment was lodged in the docket. On 05 September, Samuel J. Nasca, for and on behalf of SMART/Transportation Division, New York State Legislative Board (“SMART/TD-NY”), filed Reply Comments calling on the Board to reject BIP’s exemption claim, as “improper, and should be found inapplicable, and […] be rejected, or the exemption revoked, especially owing to the nature and magnitude of the transportation involved, and for other reasons as well” {STB Document #248439}.

Nasca asserts:

“The Board should reject the Brookfield July 9, 2019 class notice of exemption; if not rejected, the exemption should be revoked. The NE is improper, and should be found inapplicable, and […] be rejected, or the exemption revoked, especially owing to the nature and magnitude of the transportation involved, and for other reasons as well. […]

“[Several issues] have not been adequately developed in the NE, or in Brookfield’s August 16 subsequent comments (i.e., BIP/RC).” {STB Filing}

Nasca presents several “undeveloped issues,” starting with:

“Role of GIC. The [VNE} gives scant attention to GIC. 3 Yet GIC is important to the proposed control transaction. GIC is heralded as the primary joint participant. 4 […]”

As in other moments since the GWI acquisition was announced, BIP seems to find itself back-footed due to something that is curious to everyone but BIP itself. Despite Nasca’s comments having been filed well after the closing of the comment period, and indeed at the very end of the reply period, they were recorded in the docket, as was his 10.Sept Reply to Applicant’s Response. It seemed the Board felt that the benefit of additional comment superseded its own schedule for the proceeding.

CFIUS Review timelines are based on a progressive model, but mileage varies widely for each transaction. According to the model, the process begins with a consultation period, which counts toward the initial “routine review,” which is nominally limited to 30 days. Most applications receive clearance to proceed after this initial phase. If national security concerns arise from objective (s ee Note 4, below ) or subjective perspectives, a national security review stage can (nominally) last up to 45 days. If there are still concerns among Committee members, a national security investigation can follow, also (nominally) taking up to 45 days. { A Guide to Demystify the CFIUS Process , Baker Botts LLP.}.

CFIUS review procedure 5

Step 1: voluntary review process begins with a routine review that is mandated to conclude within 30 days after notification by the parties, including a 7-14 day pre-filing discussion process during which Treasury Department staff ensures that the application is complete and can be accepted as soon as the deal has been signed. Typically, the routine review concludes with a “no action” determination by the Committee, conferring clearance.

Step 2: National Security Review: In the second step, the committee is required to conduct a 45-day national security review if: a) the investment threatens to impair the national security of the United States, including homeland security, critical infrastructure, and critical technologies; and b) the transaction would result in foreign control of a U.S. entity. 6

Step 3: National Security Investigation. In the third step, if any member of CFIUS determines that a foreign investment transaction threatens to impair the national security, the transaction undergoes a more comprehensive 45-day national security investigation.

Step 4: If that produces no resolution, the question does right up to the President, who has 15 days to decide go/no-go.{Congressional Research Service IF10177 vn.17 UPDATED 06.Aug.2019.}

Enough just to make the right noises?

Typically, and ideally in the CFIUS standard procedure, the parties would have officially notified CFIUS on the 01.July signing of the merger agreement. At the latest, notification would have been made prior to seeking Board approval, as could be construed from the VNE and RC:

The 09.July VNE states that,

“prior to seeking Board approval, the parties to the Proposed Transaction agreed to submit a joint voluntary notification” to CFIUS.

The 16.Aug RC reiterates, “prior to submitting their Verified Notice, Applicants had decided voluntarily to seek approval of the Proposed Transaction by CFIUS, and the parties’ completion of the Proposed Transaction is contingent upon approval by CFIUS.”

Timely notification might have triggered the CFIUS process and imposed an at least nominally likely timeline. It would also have produced reportable updates per Order #2 of the STB 22.July decision.

It is unclear whether notification was given in early July, and the pre-filing discussion has taken nearly three months, or the if the submission of the notification was delayed somehow until the current month. If the former, then the transaction may have been born wrapped in red flags. If the latter is the case, then regulators could be excused for feeling toyed with. Or better, they could just be intent on deferring important decisions with wider ramifications until they get some idea of which direction the CFIUS is heading in. Once it leaves the yard.

CFIUS: Evolving as we speak

On August 13, 2018, the President signed the Foreign Investment Risk Review Modernization Act (FIRRMA), […] that reforms the CFIUS process to address perceived gaps in the existing … process. Among other measures, this law expands the scope of CFIUS jurisdiction and imposes mandatory reporting requirements on certain transactions. Most of the substantive provisions of this law required implementing regulations to become effective, which the statute directed to occur no later than February 2020.

On November 10, 2018 […] CFIUS launched a pilot program that [… expanded] the scope of CFIUS review to capture certain noncontrolling investments in certain companies involved in “critical technology” and requiring mandatory declarations for investments in such businesses (see our previous alert).

On September 17, 2019, the Department of the Treasury issued […] rules to implement most of the remaining provisions of FIRRMA, […] These rules will be published in the Federal Register on September 24, 2019. The proposed regulations exclude provisions governing new filing fees mandated by FIRRMA, as well as final regulations related to the pilot program (31 C.F.R. Part 801), each of which will be addressed separately.

Treasury Releases Proposed CFIUS Regulations to Implement FIRRMA , Akin Gump Strauss Hauer & Feld LLC 20.Sept.2019}

  1. STB granted the motion 27.Sept {STB #47260}
  2. The agreement was signed by the parties on 01.July
  3. NOTE GIC is a sovereign wealth fund established by the Government of Singapore to manage Singapore’s foreign reserves. Such entities compel a “Stage 2” national security review in the CFIUS process.
  4. “Brookfield Infrastructure’s investment (in the $8.4 billion agreement) will be approximately US$500m of equity, to be funded from existing liquidity. The remainder of the business will be owned by its institutional partners and GIC” {GWI press release, 01.July.2019}.
  5. “Pauses” and obstructions often extend the calendar count, and it has become somewhat common for CFIUS reviews to extend beyond a year for complex deals. A recent example is SoftBank’s (Japan) $2.25 billion investment in GM’s Cruise autonomous vehicle company. The Agreement was signed in June 2018, and CFIUS approval was conferred in July 2019. The complexities of the Brookfield/GWI acquisition are certainly different, but probably about as thorny. {Recent CFIUS Enforcement Hints at Its Priority Industries and Concerns, Fox Rothchild LLP 31.July.2019}
  6. I.e., transactions that involve a transfer of control to a foreign government, which includes companies controlled by foreign governments and sovereign wealth funds. { A Guide to Demystify the CFIUS Process , Baker Botts LLP.}