In a rare move, the president of the United States effectuated the termination of a proposed hostile takeover of Qualcomm (NASDAQ: QCOM) by Broadcom Limited (NASDAQ: AVGO) over national security concerns. The termination came via a preemptive order from President Trump on the recommendation of the Committee on Foreign Investment in the United States (CFIUS, or the committee), an inter-agency committee of the federal government which reviews transactions that may have an adverse impact on the national security of the United States.

While expected by industry insiders and CFIUS practitioners, the termination represents somewhat of a milestone for the committee. Once little-known outside of practitioners in the international mergers and acquisitions space, the committee has become a central consideration for all foreign investors, companies and individuals considering investment activity in the United States. Outright rejections by CFIUS of proposed transactions are uncommon; typically the parties to a transaction choose to withdraw their application and voluntarily terminate the transaction. Rarer still is a preemptive letter by the president terminating the transaction. While CFIUS tends to operate in secrecy, such a preemptive letter is a public document; in this instance, it seems that the administration sought to leverage the termination to direct attention to its trade policies.

The Qualcomm decision makes clear the committee will look through the corporate form to the effective ownership and identity of the acquirer. In a previous article, accessible here, we noted the confidential nature of the committee’s proceedings obscured the committee’s chief point of emphasis in a review, namely whether it is the data and intellectual property held by the company or the identity of the acquirer that most concerns the committee. The Qualcomm recommendation demonstrates, regardless of public statements by the committee to the contrary, that transactions resulting in control of a critical marketplace by Chinese interests will raise red flags with the committee. Even though Broadcom is owned by Singaporean interests, it appears CFIUS was concerned that foreign ownership of Qualcomm would result in other competitors, namely Chinese companies, leading the way in the semiconductor market. Thus, even though Qualcomm would not have been controlled by Chinese interests, the committee’s fears over Chinese activities doomed the transaction.

The national security element of this decision offers insight into other critical markets with limited competitors. Specifically, Broadcom and Qualcomm were among a limited number of similarly-sized competitors in the semiconductor and communications technology space. As such, both sold their goods to the U.S. military and government. However, there has recently been a push in Congress to limit with whom U.S. agencies and the U.S. government may contract, including a recently proposed bill in Congress which would prohibit the U.S. government from awarding contracts to one of the few competitors of Broadcom and Qualcomm. The committee’s concern regarding the Broadcom takeover of Qualcomm appears to be rooted in the fear that China, or other foreign powers, may indirectly control an entire industry important to national security and leverage its control for purposes adverse to the interests of the national security of the United States. This concern was not alleviated by Broadcom’s plans to domesticate in the United States, as CFIUS apparently concluded this domestication, along with any other mitigation efforts, was not sufficient.

This decision could be understood as another skirmish in a looming trade war between the United States and China. With the recent proposal of tariffs by both sides and bellicose language from the current administration, prospective Chinese investors should be especially wary of the prospect of CFIUS review and the risks implicated by its more prominent role in light of the increased economic tensions between the U.S. and China.

Finally, on a separate note, the Qualcomm rejection is notable because it demonstrates the use of CFIUS by a target board of directors to stifle a transaction. Here, indications are that Qualcomm attempted to use CFIUS to deconstruct the transaction and defeat the takeover attempt. CFIUS obliged, and recommended President Trump reject the transaction. Rather than a shield for national security, CFIUS became a sword for Qualcomm to use for its own private ends to defeat a hostile takeover. Due to the confidentiality of the CFIUS review process, it is unclear whether Qualcomm’s intentions to reject the takeover attempt played a role in the committee’s decisions; however, it is another factor to monitor in potential hostile takeovers in which CFIUS may be implicated.