February 12, 2011
Chinese "CFIUS process"
Reuters reports on China's announcement that China will begin subjecting inbound M&A activity to national security reviews - its own version of the US CFIUS process. Although the US security review system entails a voluntary filing, I suspect the Chinese version that they are currently envisioning will be slightly more intrusive. Here's the official goverrnmenent announcement (translated by the Google machine):
In order to guide foreign investors and orderly development of the domestic enterprise, safeguard national security, by the State Council, is to establish a foreign investor acquires a domestic enterprise security review (hereinafter referred to as M & A security review) system in the matter are as follows:
First, the scope of M & Security Review
(A) safety review of the range of M & A: Foreign investors, supporting the takeover of a domestic defense industry and military enterprises, key, sensitive military installations around the business, and relationships with other units of national security; foreign investor acquires a domestic national security of the important agricultural products, it is important energy and resources, critical infrastructure, an important transportation services, key technologies and major equipment manufacturing and other enterprises, and the actual control may be achieved by foreign investors.
(B) a foreign investor acquires a domestic enterprise, is the following:
1 foreign investor purchases shares of enterprises with foreign investment or subscribe for capital increase domestic non-foreign-invested enterprises, domestic enterprises to make the change into a foreign-invested enterprises.
2 foreign investment in a foreign investor purchases the equities of Chinese enterprises, or enterprises with foreign investment capital increase subscription.
3 foreign investors to establish foreign-invested enterprises and enterprises with foreign investment agreement through the purchase of a domestic enterprise assets and operates its assets, or through the foreign-invested enterprises to purchase shares of domestic enterprises.
4 the territory of foreign investors to buy corporate assets, and invest the assets of the foreign-invested enterprises operating assets.
(C) to obtain effective control over foreign investors, foreign investors means a domestic enterprise through the acquisition of a controlling shareholder or actual controller. Include the following:
1 foreign investors and its parent holding company, subsidiary after the acquisition of the total shares held by more than 50%.
2 several foreign investors in the acquisition of shares held after the combined total of more than 50%.
3 foreign investors in the acquisition of shares held after the total amount of less than 50%, but according to their holdings enough to enjoy the right to vote, or the shareholders meeting of shareholders, resolution of the board have a significant impact.
4 other decision-making led to a domestic enterprise, finance, personnel, technology transfer of effective control over the situation to foreign investors.
Second, the contents of M & Security Review
(A) of the M & A transaction on national security, including the defense needs of the domestic production capacity, the domestic services capacity and the impact on equipment and facilities.
(B) of the M & A transactions on the stable operation of the national economy.
(C) of the M & A transactions on the impact of basic social order of life.
(D) M & A transactions involving national security, the impact of key technology R & D capabilities.
Third, M & A security review mechanism
(A) the establishment of a foreign investor acquires a domestic enterprise security review of the Inter-Ministerial Joint Conference (hereinafter referred to as joint) system, the specific commitment to the safety review of mergers and acquisitions.
(B) under the leadership of the joint meeting of the State Council, the Development and Reform Commission, Ministry of Commerce take the lead, according to foreign capital industries and sectors involved, together with relevant departments to carry out M & Security Review.
(C) of the joint meeting of the main responsibilities are: analysis of a foreign investor acquires a domestic enterprise to national security; research, coordination of the foreign investor acquires a domestic enterprise security review of the major issues; on the need for safety review of the foreign investor business transactions within the safety review and decision.
Fourth, M & A security review process
(A) a foreign investor acquires a domestic enterprise, shall be in accordance with the provisions of this notice by the investor to the Ministry of Commerce to apply. That fall within the scope of the safety review of mergers and acquisitions, the Ministry of Commerce should be brought to within 5 working days to review the joint meeting.
(B) a foreign investor acquires a domestic enterprise, relevant State Council departments, national trade associations, industry enterprises and downstream enterprises that require acquisition of security review, conducted by the Ministry of Commerce security review of the proposed merger. Joint acquisitions deemed necessary by the safety review, may decide to conduct the review.
