Fair Play: CFIUS Is No Joke
Broadcom Ltd. CEO Hock Tan posed for a photo with President Donald Trump in November at the White House after he triumphantly announced he would relocate the headquarters of his Singapore-based company to the U.S.
Last week, Pentagon officials reprimanded Tan for using the relocation as a way to skirt a national security review of its hostile takeover attempt of Qualcomm Inc. A few hours later, Trump nixed the transaction before Qualcomm shareholders even had a chance to vote on it and before detailed merger negotiations could begin.
This is the new reality for cross-border M&A in the U.S. If the transaction involves a Chinese company, M&A lawyers need to be prepared to go to battle first on national security grounds. Already, nine deals involving Chinese companies have been scuttled by the Committee on Foreign Investment in the United States (CFIUS) in the 15 months of the Trump administration, according to Bloomberg data. CFIUS is a multi-panel agency housed in the Treasury Department that analyzes foreign transactions that could hurt national security.
An increase in CFIUS reviews over the last few years has caused a parallel increase in the demand for attorneys who have CFIUS experience. Firms that specialize in M&A say they are integrating CFIUS lawyers into merger teams early in the process, knowing that CFIUS is likely the first stop for regulatory clearance, particularly if the deal involves a Chinese acquirer.
Negotiating with CFIUS is tricky because it requires lawyers working for the merging parties to have high-level security clearance. At a hearing last week on CFIUS, Rep. Andy Barr (R-Ky.) queried Treasury official Heath Tarbert about potential national security risks in 5G wireless technology.
Tarbert responded that Barr should ask for a classified briefing to ask that question even though news reports had already said the risk of Chinese control over 5G had prompted Trump’s veto of the Broadcom-Qualcomm deal.
It comes as no surprise, then, that many CFIUS lawyers in private practice have had previous experience at one or more of the agencies that conduct the reviews. It also means the professional field for this kind of expertise is narrow, both in and outside the government.
Inside the government, staffing for CFIUS activities has stayed relatively flat while the workload has more than doubled. In 2011, there were 83 government employees assigned to CFIUS at least half the time in, according to a Government Accountability Office report made public last week. In 2016, the last year public figures are available, there were 91.
Meanwhile, the panel has upped its in-depth investigations of cross-border deals from 4 percent to 70 percent over the last 10 years, Tarbert told lawmakers. CFIUS is looking at almost three times the transactions it did in 2009 and 2010, the years before the financial crisis, he said.
Defense hawks appear to have won the public dialogue, in a bipartisan way, intoning their intent on keeping foreign owners out. “Our adversaries, the Chinese government in particular, are aware of U.S. deficiencies and are actively exploiting them,” said Rep. Robert Pittenger (R-N.C.), who sponsors legislation expand CFIUS’s review authority, at a March 15 hearing.
“There are competitors who want what we know,” agreed Rep. Denny Heck (D-Wash.), who co-sponsors Pittenger’s bill. “There are companies seeking to do an end-run around the rules.”
Broadcom tipped its hand to authorities by publicly stating that its headquarters move to the U.S. would allow the deal to circumvent CFIUS review. Other foreign companies may be less forthright, but it may not matter now that the government is alerted to these strategies. CFIUS already has broad authority to look at any deal that could result in a person or entity “controlled by or acting on behalf of a foreign government.” The law gives the government the ability to define “control.”
CFIUS officials told the GAO that the lack of specificity in the statute works in the panel’s favor by giving it the flexibility to “pursue reviews as national security risks change.” If Congress gets its way, there will soon be a few new tools in the CFIUS toolbox to parse foreign deals. Cross-border mergers beware.