On November 16, 2016, the U.S.-China Economic and Security Review Commission (USCC) recommended in its annual report to the U.S. Congress that bans Chinese state-owned enterprises from acquiring or gaining control of U.S. company, in order to prevent Chinese state-owned enterprises take advantages of acquired technologies for the benefits of China’s national interests at the expense of U.S. national security. Although the proposal has no legal power, it largely reflects the challenges faced by Chinese enterprises “going abroad”.
In fact, out of doubts about China’s rise, the United States’ agency responsible for reviewing foreign mergers and acquisitions of domestic companies in terms of national security and interests, the Council on Foreign Investment in the United States (CFIUS), has always been concerned about Chinese companies, especially state-owned enterprises, acquiring important strategic assets or sensitive technologies in the United States. In 2007, Huawei and the US PE investment fund Bain Capital attempted to acquire the US information technology company 3Com. This case is worth examination for Chinese companies. In this case, the equity that Huawei intends to acquire can only reach 21.5% of 3Com’s equity at most, accounting for 3 seats in the 11-member board of directors. Huawei will not control 3Com, nor will it obtain sensitive US technology. In addition, Huawei is a private enterprise. Still, Huawei President Ren Zhengfei’s military background has been questioned, and the U.S. market is skeptical about the deal’s success, as 3Com’s cybersecurity business includes customers in the U.S. Department of Defense. Huawei and Bain Capital ultimately withdrew their acquisition applications due to expectations that they would not be able to obtain CFIUS approval. In addition to Huawei, cases in which the applicant withdrew the acquisition application or the acquisition application was rejected include the acquisition of four small wind farms in Oregon by a subsidiary of China Sanyi Group in the United States in 2012 and the acquisition of the US oil company Unocal by China National Offshore Oil Corporation in 2005.
When Chinese companies plan to acquire US corporate assets, they should take into account that CFIUS approval may be a decisive factor in the success of the acquisition. First, although U.S. law does not mandate that M&A transactions need to submit an application to CFIUS, CFIUS has the right to require the cancellation of the transaction after the transaction is completed. Therefore, it is necessary to assess whether the M&A may have U.S. national security issues before the transaction, or consider voluntarily submitting an application to CFIUS. Submitting an application is one way. Second, in the process of dealing with CFIUS, we can learn from the experience of the Huawei case. Bain Capital, as the joint acquirer of Huawei, came forward to negotiate with CFIUS. Its pure American background can play a certain role in reducing the resistance of the United States to the acquisition. Although the final result failed to meet expectations, it is still an ingenious work worth learning from. Also, possible changes in the market during the CFIUS approval period should not be ignored. After the applicant submits the complete application materials, the CFIUS initial review time is 30 days, but if the foreign acquirer is a foreign state-owned enterprise or is controlled by a foreign government, CFIUS must initiate a 45-day in-depth investigation procedure, and the entire approval process may take up to 90 days. Finally, while state-backed Chinese companies encounter hostility in overseas markets, there may be opportunities for truly private companies. The British “Financial Times” reported that governments of various countries, including the United States, are tending to treat different Chinese companies differently, and small-scale investments from Chinese private companies are often warmly welcomed.