Professional Interpretation

In recent years, Chinese companies have been hindered from investing in the United States, M & A project or pre-transaction initiative terminated by CIFUS because of unfavorable forecasts, such as Tsinghua Unisplendour acquires Western Digital case, Ant Financial's acquisition of a US transfer company (Money Gram) case and Sany Heavy Industry acquires wind power company case. What are the institutions and procedures of CIFUS? How should Chinese high-quality companies interested in mergers and acquisitions in the United States respond? What should be done by Chinese high-quality companies that plan to merge and acquire US industries? The team will propose strategies for Chinese companies to help them invest in the United States through the analysis of the mechanism review points of CIFUS.

I. Background

With the improvement of China’s overall national strength and the increase of international competitiveness of Chinese-funded enterprises, China’s capital is accelerating towards overseas. The United States is a place of concentrated investment for international capital and has a large number of international high-quality companies, which have great attraction for Chinese companies' M&A investment. As of November 2, 2017, the scale of Chinese companies M&A investment in the United States was US$13.88 billion, compared with US$60.36 billion in the same period of 2016. The scale of Chinese companies M&A investment in the United States decreased by nearly 80%. The reasons are the Chinese government has strengthened supervision over overseas investment, investors' rationality, President Trump’s protectionism and CFIUS has tightened its review procedures for foreign investment.

II. Key Points of CIFUS

The full name of CFIUS is The Committee on Foreign Investment in the United States, the U.S. Foreign Investment Committee. It is a federal government committee composed of representatives from nine government agencies including the Department of Defense, the Ministry of State, and the Department of Homeland Security. The U.S. Treasury Secretary served as chairman of the committee and reviewed foreign investment transactions that may affect U.S. national security. Except for nine permanent seats, other permanent members and non-voting members only have the right to propose and have no voting rights. There is only one vote for each of the nine permanent seats. For the transaction under review, CIFUS implements a one-vote veto system. If any one of the examiners disagrees, the transaction may be stopped.

CFIUS has established an auditing procedure to determine whether any transactions in the United States by foreign companies and individuals in the United States involve national security.

Since the reason for setting up an audit mechanism is not to prevent all foreign investment, but to exclude the transactions that pose a threat to US national security, the following factors should be considered during the entire audit process:

(1) The degree of National Defense demand for domestic products in the United States;

(2) In the field of national defense, the degree of domestic industry satisfaction includes the degree of supply and services of human resources, products, technology, raw materials and other aspects;

(3) The degree of influence of the U.S. domestic industry controlled by citizens on defense needs;

(4) The degree of potential impact of planned or ongoing foreign investment transactions on U.S. military supplies, military equipment, and military technology;

(5) The degree of potential impact of planned or ongoing foreign investment transactions on U.S. technology related to U.S. national security;

(6) The extent of the potential impact on major U.S. infrastructure, including energy;

(7) The extent of the impact on key technologies related to the U.S. national security;

(8) Whether it is under the control of a foreign government;

(9) And other factors that the President has recognized affect the national security of the United States.

In recent years, the concept of "national security" in the United States has been expanded. Initially, CIFUS focused on the nuclear industry and other military fields, but now it has expanded into new areas where there is a large amount of personal data, such as the insurance industry and the medical industry.

In principle, it is a voluntary declaration by foreign investment. However, when the investment transaction involves companies that provide support services for the U.S. government, important infrastructure areas, the U.S. defense industry, U.S. export controls, and the U.S. Department of the Treasury determines, at the time of the transaction, investors should report to the CIFUS on their own initiative. The CIFUS review process is divided into six steps: pre-declaration, application, preliminary review, investigation, presidential decision, and post-trade risk avoidance. Under normal circumstances, CFIUS will not veto a foreign investment transaction unless the transaction is found to pose a threat to the national security of the United States.

III. Solution

Although the proportion of foreign-invested projects that are suspended by the U.S. government is relatively small, it poses a great risk to individual companies investing in the United States. Since U.S. President Trump took office, the unpredictability of the CFIUS review has increased significantly, and the sensitive areas have been correspondingly expanded, which is worthy of sufficient attention from Chinese companies. In addition to the regular filing and transaction process that employs a team of lawyers with extensive experience in communicating with CFIUS and a strategy to minimize the “break-up fee”, it should also (1) fully understand the CFIUS organization and its operating procedures as early as possible; (2) fully assess CFIUS's veto risk and plan appropriate solutions as early as possible. For high-tech areas that CFIUS focuses on, such as semiconductors, financial information processing, etc., in the case where direct mergers and acquisitions are not available in one-step strategy, Chinese investors can acquire related assets and technologies through asset stripping first, and then enhance derivatives and innovation of research and development. Such examples are not rare in China's high-tech fields, such as China's space, high-speed rail and bar network communication technologies.