Last Monday, as reported on by V&E, President Trump put an abrupt halt to Singaporean chipmaker Broadcom Ltd.’s efforts to acquire U.S.-based Qualcomm Inc., when he issued an executive order blocking the acquisition for national security reasons. The order followed an investigation into the proposed transaction by the U.S. Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”) which found that the acquisition threatened U.S. leadership in the 5G standards-setting process and could potentially disrupt important Qualcomm product supply chains to U.S. military and government security agencies. The President’s order appears to be another sign of how the U.S. increasingly views a strong domestic technology sector as an integral part of its overall national security strategy.
Beyond national security, the saga reveals other important implications for companies that deal with CFIUS. Both Broadcom and Qualcomm recognized that CFIUS’s review of the transaction would have significant ramifications on the deal, and each company attempted to influence the Committee’s review in a way that would give it an advantage. How they did so, and how CFIUS ultimately reacted to those attempts, provide important lessons for companies that find themselves in a similar situation.
Actions To Avoid CFIUS Jurisdiction During A Review Are Not Well Received
CFIUS reviews foreign acquisitions of U.S. businesses. Days before Broadcom made its first bid to acquire Qualcomm, its CEO announced at the White House that it planned to redomicile in the U.S. The company cited Republican tax efforts as the impetus. Over the past few years, we know a number of companies have moved their headquarters outside of the U.S. by allowing a foreign company (usually a smaller company) to acquire the U.S. company. These were called inversions. The “inversion transaction” resulted in a foreign acquisition of a U.S. business and many were subject to review by CFIUS. But in this case, Broadcom was going to move its headquarters to the U.S. There are many that have speculated the goal of this effort was not to obtain favorable tax treatment but to avoid CFIUS review. If the strategy was to avoid CFIUS review, it fell short of the mark.
Initially, Broadcom anticipated it would redomicile sometime in the spring of 2018, but sought to move up the date around the time CFIUS became involved. Before Broadcom could do so, CFIUS issued an interim order on March 4, 2018, which prevented Broadcom from taking any action toward redomiciling in the U.S. without providing 5 business days’ notice. The order also postponed Qualcomm’s Board of Director elections by 30 days in order to allow CFIUS to continue its investigation. Despite the order, Broadcom continued its attempts to redomicile without providing the requisite notice. In response, on March 11, CFIUS issued a letter characterizing Broadcom’s actions as attempts to “shorten the time period for CFIUS investigation” and therefore requested Broadcom to furnish it with any written materials it considered relevant to the investigation by noon on March 12 — the next day. CFIUS indicated Broadcom would have no additional opportunity to submit information thereafter. What is uncommon was that CFIUS took the view that redomiciling altered the timing of CFIUS’s review, where we would have expected such a move to obviate CFIUS’s ability to conduct the review.
Hostile Takeovers and CFIUS
In a typical merger situation, parties agree to jointly submit the transaction to CFIUS review. Here, Qualcomm made a unilateral filing, not a joint filing, and CFIUS ultimately initiated an investigation. Some have suspected that Qualcomm made that filing to ward off Broadcom, perhaps using CFIUS as a weapon. But that weapon can backfire. The Boards of public companies must act in the shareholders’ interest, and submitting a transaction to CFIUS review and identifying a national security risk may effectively fire all of one’s ammunition prematurely. That is, once cast as a national security concern, it may be difficult to reverse course.
CFIUS Continues to Issue Interim Orders During its Review
Importantly, while performing these investigations, CFIUS has broad authority to “take any necessary actions in connection with the transaction to protect the national security of the United States.” 50 U.S.C. § 4565(b)(2)(A) (2012). Furthermore, it can “enforce any agreement or condition with any party to the covered transaction in order to mitigate any threat to the national security of the United States that arises as a result of the covered transaction.” 50 U.S.C. § 4565(l)(1)(A) (2012). CFIUS cited these provisions in justifying its interim order in this case, and it seems likely that the Committee will continue to exercise its broad authority to issue such orders when its deems necessary.
In sum, Broadcom’s thwarted attempt to acquire Qualcomm teaches several important lessons about the process and substance of CFIUS review. This is a reminder for companies intent on engaging in transactions subject to CFIUS jurisdiction to pay close attention to the Committee, its priorities, and its past practices. Likewise, companies may wish to consider the example of Qualcomm’s effort to “weaponize” CFIUS review as a defense to a hostile takeover. Working with experienced counsel, companies must seek to assess the potential benefits and pitfalls of the CFIUS regime.