This article was published in ACG New York Private Equity 2016 Year in Review. It is reprinted here with permission.
Congress crafted the Exon-Florio Amendment in 1988 to fill gaps that it perceived in federal antitrust, environmental and securities laws, as well as in the general power of the president to declare a national emergency, and to protect companies involved in defense or national security from takeover by foreign interests.
The review process under the Exon-Florio Amendment is delegated to the Committee on Foreign Investment in the United States (CFIUS). The CFIUS chair, the Secretary of the Treasury, on November 21, 2008, issued new CFIUS regulations, and on December 8, 2008, issued a notice providing guidance on this CFIUS reform and the national security considerations. The new regulations retained many of the basic features of earlier regulations, with voluntary notices to CFIUS by parties to transactions, although CFIUS also has the authority to review a transaction when parties have not voluntarily notified. The failure to notify about a transaction leaves a continuing risk that divestiture of the target may be required following closing.
In recent years, Congress, motivated by terrorist activity and other global policy concerns, has developed a growing interest in CFIUS. In particular, the rise of China and its economic strength have caused anxiety, just as China has become the largest growing source of foreign investment in the United States. That confluence has brought to the forefront the necessity of considering a CFIUS filing, even when the target is not a U.S. company or has no apparent role in defense or national security.
China's Rise and Fall?
CFIUS released a public version of its most recent classified annual report to Congress on covered transactions in Current Year 2014 on February 19, 2016. China led all countries represented in CFIUS reviews for the third year in a row, but European investors resurged following a decrease in activity in 2013.
The most prominent recent China CFIUS review ended successfully. CFIUS approved state-owned China National Chemical Corp.'s takeover bid of Swiss seeds-and-pesticides group Syngenta AG in August 2016. Trumpeted as the "biggest cross-border deal involving a Chinese buyer" and one that would "mark an acceleration of a shakeup in the global agrochemicals industry," this deal caused considerable anxiety in the financial markets.
A very recent covered transaction highlighted the extraterritorial impact of CFIUS. The voluntary public takeover offer of Chinese investor Fujian Grand Chip Investment Fund LP (partially owned by the Chinese government), through its indirect German subsidiary Grand Chip Investment GmbH, for German chip maker Aixtron SE was opposed by both Germany and President Obama (following CFIUS's recommendation) on the grounds of national security concerns. Authorities were concerned with the transaction because the targets products were used in the production of parts that would be incorporated into larger projects.
The Trump Administration and Beyond
CFIUS already is shining a bright light on Chinese covered transactions, and that light likely will only intensify under the new Trump administration. The press has heavily publicized President Trump's intentions to confront China and others across the board on public policy and commercial matters, especially trade and investment issues. Foreign investors, especially Chinese investors, need to be aware and active in gaining CFIUS approval before consummating any covered transactions in the United States.
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.