Last week, Huawei Technologies, the world’s largest mobile gear manufacturer behind Ericsson and Nokia Siemens Networks, backed away from a confrontation with a U.S. government agency in a sudden move. The business media portrayed Huawei’s response as unpredictable and somewhat unwarranted. Seen through the lens of the legal architecture for review of foreign direct investments in the US, the result was more predictable than not, even though the transaction had been closed and completed for seven months.
By way of background, in May 2010, Huawei had acquired certain assets of near-bankrupt 3Leaf Systems for $2 million. The assets purchased were intellectual property rights, including patents of 3Leaf. 3Leaf’s software allows the reallocation of computer resource across a network, based on users’ needs. Huawei did not file a notice with CFIUS with respect to this purchase prior to completing the transaction. Had Huawei filed the notice in May and had CFIUS cleared it, the deal would have been insulated from subsequent scrutiny.
After learning that CFIUS was looking into the transaction in December 2010, Huawei suddenly filed its notice. In mid-February 2011 CFIUS notified Huawei that it would not approve the notice. For a period of days, it appeared that Huawei would not relent. Then, on February 24, Huawei announced that it had decided to “accept the recommendation of CFIUS to withdraw [its] application…” and would, according to the Cloud Computing blog, either sell off the patents or abandon the intellectual property altogether.
The legal context in which this contest played out drives the result. Under the Foreign Investment and National Security Act of 2007, which gives CFIUS its authority:
- CFIUS has the authority “pursuant to a unilateral notification” to review any transaction that could result in foreign control of any person engaged in interstate commerce (a “covered transaction”).
- The purpose of review by CFIUS is to determine the effects of the covered transaction on U.S. national security.
- If, in its review, CFIUS determines that the covered transaction could result in the control of a U.S. business shifting to a foreign government or an entity “controlled by or acting on behalf of a foreign government,” then CFIUS must also investigate the covered transaction.
- If the investigation is required on these grounds, then CFIUS must also take “any necessary actions” to protect U.S. national security, unless the Secretary of the Treasury and the head of the lead agency reviewing the transaction jointly determine that the covered transaction will not impair U.S. national security
- Under its regulations, upon completing its investigation, CFIUS may conclude its deliberations or it may send a report to the President requesting the President’s decision in three cases:
- if CFIUS recommends that the President suspend or prohibit the transaction;
- if CFIUS cannot decide whether to suspend or prohibit the transaction; or
- if CFIUS requests that the President decide the matter.
- If the President believes that a foreign interest’s control of a U.S. business threatens to impair national security, the President may suspend or prohibit the covered transaction and may direct the Attorney General “to seek appropriate relief, including divestment relief” [emphasis added].
- The President’s actions in these respects are not subject to judicial review.
The net effect of the legal structure is that the high card is the President’s authority to order divestment. The President can invoke his authority as long as CFIUS has not cleared the covered transaction after its review or investigation. Divestment means rescission. In a case where Huawei or any other buyer has paid the purchase price for assets to parties without notice of the possibility of rescission, the buyer may well be deprived of the assets and not be able to recover the price paid. Assessing the balance of legal power and the economic realities, it appears that, for Huawei, prudence was the better part of valor.