This past week saw Huawei Technologies Co. Ltd., the astoundingly successful Chinese manufacturer of mobile telecom equipment take a difficult step and back away from a confrontation that might have directly involved President Obama as an adversary. Then, on February 25, Huawei’s Deputy Chairman Ken Hu issued an open letter on his company’s website, requesting a fair and impartial hearing so that Huawei can complete investments in the U.S. With its letter, Huawei has attempted to put the ball in the court of the U.S. government. Since the Committee on Foreign Investment in the United States (CFIUS) clears only specific transactions and does not pre-clear transaction participants on a blanket basis, there may not be any volley until Huawei attempts its next deal.
The controversy is all the more noteworthy because it arose out of Huawei’s May 2010 purchase of patents and its employment of staff from 3Leaf, a near-bankrupt IP start-up, for a mere $2,000,000. 3Leaf pioneered in “I/O virtualization,” and, according tothe 451 Group’s Inorganic Growth blog had received $67 million in VC funding plus additional funds from Intel and other strategic investors before its money ran out. 3Leaf is therefore not to be confused with the legendary 3Com deal that CFIUS did not approve and was the inception of the CFIUS-Huawei feud. In December 2010, seven months after the assets had been transferred, in the face of an inquiry from CFIUS, Huawei apparently filed a notice with CFIUS for the completed acquisition. By February of 2011 Huawei was also contending with a letter sent to U.S. Commerce Secretary, Gary Locke, and Treasury Secretary, Tim Geithner, by a group of top U.S. lawmakers. According to the American Daily Herald and other sources, the authors included Senators Kyl of Arizona and Webb of Virginia and accused Huawei of having ties with the People’s Liberation Army, the Taliban and the Iranian Revolutionary Guard.
The difficulties of others, however, often present unique learning opportunities. This outsized outcome from a simple, small purchase of assets presents three clear lessons for international acquirers of US businesses.
FIRST, when in doubt, file the voluntary notice with CFIUS. Not doing so now makes it appear both to CFIUS and to Congress that the buyer is using an avoidance tactic. CFIUS prides itself, with justification, on its willingness to meet with transaction participants ahead of time and assist them in isolating sensitive or problematic points, if there are any. This may seem like “We’re from the government; we’re here to help.” But in fact CFIUS is sincere about its offers and may not understand those who do not take it up on its offers to help. Playing catch-up ball is very difficult. Moreover, because there are multiple reviews of notices from various governmental agencies, it is good practice to understand from the CFIUS staff which agency or agencies will be most involved in the review of the notice.
SECOND, there is value to proceeding to file the voluntary notice with respect to one or more transactions that present low or no risk to U.S. national security, if only to build a dossier with CFIUS. By statute, CFIUS must determine whether a foreign government controls the acquiring party. Familiarity with the acquirer, its ownership structure and its organization chart help with this determination. Colloquy with the acquirer and its advisors during the review process build trust and confidence that can be relied on if the acquirer later decides to undertake a transaction with U.S. national security connections. Again, avoiding the point will only create an appearance of a motive to conceal something.
THIRD, an acquirer is always best to avoid any actions that suggest confrontation with CFIUS, especially actions that might put CFIUS in a poor light in front of the U.S. Congress. In the last several months there have been two documented efforts by groups of Senators and Representatives to bring public attention to CFIUS matters and try to force the Committee’s hand. The FINSA legislation was designed in part to remove CFIUS from public pressure. The 24-hour election cycle has led members of Congress to put themselves forward as protectors of U.S. national security and challenge CFIUS. It is rarely in a buyer’s or investor’s interest to politicize an administrative review process. Best interests are served by alignment with CFIUS in the process.
It may be that, with so much bad history behind them, CFIUS and Huawei Technologies are fated to make headlines no matter what. But it remains that Huawei’s ability to invest in and acquire assets in the United States is a bellwether case for CFIUS. U.S. policy that seeks to encourage direct foreign investment from China and elsewhere is being balanced against the Administration’s constitutional obligation to protect U.S. national security. The balancing act is performed in front of members of Congress. Our elected officials seems always to have high political motivations to act publicly in favor of national security and but little to gain by supporting inbound FDI, despite its proven ability to create jobs and keep U.S. businesses alive. To navigate these straits, it is imperative to learn from Huawei. Its lessons can differentiate an acquirer or investor as one who can reliably complete deals without fear of regulatory interference after the fact.