CFIUS reality check: Seven insights for Chinese investors
China’s appetite for US M&A has increased dramatically since the turn of the century, with the annual number of Chinese-led US acquisitions increasing from zero in 2000 to 100 in 2014, figures from the Rhodium Group show. Yet in the minds of many Chinese investors, the Committee on Foreign Investment in the United States (CFIUS) remains a formidable barrier to getting deals done, says White & Case partner Farhad Jalinous.
CFIUS reviews the national security implications of foreign investments in US companies, and it has the power to limit or scuttle deals that it deems threatening.
Although CFIUS reviewed more Chinese deals than deals from any other country in each of the last two years for which the committee provided data (23 in 2012 and 21 in 2013), many of the concerns that Chinese entities have about CFIUS may be exaggerated or even false, notes Jalinous.
Drawing on our experience representing investors in CFIUS reviews, along with publicly available information, we identified some CFIUS insights and rules of thumb to help Chinese investors better understand—and successfully navigate—this important facet of the US M&A market.
Most deals are not reviewed The Rhodium Group reported that Chinese entities acquired 139 US companies from 2011 to 2013; CFIUS reviewed 54 Chinese deals during this period. Dividing reviewed deals by the total number of deals completed over a set timeframe yields an imprecise but serviceable proxy estimate of the CFIUS review rate. By this calculation, the review rate for Chinese deals from 2011 to 2013 was about 39 percent. This suggests that more than 60 percent of Chinese acquisitions were not reviewed by CFIUS.
Most reviewed deals proceed In 2013, CFIUS reviewed 97 deals overall, 21 of which were by Chinese acquirers. We know that eight acquirers withdrew from the process, and no deals were formally blocked. CFIUS does not report details about withdrawals by nationality, so we don’t know how many withdrawn deals were Chinese. But even if all eight were Chinese, China’s pass rate would have been at least 62 percent in 2013. Given that CFIUS reviewed deals from 26 countries in 2013, it is unlikely that all eight withdrawals were Chinese deals. China’s pass rate is probably closer to the overall pass rate of 92 percent. (It’s also important to remember that transactions may be withdrawn for reasons unrelated to CFIUS, such as when a deal falls through for business reasons.)
Don’t avoid CFIUS CFIUS can review any deal that might have national security implications, even if that means conducting the review after a deal has closed. Companies that wait to submit deals for review or attempt to evade review altogether expose themselves to the risk of having to change their deal terms late in the process—or live with CFIUS conditions after the deal has closed. CFIUS-imposed mitigation measures can be significant, including asset divesture and access restrictions, and they can render deals impracticable for participants.
In the worst-case scenario, CFIUS can recommend that the president order the buyer to sell the US business (often at a substantial loss) after the deal has already closed. Just the threat of this possibility is usually sufficient to compel buyers to divest, particularly because presidential decisions are publicly announced.
Don’t count on US political ties CFIUS, which is composed of representatives from various departments and agencies of the executive branch of the US government, is not required to notify Congress about the deals it reviews until it has made its final decision about them. Details about deals sometimes get out by other channels before CFIUS renders a decision, and in some cases political figures and competitors attempt to influence CFIUS. It is important to note that CFIUS has approved many controversial deals, even when politicians have made concerted efforts to stop them. Shuanghui International’s 2013 acquisition of pork producer Smithfield Foods is a case in point. The deal faced bipartisan opposition from US lawmakers expressing food safety concerns, but CFIUS let it proceed.
Having ties to the Chinese government isn’t a deal breaker Government ownership—regardless of the country involved—triggers additional scrutiny under the CFIUS statute; CFIUS also gives weight to indirect ties, as when the management team is associated with the Chinese government. Although government ties are a factor in the national security analysis, this is not in itself a reason to block a deal, as the record clearly shows. According to the Rhodium Group, government-owned Chinese entities acquired 76 US companies from 2000 to 2014, which accounts for 21 percent of the total number of Chinese acquisitions in the United States during that period.
Many tech-related acquisitions proceed
CFIUS gives special attention to deals that involve the acquisition of cutting-edge or strongly controlled technology, but many deals involving technology proceed without complication. To raise concerns, the technology in question must be relevant to national security. Technology that is already mainstream, particularly if not subject to substantial export controls or available widely on the international market, is usually fair game, as is suggested by an example from 2011. That year, a unit of China Aviation Industry Corp, the state-run aerospace and defense company, made a bid for Cirrus Industries, a Minnesota-based aircraft manufacturer. Lawmakers raised defense concerns, but CFIUS did not object to the deal, presumably because Cirrus’s technology was not considered sensitive.
Portions of US companies with special security or defense status may be fair game Due to US export-control and industrial security laws and policies, a Chinese investor cannot normally own a US company that has facility security clearance or is registered under the International Traffic in Arms Regulations (ITAR). But if such a company can segregate a portion of its business from the parts that require security clearances or ITAR registration, that unrestricted, commercial portion of the company could be made available for acquisition by a Chinese buyer.
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