Now more than ever Chinese investment in the United States is facing barriers stemming from the strict reviews conducted by the Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”). After several high-profile cases, which our law firm has covered in previous articles and are summarized below, the general consensus is that Chinese investment will be greatly scrutinized – and in many cases completely blocked – to satisfy the U.S. government’s national security concerns.
But even in these uncertain times, we have also seen some Chinese transactions approved by CFIUS, confirming that not all Chinese investment is off limits. Below we summarize some of the cases that were reviewed and cleared by CFIUS, as well as some of the high-profile cases that involved blocking or divestment orders to identify steps that potential investors and acquirers can take to increase the changes of successful review.
In just over one year, at least four acquisitions of U.S. companies by Chinese entities have been approved by CFIUS. In early July 2019, CFIUS approved the acquisition by AssetMark Financial Holdings, Inc. (“AssetMark”), a wealth management and financial services company with Chinese ownership, of Global Financial Private Capital, another financial services firm, in a cash purchase for $35.9 million, which added another $3.8 billion in platform assets. AssetMark had been acquired by the Chinese securities group Huatai Securities Co., Ltd. (“Huatai”) in 2016 and is now 70.3% owned by Huatai.
In late February 2020, AssetMark received approval from CFIUS for the acquisition of another wealth management firm, WBI OBS Financial, LLC, parent of OBS Financial Services, Inc. This time, the purchase by AssetMark led to the acquisition of approximately $2.1 billion in platform assets. CFIUS approvals are not made public, so it is impossible to know the exact criteria that went into the Committee’s decision to approve. But it is clear from these two acquisitions that there is some opportunity for Chinese companies to acquire U.S. firms in the financial services sector.
In early November 2019, CFIUS approved the strategic alliance between Shanghai RAAS Blood Products Co., Ltd. (“Shanghai RAAS”), a Chinese company, and Spanish blood-products company Grifols GRLS.MC (“Grifols”), which resulted in Shanghai RAAS acquiring a non-majority share (45% economic rights and 40% voting rights) in Grifols Diagnostic Solutions Inc. (“GDS”), a U.S. subsidiary of Grifols. As part of the arrangement, Grifols received 26.2% economic and voting rights in Shanghai RAAS. The transaction marked the first share swap in China between a foreign company (GDS) and a non-state-controlled Chinese company listed on a stock exchange. The fact that Shanghai RAAS was ostensibly not state-controlled may have contributed to CFIUS’s approval of the deal: Chinese acquisitions of U.S. companies involved in the medical field have been rejected in the recent past. For example, CFIUS rejected the acquisition of Ekso Bionics Holdings, Inc., a leader in medical and industrial exoskeleton technology, by a Chinese joint venture in May 2020.
In early March 2020, Citiking International US LLC (“Citiking”), a Chinese-controlled investment company, received CFIUS approval for its acquisition of ONE Aviation, a New Mexico-based manufacturer of very light private jets that filed for bankruptcy in October 2018. Citiking had financially backed ONE Aviation’s service operations on Eclipse 500 and 550 very light jets since the bankruptcy declaration. ONE Aviation reportedly owes $198.8 million in total debt, including approximately $53.2 million owed to state and local governments. The ONE Aviation acquisition provides a template for other possible acquisitions by Chinese companies of failing commercial aviation companies in the United States.
Though somewhat different from the above examples of corporate acquisitions, in June 2020 CFIUS also approved a real estate acquisition of a greenfield wind farm project by GH America Energy, a subsidiary of the Chinese company Guanghui Energy Co., Ltd. The greenfield project is in Val Verde County, Texas, which is also the location of Laughlin Air Force Base the largest pilot training base in the country. The real estate transaction has caused some concern, including from U.S. Representative Will Hurd of Texas’s 23rd District and U.S. Senator Ted Cruz. Nonetheless, by clearing the transaction, CFIUS must not have found sufficient national security concerns to reject the acquisition. Importantly, Laughlin is not listed on the list of sensitive facilities contained in the CFIUS regulations on real estate transactions.
The Bad and the Ugly
We have previously covered high-profile cases involving the blocking of transactions or ordering companies to divest their acquisition of U.S. companies. For example, in 2017 President Trump blocked Canyon Bridge Capital Partners Inc. (“Canyon Bridge”), an investment firm backed by Chinese investors, from acquiring Lattice Semiconductor Corporation (“Lattice”). In blocking the transaction, the U.S. government cited national security risks including: the potential for the transfer of intellectual property to a foreign party, the Chinese government’s role in the transaction, the importance of the semiconductors to the U.S. government, and the use of Lattice products by the U.S. government.
