Will America’s expanded reviews shut out the worthwhile deals along with the unwelcomed investments?
- New pilot programme requires mandatory review of broader range of deals
- Minority investment in critical industries faces new inquiries
A move by United States authorities to more broadly review transactions tied to China on national securities grounds could have the unintended consequence of sweeping up more traditionally welcome deals by other overseas investors, according to legal experts.
This summer, the US Congress passed legislation that expands the powers of the Committee on Foreign Investment in the United States, or CFIUS, to examine mergers and investment by foreign persons, including non-controlling stakes.
The expanded law, known as the Foreign Investment Risk Review Modernization Act, or Firrma, was adopted in light of increasing concerns about deals by Chinese state-backed companies. It is expected to be fully implemented in February 2020.
Beginning on Saturday, a new pilot programme, issued by the US Department of the Treasury, will require a mandatory review of transactions that involve certain critical technologies and fall within 27 industries, ranging from aircraft manufacturers and semiconductor makers to biotechnology companies in the US.
“I think one of the ironic results of this pilot programme is it’s not going to impact Chinese investment as significantly as the authors had intended,” said Shawn Cooley, an antitrust lawyer at law firm Freshfields Bruckhaus Deringer in Washington.
“It’s going to sweep in all of the non-Chinese investment that would have never voluntarily filed. That’s where CFIUS is going to see the most immediate peak. It’s probably going to be overwhelming from Japan, from Korea, from Canada, from the UK – all the ones that would have generally accepted the latent risks of not filing under a voluntary process,” he said.
The expanded powers come just two years after Chinese deal making in the US reached a record high in 2016, with 147 announced deals worth US$61.2 billion, according to data from Refinitiv, the former risk and financial business of Thomson Reuters.
However, the number of announced deals has declined over the past two years as Chinese-backed acquisitions are receiving greater scrutiny from US authorities. President Donald Trump blocked Chinese investment firm Canyon Bridge Capital Partners’ US$1.3 billion deal for Lattice Semiconductor in 2017 and Broadcom’s proposed US$117 billion deal for Qualcomm this year.
Several other deals have collapsed after failing to win approval from the committee, such as Ant Financial’s US$1.2 billion deal for MoneyGram. Ant Financial is an affiliate of Alibaba Group Holding, the parent company of the South China Morning Post.
Chinese-backed deals in the US have also declined as a result of Beijing urging companies to reduce debt. Several large deals announced in 2016 by insurers HNA Group and Anbang Group and the entertainment company Dalian Wanda have been unwound, or their stakes reduced, as part of a deleveraging push by the government.
The number of announced Chinese-backed acquisitions of US companies is down by 28 per cent year on year as of November 5, according to Refinitiv.
But despite the decline in Chinese-backed deals, CFIUS reviewed about 250 transactions in 2017, an increase of almost 40 per cent from the year before, according to law firm Wilson Sonsini Goodrich & Rosati.
Freshfields’ Cooley said CFIUS was on pace to exceed this amount in 2018.
CFIUS was established by US president Gerald Ford in 1975 amid increasing concerns about investment by Opec members and whether they were driven by politics.
The committee is made up of representatives from 16 agencies, including the Department of Defence, the Justice Department and the Department of Homeland Security. US Treasury Secretary Steven Mnuchin is its chairman.
CFIUS often conducts its work in secret, so it can be difficult for companies to ascertain why a deal was rejected. The new process may not make that any more clear, according to legal experts.
Under the pilot programme, CFIUS will require companies involved in deals that cover so-called critical technologies to file for a mandatory review of these transactions if they fall within a list of two dozen industries where “certain strategically motivated foreign investment could pose a threat to US technological superiority and national security”.
The broader scope of Firmma “will make some smaller deals more difficult to do, but I have a hard time concluding that it will have a chilling effect in the long run. Even in the medium term,” said Scott Flicker, a partner with law firm Paul Hastings and chairman of its Washington office.
“The reason I say that is these investment decisions continue to be driven by fundamentals. I think the CFIUS process will come to be seen as one more thing, like Chinese government approval, that will have to be dealt with, but I don’t think it will ultimately drive most decision-making,” he said.
The expanded review goes as far as minority investors who have access to material non-public technical information, as well as investment that involves a board seat or observer rights.
In the past, CFIUS filing has been voluntary by companies that fell within certain areas designated as important to national security, such as defence applications.
Christine Laciak, an antitrust lawyer at Freshfields in Washington, said CFIUS could find itself “overwhelmed” by the new notifications it receives as a result of the change.
“We have to go back over deals that have been pending over the past four to six months because anything that has not closed by the effective date could fall under this mandatory requirement,” said Laciak.
“Some of them we had pre-cleared already because under the voluntary regime nobody would need to file. Now we have to reconsider that view and see if they would be swept up into the mandatory system,” she said. “We’ve already seen examples of companies that we never would have filed under the voluntary regime, but they’ll now be swept up under the mandatory regime.”
The mandatory filing period could potentially extend the review of more complex deals, by adding an additional two months or more to the review process, according to legal experts. Deals are supposed to be reviewed within a 90-day window, but this has been extended by as long as a year in some complicated transactions.
However, the updated process could ultimately benefit some companies if CFIUS reviews and approves deals in a more timely manner.
“Getting certainty around processes will only help advisers do their job,” said Matt Herman, co-head of global M&A at Freshfields in New York. “It’s easy to sit there, to say we have a US business. This is a Chinese buyer. Trump equals ‘no’. That’s hardly a nuanced approach to a complicated body of law and regulation.
“The ability to add some clarifying factors to it and effectively force more nuanced examination [ahead of deal signing] is helpful for buyers and sellers of assets,” he said. “It’s helpful for lending sources. It’s helpful for advisers. It’s a good thing.”