(C) of the joint review of the Ministry of Commerce deals brought to safety, the first general review of the general review of the failed, to conduct a special review. The parties shall deal with the joint safety review, to provide security review required materials, information, and accepted the inquiry.
Review of written comments of general way. Ministry of Commerce received the Joint Security Review deals brought to the application, within 5 working days, the departments concerned to seek a written opinion. After receiving the additional request in writing the relevant departments, should be within 20 working days to submit written observations. Such as the departments concerned that the deal does not affect national security, are no longer conduct a special review by the joint meeting of all the written comments received within 5 working days to review comments, and written notice to the Ministry of Commerce.
M & A transactions, if any departments that may impact on national security, joint written comments should be received within 5 working days after the start the special review process. Start the special review procedures, joint organization of the safety assessment of mergers and acquisitions, combined with assessment of the review of M & A transactions, basically the same comments, review comments made by the joint meeting; there are significant differences, by the joint meeting of the State Council for decision. Joint meeting since the launch of special review procedures within 60 working days to complete special reviews, or to the State Council decision. Review comments in writing by the joint meeting of the Ministry of Commerce.
(D) the safety review process in the acquisition, the applicant may apply to the Ministry of Commerce program to modify or withdraw merger transaction.
(E) acquisition of security review was made by the applicant written notice of the Ministry of Commerce.
(Vi) acts of a foreign investor acquires a domestic enterprise to national security have caused or may cause significant impact on the joint meeting with the relevant departments should be required to terminate the Ministry of Commerce of the transaction parties, or transfer the relevant shares, assets or other effective measures to eliminate the merger and acquisition on national security.
V. Other provisions
(A) the relevant departments and units to establish the overall concept, enhance a sense of responsibility and keeping state secrets and commercial secrets, improve efficiency, expanding opening up and foreign investment to improve standards at the same time, promote the healthy development of foreign capital to safeguard national security.
(B) the acquisition of domestic enterprises involving foreign investors new investment in fixed assets, fixed assets investment by state regulations for project approval.
(C) acquisition of domestic enterprises involving foreign investors to change the state-owned property, the management of state assets by state regulations.
(D) a foreign investor acquires a domestic financial institutions, security review separately.
(E) Hong Kong SAR, Macao Special Administrative Region, Taiwan investors in mergers and acquisitions, with reference to the provisions of this notice.
(Vi) M&A safety review system since the date of the notice issued 30 days after implementation.
Rules for this review process are expected to be released in March.
June 02, 2009
CFIUS Filing for Hummer Deal?
OK, so GM went the way of Chrysler and filed for bankruptcy yesterday. Earlier this morning there was an announcement by GM’s management that it had entered into an MOU with a mysterious unidentified potential buyer for its Hummer division. Now, it’s leaked to the NY Times and Bloomberg (and just about everybody else in the world) that the buyer is Sichuan Tengzhong Heavy Industrial Machinery Company Ltd., based in Chengdu. They are offering to take the Hummer Division off GM's hands for $500 million in cash.
Of course, a few years ago sale of an automotive division that produces the civilian version of the military’s Humvee would have likely generated cries of outrage about threats to our national security. Remember Dubai Ports? Or how about Unocal-CNOOC? Well, with GM in bankruptcy those concerns are not likely to carry the day. That said, this transaction is a strong candidate for a voluntary CFIUS filing with the US Treasury. Given the nature of the business (vehicles manufacture with a potential military use) and the nature of the acquirer (News articles are murky about that. They say it's "privately" owned. Maybe.), this is precisely the type of transaction that should seek to make a filing. Worst case for GM would be that they announce this transaction and proceed along a path to closing only to have a Dubai Ports/Unocal-like flare-up kill this transaction.
October 02, 2007
Nasdaq, Borse Dubai and Exon Florio
Last week, Nasdaq announced a series of transactions which included a 19.99% equity investment by Borse Dubai, with voting rights on this stake limited to 5%. In addition, a Borse Dubai affiliate is to be the beneficiary of a trust holding another 8.4%, a stake without voting rights that would be managed by an independent trustee and eventually sold. The deal was reached in furtherance of Nasdaq's increasingly winning bid for OMX and its disposition of its shareholding in the London Stock Exchange.