Again in 2018, Ant Financial, a Chinese company owned by Alibaba Group Holding Ltd. (“Alibaba”), announced that its proposed acquisition of MoneyGram International, Inc. (“MoneyGram”) was being blocked by CFIUS. MoneyGram provides financial services around the world. This decision was surprising because Alibaba and Ant Financial had received CFIUS clearance in previous transactions and MoneyGram arguably did not deal with particularly sensitive information from a national security perspective. Unlike the Canyon Bridge case, MoneyGram does not operate in the defense sector nor does it deal with critical infrastructure such as semiconductors. Additionally, both MoneyGram and Ant Financial offered several amended proposals to help mitigate the concerns of CFIUS. Ultimately, the proposed transaction was denied because the Chinese government held a 15% stake in Ant Financial, and it was feared that the data held by MoneyGram could be used by the Chinese government to target activists, journalists, and others.
Following the same trend, in 2019 CFIUS required gaming company Beijing Kunlun Tech Co. Ltd. to divest its 100% ownership of Grindr, LLC, a dating app whose database contains personal information of over 27 million users, including user locations, HIV status, and other personal details. That same year CFIUS required iCarbonX, a Chinese genome company, to divest its majority ownership of U.S. company PatientsLikeMe Inc., which provides a platform for patients with the same diseases to connect with one another and exchange information.
Similarly, in 2020, President Trump issued an executive order requiring publicly traded Chinese company Beijing Shiji Information Technology Co., Ltd (“Shiji”) and its wholly owned subsidiary, Shiji (Hong Kong) Ltd., to divest the 2018 acquisition of U.S.-based hotel-management software company StayNTouch, Inc. (“StayNTouch”), citing national security concerns. Though the executive order did not cite specific reasons, it appears, based on the restrictions from accessing any hotel guest data through StayNTouch placed on the Chinese entities, that at least one of CFIUS’s concerns was Shiji’s potential access to a large database of personal and financial information of U.S. citizens.
Most recently in 2020, CFIUS ordered TikTok’s owner, ByteDance Ltd., to divest its ownership of American assets because of concerns that the app captures a large amount of information from users, “including internet and other network activity, such as location data and browsing and search histories.” The order came as a step to protect users from exploitation of their personal data.
Ultimately, Chinese government ownership or access to sensitive U.S. technologies, critical infrastructure, or the personal data of U.S. citizens will face the highest levels of scrutiny: as seen in recent cases, it may be very difficult – if not impossible – to get CFIUS approval for these types of transactions.
Even in these uncertain times, however, there have been Chinese-backed investments or acquisitions which have been cleared, providing valuable lessons to potential acquirers or investors.
To increase the likelihood of any given deal being approved, conduct a thorough pre-filing risk assessment to identify issues of concern so that you can proactively introduce mitigation measures to ease the U.S. government’s national security concerns. For example, if the target possesses sensitive technologies, implementing strong cybersecurity policies and technology control plans, which outline separate IT systems and firewall sensitive technologies, would be a good start.
Your initial mitigation plan would need to be tailored to address issues identified during your pre-filing risks assessment, and you should attempt to anticipate CFIUS’s potential concerns (e.g., target’s location, technologies, sensitive data of U.S. persons, or acquirer’s country of origin and government ownership or contacts, to name a few). Try to ease those concerns in the mitigation measures you implement prior to the filing. This will also help build trust with CFIUS, which will be critical during CFIUS’s review.
Being proactive in your pre-filing mitigation measures may also help you have a more direct impact on potential mitigation agreements after the filing has been made. Importantly, this risk assessment and mitigation measures should also be considered for transactions involving Chinese investments which may not have been covered in years prior to the Foreign Investment Risk Review Modernization Act of 2018. This is especially important as the U.S. government is able to review transactions already consummated, regardless of whether a CFIUS filing was submitted.
John C. Demers (Assistant Attorney General for National Security) at the U.S. Department of Justice recently provided more details regarding the use of mitigation agreements at a Torres Law-sponsored ACI CFIUS Annual Conference earlier this year. In a nutshell, strong mitigation agreements must be effective, verifiable, and enforceable.1 In particular, for mitigation agreements to be enforceable, he highlighted the importance of trusting the parties in the transaction.
Mr. Demers provided examples of situations that could present trust issues such as a company with a history of non-compliance, or one owned by a foreign government that the U.S. does not trust, or is under the jurisdiction of a government that is not subject to the rule of law that could compel the company to act in ways that violate its mitigation agreement.
There is no “off the shelf” mitigation agreement that will work with every reviewed transaction, and instead effective mitigation agreements should be tailored to the company’s unique operations and the risks inherent in the transaction. But Mr. Demers outlined some common characteristics of mitigation agreements including:
Internal compliance oversight (e.g., security directors and officers who are appropriately resourced to enforce compliance and have direct access to senior management).
External compliance oversight (e.g., independent verification of compliance such as third-party monitors and in technical fields such as accounting or information technology).
Engagement with monitoring agencies (e.g., active communications regarding all aspects of the obligations undertaken under an agreement as well as support for site visits, interviews of company personnel, and other similar access requirements).