The Committee on Foreign Investment in the United States has forced the unwinding of another Chinese acquisition, as announced on June 18, 2013. Exhibiting continuing sensitivity toward acquisitions of companies operating near US defense facilities, CFIUS’s decision is consistent with recent trends described in our November 2012 release. Lessons underscored by this recent CFIUS action include the following:
- Acquirers from China and other countries with which the US government has tense security relations create more CFIUS risk.
- Proximity to sensitive defense facilities also creates more CFIUS risk, regardless of the sensitivity of the assets being acquired.
- Failure to notify CFIUS in advance of a deal closing can be catastrophic.
- CFIUS should be considered whenever the target business has operations in the United States, even when the target company is not based in the United States.
In this most recent case, Procon Resources Inc. acquired a controlling stake in Lincoln Mining Corporation, a Canadian company with US subsidiaries. Procon is also Canadian, but controlled by a Chinese state-owned enterprise. Procon apparently failed to notify CFIUS prior to proceeding with the acquisition, and the Committee has now required Procon to divest its interest in Lincoln.
The Procon-Lincoln transaction appears to have been brought down by the Committee’s concern over a Chinese entity gaining control over Lincoln’s mine near Naval Air Station (NAS) Fallon in Nevada. That very same facility was at issue when CFIUS blocked another Chinese mining deal less than four years ago, in the Firstgold case.
This case should serve as a reminder that there may be CFIUS risk in any in-bound foreign investment, even if the assets being acquired appear inconsequential from a national security perspective. While there is seemingly nothing sensitive about Lincoln’s gold mining business, the problem of proximity to sensitive facilities should be well understood. CFIUS likely will have little sympathy for parties claiming not to know that they should have sought CFIUS approval in advance of closing.
Indeed, the Procon-Lincoln matter also serves as a reminder that so-called “non-notified” or “non-filed” transactions, when they touch on security matters, sometimes generate severe actions by CFIUS. The Committee monitors such non-notified transactions, and their non-notified nature often will make CFIUS suspicious of the parties’ intentions. Further, the Committee often views any attendant security risk as difficult to mitigate. Completed deals are, by their nature, less amenable than pending deals to risk-mitigating modifications. Advance notification to CFIUS often enables the Committee to mitigate security risks. Where such risks exist and there is no notification, the risk of a divestment order looms large.
And the consequences of a divestment order can be enormous, including not only the separation of companies intended to be integrated or connected, but also attendant security restrictions. For instance, based on publicly reported information, Lincoln will face restricted access to its US properties until the divestment is complete, and CFIUS will have to approve the new owner. Lincoln reportedly has found itself forced to take out a working capital loan just to make it through this period.
This matter also highlights that a “US business” over which CFIUS may exercise jurisdiction means, according to the governing regulations, any entity “engaged in interstate commerce in the United States.” The fact that Lincoln was a Canadian company did not preclude CFIUS action, because Lincoln has US subsidiaries and US operations. A foreign company, even one without US subsidiaries, may be a “US business,” in the view of the Committee, if it is operating in the United States. This case also underscores the point that the acquirer’s place of incorporation or principal place of business is irrelevant if it is owned or controlled by a foreign entity. As a matter of form, one might have viewed the Procon-Lincoln acquisition as between two Canadian companies. But CFIUS eschews form in favor of substance, and the Committee accordingly viewed the deal as a Chinese acquisition of a US company.
Because the CFIUS process is strictly confidential – and that confidentiality extends even to the fact that parties are undergoing CFIUS review – the Committee often seems opaque. Only the parties themselves may disclose information to the public; the Committee may not. But the procedures for filing, codified in federal regulations, are reasonably clear. And, when a foreign entity acquires control of a US business, filing a notice with the Committee in advance of closing is generally the way to avoid CFIUS risk.