An issue in this deal appears to be CFIUS approval. CFIUS stands for the Committee on Foreign Investment in the United States, an inter-agency committee chaired by the Secretary of Treasury. It is charged with administering the Exon-Florio Amendment. This law grants the President authority to block or suspend a merger, acquisition or takeover by a foreign entity if there is “credible evidence” that a “foreign interest exercising control might take action that threatens to impair the national security” and existing provisions of law do not provide “adequate and appropriate authority for the President to protect the national security in the matter before the President." The President has delegated this review process largely to CFIUS.
The statute was enacted in 1988 in response to the 1987 attempt by Fujitsu, a Japanese electronics company, to acquire Fairchild Semiconductor Corporation. That was back when the Japanese were going to take over the United States (who could forget Gung-Ho and Rising Sun?!). Congress struck back at this "menace" by passing the Exon-Florio Amendment. And in July of this year, Congress passed The National Security Foreign Investment Reform and Strengthened Transparency Act. The bill further enhanced the CFIUS review process, and adds to the factors for review critical infrastructure and foreign government-controlled transactions. In either instance CFIUS can initiate a mandatory review. Like the 1988 bill, this amendment was a response to perceived foreign investment "threats". This time it was the acquisition of Peninsular & Oriental Steam by Dubai Ports and the ensuing political brawl and heavy congressional protest which led to Dubai Ports terminating the U.S. component of its acquisition.
Nasdaq has helpfully not filed the agreements for this transaction, so the extent of Borse Dubai's control over Nasdaq post-transaction are unknown, but the 5% voting stake indicates that it will not exercise indicia of control. Therefore, arguably CFIUS does not have authority to initiate mandatory review (or even jurisdiction for a voluntary one). Nonetheless, Nasdaq is making a big deal of voluntarily initiating an Exon-Florio review here. But, Exon-Florio has always been a voluntary process until the recent amendments -- making such a filing and clearing the review process removes the ability of the President to later unwind the transaction on national security grounds.
Of late, CFIUS has been much more attentive to foreign takeover transactions. According to one news report, CFIUS considered 113 transactions in 2006, up 74 percent from the previous year. And CFIUS conducted seven second-stage investigations in 2006, equaling the number of the previous five years combined. Nonetheless, I can't see why CFIUS would object here -- this appears to be merely a 5% voting stake and I would suspect that Nasdaq has put limitations on their acquiring an increased controlling stake in Nasdaq (which would require a new CFIUS review in any event). Though again, we don't have the agreements so don't know. you would think since Nasdaq was a regulator it would more fully disclose. Nonetheless and as noted, the spur for the most recent legislative reform was congressional protest at another Dubai acquisition. That dispute was always puzzling: Dubai Ports was acquiring an English company with port operations in the United States and Dubai Ports is headquartered in the United Arab Emirates, one of our strongest allies in the Mid-East. Here, Dubai may have been scarred by that experience and asked for this review themselves. Better safe than sorry, and likely why Nasdaq and Borse Dubai are initiating this voluntary review. They are playing to political concerns more than the legal prerequisites of Exon-Florio. Our economy reached the stature it has today as a result of direct investment from abroad; hopefully for our sake we will remain hospitable this time around. This is likely given the legal case.
For a summary of the final legislative provisions of the CFIUS reform bill, see this client memo by Wiley Rein here. For more on Exon Florio and the CFIUS process see my prior posts: CFIUS Reform to Become Law; GE, The Saudis and Exon-Florio; and The Politics of National Security.
August 30, 2007
The Gates of Taiwan
On Monday, Taiwanese based Acer Inc. announced that it had agreed to acquire Gateway, Inc. Under the agreement, Acer will commence a cash tender offer to purchase all the outstanding shares of Gateway for $1.90 per share, valuing the company at approximately $710 million. For those who bought at $100 a share in 2000, I am very, very sorry. The acquisition is subject to CFIUS review and a finding of no national security issues (more on this at the end).
