M & A Law Prof Blog

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.

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.