Warren, Casten Urge BAE Systems to Refrain from Stock Buybacks After Receiving CHIPS Act Funds

Letter

Dear Mr. Arseneault,
We are writing regarding the preliminary agreement between BAE Systems Electronic
Systems (BAE Systems) and the Department of Commerce (Commerce) to award roughly
$35 million in CHIPS and Science Act federal grant funds to BAE Systems. This award will be the first CHIPS grant handed out by Commerce, and we were pleased to see Commerce –
after unnecessary delays – make this award to spur investments in national security- and
defense-critical technologies. But we are concerned by BAE Systems’ history of engaging in
massive stock buyback schemes that divert capital away from important investments. This
history of buybacks raises serious concerns about BAE Systems’ intent to comply with the
requirements of the CHIPS incentive programs. We urge BAE Systems to hew to the spirit of
the law as passed by Congress, as well as guidance issued by Commerce, and refrain from
engaging in stock buybacks for the duration of its CHIPS Act grant.

The CHIPS and Science Act contains several provisions delineating exactly how award
recipients can use program funds. First, Section 9902(a)(3) of the National Defense
Authorization Act of 2021 (NDAA), as amended by the CHIPS Act, directs the Commerce
Secretary to “determine that the [CHIPS] project to which the application relates is in the
economic and national security interests of the United States.” As we noted in our letter last
year, given the need for investment in domestic chip production, and the small number of
companies currently producing chips domestically, any CHIPS funding that enables a
company to then turn around and use that money for buybacks rather than research,
manufacturing, or other production costs is not in the “economic and national security
interests of the United States.” The Department of Commerce reiterated this requirement by
announcing it would make certain that awards were not used as “a subsidy for companies to
make them more profitable or enable them to have more cash for stock buybacks or to pad
their bottom line[s].”

Second, Section 9902(a)(4) of the 2021 NDAA lists four permissible uses of CHIPS funding:
financing the construction of a semiconductor facility, supporting workforce development,
supporting site development, and paying for facility operating expenses. None of those uses
encompass stock buybacks.
Finally, and most importantly, Section 102(g) of the CHIPS Act
explicitly forbids companies from using CHIPS funding to engage in stock buybacks.

In February 2023, we wrote to Secretary Raimondo regarding the need for strong guardrails to
protect CHIPS funding and ensure that it is used wisely and in consistence with the law. The
letter also called on Commerce to “use its full authority to prevent CHIPS funding recipients
from misusing taxpayer dollars by directly or indirectly funding buybacks and other
shareholder distributions.” Specifically, the letter urged Commerce to ban CHIPS funding
recipients from engaging in stock buybacks for at least 10 years; to require rigorous
disclosures and audits of companies’ buybacks and dividend payouts; and to require
applicants to proactively certify to the Department that they would not conduct stock
buybacks for a specified time period.

Commerce’s subsequent Notice of Funding Opportunity (NOFO) for the first round of CHIPS
funding offered applicants the opportunity to disclose their plans with respect to stock
buybacks for the five years following receipt of a CHIPS grant. The Department indicated that
CHIPS incentive program applicants could “complement their commitment to reinvestment
with a commitment to refrain from stock buybacks for five years from the date of award,” and
“should detail their intentions with respect to stock buybacks over five years, including
whether they intend to refrain from or limit them, as well as details around the existence of
any current or future intentions for share buybacks, dividend payments, dividend payment
increases, or special dividends.” In evaluating applications, Commerce indicated that it
would assess the broader public impacts of the proposed project, including “the extent of the
applicant’s commitments to refrain from stock buybacks.”

We were disappointed to see the Commerce Department did not take full advantage of its
statutory authority to ban buybacks as we recommended; however, the Department’s approach to at least consider the impacts of buybacks represents a step forward in ensuring
federal funds are used for their intended purpose and not simply to line the pockets of
company executives and shareholders. Moreover, the Department included strict enforcement
language in the NOFO, in line with prior statements. BAE Systems and other CHIPS
funding recipients “will be subject to administrative requirements” such as “terms to ensure
the appropriate use of Federal funds [and] compliance with programmatic requirements and
commitments made by the applicant in the application.” Should award recipients fail to
comply with those commitments—including any commitments made with respect to stock
buybacks as part of the terms of the award—Commerce may withhold future payments, claw
back previously disbursed funds, suspend or terminate the award, or even initiate debarment
proceedings that would preclude the awardee from receiving future federal grants or other
awards.
BAE Systems’ track record of extensive stock buyback programs raises serious concerns
about its willingness to forgo buybacks at the expense of the capital needed for the
investments expected of CHIPS funding recipients. Over the ten years leading up to the
passage of the CHIPS and Science Act, BAE Systems paid out nearly $9.4 billion to
shareholders in dividends and stock buybacks. In June 2023, the company commenced the
third round of a nearly $2 billion stock buyback program while simultaneously authorizing
another roughly $2 billion in stock buybacks over the next three years – squarely within the
period of its CHIPS Act award. In comparison, BAE Systems funded only 14 percent of its
research and development budget in 2022. BAE Systems has made no public indication that
it plans to suspend its most recent round of stock buybacks after receiving CHIPS Act
funding, which would seem to run counter to the intent of the law.

Expanding domestic capacity for chip manufacturing is critical to U.S. national security.
Congress placed explicit guardrails on the use of CHIPS and Science Act incentives to ensure
recipients use those funds for their intended purpose. In light of BAE Systems’ near-constant,
decade-long stream of stock buyback programs raises, it is imperative the public know what
commitments the company has made to protect taxpayer funds from diversion and misuse.
Therefore, we request that you provide responses to the following questions by no later than
March 6, 2024:
1. What commitments and disclosures, if any, did BAE Systems make with respect to
stock buybacks as part of the nonbinding preliminary agreement it signed with
Commerce in December?
2. What commitments and disclosures, if any, did BAE Systems make with respect to
stock buybacks as part of its application for CHIPS and Science Act incentive
programs?
3. Will BAE Systems commit to pausing any ongoing stock buybacks and refraining
from any further stock buyback programs for the five years following its initial receipt
of CHIPS Act funds?
4. If not,
a. Are the planned buybacks any larger than they would have been absent receipt
of the CHIPS grant?
b. How will the company obtain the capital for these buybacks?
c. How will the company segregate CHIPS funds to ensure that they are not used
for or to enable buybacks?

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