Huawei, CFIUS and the Future of US Security Review

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It’s been over a month now since I wrote about Chinese telecom giant Huawei’s latest problem with the US government, specifically the recommendation to divest itself of assets purchased from defunct firm 3Leaf. I didn’t really have any big “takeaways” to offer from the incident, aside from the obvious, that Huawei has an uphill battle going for it if it wants to expand in the US via M&A:

Huawei has a big red target on its back, and it’s hard to see CFIUS shelving its suspicions of the Chinese company, which many in the US believe has ties to the People’s Liberation Army, any time in the future. Since Huawei is a high-tech firm, virtually any acquisition it makes in the US will involve technology that can be easily portrayed as “sensitive” from a national security perspective.

What I didn’t really get into at that time was what, if anything, this says about other Chinese companies looking to invest in the US. I’ve seen a few opinions along these lines already, including a note I read today on the topic from law firm Paul Hastings (.PDF file), in which the authors caution similarly situated Chinese companies.

Why should Chinese firms worry about a potentially more aggressive CFIUS?

First, this case starkly demonstrates that CFIUS member agencies (and the staff itself) scour the business pages for reports of deals that might raise national security/critical infrastructure concerns and will not hesitate to reach out to the companies involved when no filing has been made.

Huawei did not notify CFIUS of their asset purchases, yet CFIUS found out about it anyway. Lesson One: there’s no place to hide.

Second, CFIUS will define its jurisdiction broadly in favor of finding a covered transaction if the deal carries any indicia of concern (in this case, a buyer well-known to CFIUS but with a problematic track record), even if the merits argue against jurisdiction.

Lesson Two: if they want to get you, they will find a way to do so.

Third, though its action transpired with relatively little fanfare, the fact that CFIUS chose to intervene in this transaction after it had closed, and then recommended that it be unwound, should be a matter of significant concern to foreign firms looking to invest in the United States.

Lesson Three: It’s not over even when the deal is over.

OK, I agree with the authors that these are interesting/notable facts, but what about their other contention, that this incident should give pause to other Chinese firms that are “similarly situated”?

That’s where I part company from the Paul Hastings guys, I suppose. The reason is that these notable circumstances have a lot more to do with the way Huawei is perceived by the US government than anything else, which does not really suggest an overall policy.

So, yes, there is no place to hide from CFIUS. However, whatever staffer pounced on the Huawei-3Leaf deal and brought it to the attention of his superiors may not have done so if it was another company, in a different sector, with no previous CFIUS track record. You gotta assume that these guys are running “Huawei” keyword searches at this point. Or to put it bluntly, CFIUS has the same hard-on for Huawei as folks in the Chinese government apparently have for Google.

Similarly, CFIUS was aggressive with both its jurisdiction and its post-deal reach here, but would it have been as aggressive if it wasn’t Huawei?

To put this another way, there aren’t that many CFIUS review cases each year, and there certainly aren’t that many companies out there with the corporate structure and history of Huawei’s. That’s a rather unique situation, and so I find it hard to believe that there are a lot of other guys running around out there that are “similarly situated.”

That being said, CFIUS has been more aggressive in recent years, and it has gone after more Chinese companies as well as PRC firms have stepped up their US investment. But are we going to see a whole series of Huawei-type actions? I doubt it.