For language hogs, the merger agreement contains some solid contract language dealing with Gateway's exercise of its right of first refusal to acquire from Lap Shun (John) Hui all of the shares of PB Holding Company, S.ar.l, the parent company for Packard Bell BV. In Section 5.11 (pp. 36-37), Acer agrees to fund the purchase of Packard Bell by Gateway. The interesting stuff is in Section 7.2 which deals with what happens to Packard Bell if the agreement is terminated. In almost all circumstances of termination Gateway is required to on-sell Packard or its right to buy Packard to Acer. The big exception is in the case of a superior proposal. In such circumstance, if the third party bidder elects, Gateway is required to auction off Packard or its right to buy Packard to the highest bidder. According to one report on The Deal Tech Confidential Blog, Lenovo is contemplating an intervening bid for Gateway in order to acquire Packard; their lawyers should take a look at these provisions. In any event, Gateway did not disclose in its public filings that, if the Acer deal fails, it is highly unlikely to remain the owner of Packard Bell if it succeeds in purchasing it.
For those who track such things the deal has a no-solicit and a $21.3 million break fee -- about normal. It is also yet another cash tender offer with a top-up option.
The other interesting thing about this transaction is the Exon Florio condition. The Congress enacted the Exon-Florio Amendment, Section 721 of the Defense Production Act of 1950, as part of the Omnibus Trade and Competitiveness Act of 1988. The statute grants the President authority to block or suspend a merger, acquisition or takeover by a foreign entity if there is “credible evidence” that a “foreign interest exercising control might take action that threatens to impair the national security” and existing provisions of law do not provide “adequate and appropriate authority for the President to protect the national security in the matter before the President."
The Exon-Florio provision is implemented by the Committee on Foreign Investment in the United States ("CFIUS"), an inter-agency committee chaired by the Secretary of Treasury. Exon Florio was amended in July by The National Security Foreign Investment Reform and Strengthened Transparency Act. For a summary of the final legislative provisions, see this client memo by Wiley Rein here. The legislation is Congress's response to the uproar over the acquisition of Peninsular & Oriental Steam by Dubai Ports and the ensuing political brawl and heavy congressional protest which led to Dubai Ports terminating the U.S. component of its acquisition. The dispute was always puzzling: Dubai Ports was acquiring an English company with port operations in the United States and Dubai Ports is headquartered in the United Arab Emirates, one of our strongest allies in the Mid-East. Nonetheless, the controversy has now spawned a change in the CFIUS review process. And on the whole, the measure is fairly benign, endorsed by most business organizations and will not bring any significant change to the national security process. However, the bill does come on the heels of a significant upswing of CFIUS scrutiny of foreign transactions. According to one news report, CFIUS considered 113 transactions in 2006, up 74 percent from the previous year. How this will all ultimately effect the willingness of foreigners to invest in the U.S. is still unclear, though you can make a prediction.
Back to the Acer transaction. The tender offer is conditioned on:
the period of time for any applicable review process by the Committee on Foreign Investment in the United States (“CFIUS”) under Exon-Florio (including, if applicable, any investigation commenced thereunder) shall have expired or been terminated, CFIUS shall have provided a written notice to the effect that review of the transactions contemplated by this Agreement has been concluded and that a determination has been made that there are no issues of national security sufficient to warrant investigation under Exon-Florio, or the President shall have made a decision not to block the transaction.
This Exon-Florio condition appears prudent given that Lenovo had to make concessions to clear CFIUS review when it bought IBM's computing division. CFIUS review, though, has a minimum review period of 30 days which is longer than the 20 business day minimum required for a tender offer to remain open. Given this, I'm surprised Acer and Gateway went the tender offer route; typically in these situations you would use a merger structure which allows for a longer time period between signing and closing, but is more certain to get 100% of the shares in a more timely fashion. One likely reason is that they did so because they anticipate clearing Exon-Florio quickly. This, of course, is now in the hands of the U.S. government.