You remember the Ralls wind farm case, yes? The deal involving Chinese investors, backed by Chinese firm Sany, and several U.S. wind farms, one of which happened to be near a navy base. Because of national security concerns, the Committee on Foreign Investment in the U.S. (CFIUS) forced Ralls to divest itself of certain assets; President Obama ultimately had to make the call upholding the CFIUS decision. Ralls is now suing in federal court.
If you’re interested in the big picture, and in particular how other Chinese investors should approach outbound M&A in the U.S., check out this useful bit of advice in Forbes: “If You Want to Buy an American Company, Ask Permission, Not Forgiveness.”
The big takeaway from the article: if there’s any doubt whatsoever regarding national security, prior notification to CFIUS is the way to go. The author breaks this down into three points:
First, it may not always be easy to know whether a transaction will raise concerns. [ . . . ] [I]f there is any possible national security implication, however slight, a foreign acquirer would be well advised to make CFIUS approval a condition of closing the deal. Relative to the blizzard of legal work that accompanies most acquisitions, the additional burden to make a voluntary filing with CFIUS is likely to be relatively modest.
The wind farm project that got Ralls in trouble can be called an obvious red flag, since it was near a navy base. But even in that situation, Ralls was in touch with the navy and was given assurances about the company’s mitigation efforts. In other words, even if you are in communication with one part of the U.S. government, don’t forget about the authority of CFIUS. As we say all the time over here in China, which also applies to the U.S.: the government is not a monolith.
Second, prospective foreign buyers and American sellers should proactively think about all of the potential applications of the intellectual property and other assets that would be transferred in a transaction, including those well outside the scope of current product lines.
A narrow focus or definition can burn you here. Think creatively and, I would argue, politically.
Finally, companies should not rely on the apparent lack of CFIUS objections in relation to other similar transactions as indicative. If the purchase by a foreign company of your competitor received CFIUS clearance two years ago, that doesn’t mean that a foreign buyer of your company shouldn’t worry about seeking clearance.
A very good point, and something that many U.S. lawyers and consultants may not consider. You see, the U.S. is a Common Law jurisdiction, and we’re all trained with the case precedent system. But although that way of thinking works well for many areas of U.S. law within the context of the judicial system, CFIUS is outside of that framework. No binding precedents, no comfortable guidance. FYI, that’s how China law works most of the time.
All in all, good advice. When in doubt, notify, and keep that CFIUS approval in mind when drafting your M&A documents. Government approvals are very common conditions precedent in overseas transactions, including China deals; maybe it’s time for U.S. investment transactions to do the same.