President Donald Trump blocked Singapore-based semiconductor company Broadcom Limited (Broadcom) from acquiring U.S.-based Qualcomm Incorporated (Qualcomm), on March 12, 2018, because of national security threats posed by the deal. The rejection of this deal is the latest and most striking example of the increasingly aggressive approach taken by the Committee on Foreign Investment in the United States (CFIUS) and a reminder that companies considering cross-border investments involving U.S. businesses, particularly in the technology sector, should take proactive steps to anticipate and address CFIUS risks.

Background

CFIUS is an interagency committee principally comprising nine members, chaired by the Secretary of Treasury and tasked with reviewing transactions that could result in control of U.S. businesses by non-U.S. persons to determine the effect of such transactions on U.S. national security. CFIUS operates pursuant to the Defense Production Act of 1950, as amended by the Foreign Investment and National Security Act of 2007 (FINSA), which authorizes the President to block or require the unwinding of covered transactions that would negatively impact national security.

Broadcom had been pursuing a US$117 billion hostile takeover of Qualcomm, which reportedly would have been the largest ever in the technology sector. On March 4, 2018, prior to the President’s blocking order, CFIUS issued an Interim Order requiring Qualcomm to delay holding a shareholder meeting at which it was anticipated a slate of directors proposed by Broadcom might be elected. The following day, Qualcomm publicly released a letter from CFIUS that described the state of the national security review.

While noting in the letter that many of its concerns were classified, CFIUS cited the threat to national security posed by an anticipated reduction by Broadcom in funding of Qualcomm’s research and development efforts, and the implications for U.S. technological leadership relative to China in such a sensitive industry. In this regard, CFIUS noted that Qualcomm is a supplier to, among others, the U.S. Department of Defense. CFIUS also identified Chinese telecommunications company Huawei as a likely beneficiary of Qualcomm’s potential loss of competitive advantage. CFIUS noted that its investigation of the matter would continue during the pendency of the Interim Order.

President Blocks the Deal

Just one week after the issuance of the Interim Order, on March 12, 2018, President Trump issued an Order formally blocking the deal. Citing “credible evidence” that, upon acquiring control of Qualcomm, Broadcom “might take action that threatens to impair the national security of the United States,” the President ordered Broadcom and Qualcomm to “immediately and permanently abandon the proposed takeover.”

The President’s decision to block this acquisition echoes similar action taken in September 2017, when the President blocked a Chinese-backed private equity fund from purchasing Lattice Semiconductor, another U.S. chip manufacturer. Other proposed transactions involving Chinese investors have been abandoned in the face of CFIUS opposition. (Dechert’s recent coverage of these and other CFIUS considerations and trends is available here.) The current decision, however, represents an even more aggressive stance against non-U.S. competition (particularly in the high tech sector) and a broader view of “national security risks.”

CFIUS’ Continued Focus on China and the U.S. Technology Sector

The blocked takeover bid is the latest, and perhaps most sweeping, development in the U.S. Government’s recent increased scrutiny of certain foreign investment. The President’s action is only the fifth time that a U.S. President has formally blocked a transaction, though three of these actions have taken place since 2016. While this is the first transaction blocked by a President that did not involve a Chinese acquirer, it nevertheless represents a continued skepticism regarding Chinese involvement in the U.S. economy and competition with China more broadly. Notably, this is the first time that a U.S. President blocked a deal before CFIUS had concluded its review and formally recommended that the President block the deal on national security grounds. This would also appear to be the first time that CFIUS and the President acted before a deal had even been signed.

By taking this action, the U.S. Government has demonstrated that it will take into consideration perceived Chinese threats to U.S. national security even when the foreign acquirer is not Chinese. As Broadcom is a Singapore company with a significant U.S. presence, there was no threat of Chinese acquisition of Qualcomm. Instead, the national security concerns appeared to stem from Broadcom’s activities in China and relationships with Chinese companies. (Neither CFIUS’ letter nor the President’s Order indicated whether consideration was given to Qualcomm’s own activities in China and relationships with Chinese companies.)

The President’s decision also demonstrates that CFIUS reviews increasingly give weight to the ability of American companies to maintain technological leadership. Explaining its issuance of the Interim Order, CFIUS stated that “a weakening of Qualcomm’s position would leave an opening for China to expand its influence on the 5G standard-setting process” and noted that “a shift to Chinese dominance in 5G would have substantial negative national security consequences for the United States.” While CFIUS exclusively reviews transactions on national security grounds, a broader definition of national security that includes considerations of U.S. industrial competitiveness in sensitive sectors would expand the Committee’s jurisdiction considerably. (Legislation that would expand CFIUS’ mandate in this manner is currently under consideration in Congress.)

Playing Offense and Defense in Foreign M&A

CFIUS’ increased scrutiny of transactions that involve a sensitive sector and even indirectly relate to China presents challenges and opportunities for foreign investors and U.S. targets. For companies contemplating cross-border transactions involving the U.S. economy, particularly in sensitive sectors, understanding both direct and indirect relationships with Chinese entities is essential. Joint venture arrangements and other third party relationships may expose transactions to heightened scrutiny from CFIUS, and understanding these risks has become more important than ever in planning for CFIUS clearance.

The challenges posed by these developments to some investors may represent opportunities for others. The cross-border M&A market will likely adjust, creating advantages for companies operating in less sensitive sectors as well as companies both incorporated and operating in countries perceived by the U.S. Government as non-adversarial.