In late December 2009, a Chinese company, Northwest Nonferrous International Investment Co. (“Northwest”), backed out of a deal to purchase a 51 percent interest in a U.S. mining company, Firstgold Corp. (“Firstgold”), after being informed that the U.S. Committee on Foreign Investment in the United States (“CFIUS”) intended to recommend that the President of the United States block the investment.
Firstgold and Northwest had filed a voluntary notice of the proposed investment with CFIUS, a U.S. government agency which reviews potential acquisitions of U.S. companies by foreign entities for national security threats. Although CFIUS itself is not empowered to block proposed transactions, after a review it may recommend that the president do so. It is very rare for a proposed transaction to reach the point where it is put before the president, as problematic proposals are generally withdrawn after objections become known. Only one transaction has actually been blocked by the president. In 1990, President George H.W. Bush ordered China Aviation Technology Import-Export Corporation (“CATIC”) to divest its interest in MAMCO, a manufacturer of civilian airplane parts, primarily for Boeing. CATIC was, at the time, the import-export arm of the Ministry of Aerospace Industry of the People’s Republic of China, and the order came shortly after the Tiananmen Square protests of 1989, leading to claims that it was politically motivated.
The recently proposed transaction by Northwest was a US$26 million investment in Firstgold in exchange for a 51 percent interest in the company. Firstgold is a Nevada-based mining company that holds mining rights to at least four properties in Nevada, some of which were located near U.S. military facilities. Although CFIUS proceedings and decisions are not released to the public, it has been widely stated that CFIUS officials repeatedly cited the proximity of Firstgold’s properties to Fallon Naval Air Station (where the TOPGUN flight training school is located) and other unidentified, sensitive, and classified security and military assets as a national security concern. Other sources have noted that China’s recent substantial boosting of its gold reserves may have been a consideration. It has also been reported that the U.S. government may have been concerned over what other minerals, other than gold, Firstgold might try to extract from their properties, as Firstgold has permission to mine for zinc and uranium.
Background on CFIUS and Exon-Florio
Through the Defense Production Act of 1950 and its various amendments, including the Exon- Florio Act in 1988 (the “Exon-Florio” or the “Act”) and the Foreign Investment and National Security Act of 2007 (“FINSA”), the U.S. Congress has granted the President of the United States the authority to interrupt or unwind certain transactions that are deemed national security threats. There is no statute of limitations on this authority, although the CFIUS review process may provide a safe harbor.
CFIUS’s Composition and Authority
CFIUS is a multi-agency governmental committee that is authorized to evaluate the national security implications of foreign acquisitions of, and investments in, U.S. businesses. These national security reviews allow CFIUS to identify and address any risk that arises as a result of a covered transaction. After a review, CFIUS may request that the president suspend or prohibit the subject transaction. The CFIUS review process is a voluntary process for potential foreign investors and their U.S. counterparts. Once CFIUS reviews a transaction and decides to take no action or to impose a mitigation agreement, the parties have a “safe harbor” from the president’s Exon-Florio authority. Consequently, voluntary reviews, where appropriate, may better secure a company’s transaction.
CFIUS has grown in importance in recent years after FINSA made it clear that the definition of national security includes businesses involved in “critical infrastructure” rather than only those businesses involved in defense contracting. Industries that may now be implicated under FINSA include energy, commercial air and spacecraft, harbor and port regulation, highway construction, aviation control, public transit, and telecommunications.
CFIUS is comprised of the heads of the Department of the Treasury, Department of Justice, Department of Homeland Security, Department of Commerce, Department of Defense, Department of State, Department of Energy, Office of the U.S. Trade Representative, and the Office of Science & Technology Policy. The Office of Management & Budget, Council of Economic Advisors, National Security Council, National Economic Council, and Homeland Security Council observe the actions of CFIUS and participate in its activities as appropriate.
Once a party files a voluntary notice, CFIUS has 30 days to notify the parties whether CFIUS will conduct an investigation. At the end of the 30 day period, CFIUS is required either to clear the transaction, or, if it cannot do so, to begin an additional investigation. If CFIUS conducts an additional investigation, it has an additional 45 days to determine whether the government will seek mitigating actions, recommend that the transaction be prohibited, or determine to take no action. The president then has another 15 days to publicly announce any action he will take.
Contents of Notice
A voluntary notice filed before CFIUS includes information such as the following:
- A detailed description of the assets of the U.S. business being acquired, including the approximate value of those assets in U.S. dollars.
- A detailed description of the business activities, market share, regulated technologies, cyber security plans, and contracts of the U.S. business with the U.S. government.
- Information regarding the ownership of the foreign party and its parent companies, owners, and principals.
- Information regarding the plans of the foreign person for the U.S. business.
Determination of a National Security Threat
The term “national security” is interpreted broadly for purposes of Exon-Florio review. Judgment lies wholly and ultimately within the president’s discretion. CFIUS has stated that in conducting its analysis of whether a transaction poses a national security risk, it will assess whether a foreign person has the capability or intention to cause harm and whether that foreign person’s relationship with the U.S. company is linked to a vulnerability in the U.S. infrastructure, thereby creating a threat to national security. Generally speaking, factors that may affect whether a transaction presents national security considerations include:
- The nature of the U.S. business over which control is being acquired.
- The identity of the foreign person that is acquiring control.
- Whether the U.S. business is undergoing exceptional corporate reorganization.
- Whether the foreign control is being asserted by a foreign government or a state-owned enterprise.
Implications for Investors
The withdrawal of the proposed investment in Firstgold highlights some of the issues faced by foreign investors considering acquisitions of U.S. companies. Of particular note is the fact that the investors in the Firstgold transaction were Chinese. Chinese companies have faced stricter scrutiny under CFIUS both because Chinese companies often have some level of state ownership, and because China is not a military ally of the United States and has been known to do business with countries that are not friendly to the United States (i.e., Iran). Although U.S. officials have stated that the U.S. government is committed to promoting investment, it is clear that Chinese companies face a more stringent hurdle when investing in areas that have any potential connection to national security. Investors should remain mindful that CFIUS has expanded its jurisdiction to look closely at transactions in sectors not traditionally subject to scrutiny.
Although most transactions are likely to be cleared eventually, it is very possible that any Chinese companies with government connections will wind up subject to certain structural requirements (via a mitigation agreement with the U.S. government) that would prevent foreign government persons from controlling the U.S. acquisition or having access to certain technologies. Similarly, transactions with Chinese investors could require a spin-off of U.S. subsidiaries or divisions that control sensitive technology or maintain U.S. government contracts.