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US foreign-investment body vexes Asia merger and acquisition bankers

Euromoney looks at the fine art of cross-border deal approval as the Committee on Foreign Investment in the United States gnashes its teeth.

If there is one acronym that is bound to raise the blood pressure of leading M&A bankers in Asia, it is CFIUS. The decisions of the Committee on Foreign Investment in the United States often hang like a guillotine over deal teams as they edge carefully towards the close.

The threat that the blade could fall and dismember a transaction for good is real and not to be taken lightly. So what is this strange beast that causes dealmakers to wake up in a cold sweat? And are there any golden rules for dealing with it?

CFIUS, part of the US
Treasury department

The remit of CFIUS is to review transactions that “could result in control of a US business by a foreign person” to determine any potential national security implications. The committee is made up of the heads of most of the largest and most powerful government departments and offices in the US. It is chaired by the secretary of the Treasury, who is joined by the heads of departments such as defence, state, homeland security and commerce, among others. The hunger of Chinese firms, particularly, to buy up more and more assets around the globe, including in the US, means the ability to engage with and satisfy CFIUS has become ever more vital for M&A bankers in Asia. And for those that have found their deals subject to a CFIUS review, one aspect vital to success is having the right people in place.

The purchase by Chinese-owned Ralls Corporation of several Oregon wind-farm companies is the most high-profile CFIUS case in the public domain. The committee previously determined the acquisition threatened national security and ultimately referred it to the president, who then ordered a divestiture, according to court documents.

However, the authority of CFIUS suffered a rare challenge in July after Ralls achieved a ruling in the Court of Appeals for the District of Columbia, stating the company’s property rights and allowing it to receive the unclassified evidence used in the decision, extending the process on the purchase.

The power of CFIUS to provide smooth passage to a deal was demonstrated last year in its approval of Hong Kong-based Shuanghui International’s acquisition of Smithfield Foods for a reported $4.7 billion. Another notable deal that received approval was when Japan’s SoftBank acquired US mobile operator Sprint for around $21.6 billion in 2013.

If you are too complacent, you will have
a problem. We got through because we had some
very good law firms working with us

Hong-Kong-based banker

“It’s a process that’s complicated and time-consuming, and really needs someone with Washington local expertise to guide you through the multiple agencies,” says one senior Hong Kong-based banker with CFIUS experience. “If you are too complacent, you will have a problem. We got through because we had some very good law firms working with us.

“At the early stage, you appoint a CFIUS counsel and brainstorm whether it is going to get through. I have had deals in Greater China and after they have looked at the CFIUS process, they have decided not to move ahead. More sophisticated clients may decide not to go ahead, whereas more gung-ho clients may decide to go ahead, and come unstuck.”

Bankers generally agree that when approaching a CFIUS review, a lack of willingness to spend money on the right people could be hazardous to the completion of the deal.

“What we try to do is we want to use consultants or lawyers with good Washington connections,” says a second Hong Kong-based dealmaker, also with past CFIUS experience. “The best are good. If it looks like you might have those issues, you’ve got to have the right people. If you might have a problem, you need to find a way to rethink your deal early. Always be on the front foot in redesigning bits of your deal.”

The second banker explained that the main red flags for CFIUS seem to be anything to do with defence or technology, but that the process is gradually becoming less opaque for those that have to tackle it.

“It’s probably getting a little clearer how they think these days,” he adds. “Back in the day, people didn’t have a good idea how they dealt with things. There are now a good body of cases.”

According to the Treasury, all cases will generally begin with the filing of a voluntary notice. Once the notice is deemed complete, it will be circulated to committee members and a review period of up to 30 days starts on the next business day. In 2012, the last set of figures released by CFIUS, there were a total of 114 notices. But what happens once the notice is submitted and circulated remains somewhat unclear to some of the companies under review, with requests for clarity seemingly only flowing one way.

“You don’t have much in the way of back and forth,” adds the first banker. “They won’t say ‘I want you to do this or that,’ you have to guess and it’s a very complicated process. If you are a Singaporean, Japanese or Australian buyer, no issue. If [you are] Chinese, you have a lot of baggage at the outset.”

The insertion of a CFIUS review into more outbound China deals provides a headache for the deal teams involved, but the continual build-up of cases appears to be revealing ever more information about the nuances of engaging with the committee.

Lawyers such as Timothy Keeler, a partner at Mayer Brown LLP, believe the modern CFIUS process is more stringent now, but also there are clear ways to approach dealing with the committee and certain pitfalls to avoid.

“It is particularly difficult if CFIUS learns of a sensitive foreign investment from the press or other parties,” says Keeler. “But if the parties are clear and transparent from an early stage with CFIUS, then it is a very manageable process. Engage as early as commercially possible with CFIUS, and develop trust by being open and transparent.”

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