President Trump issued an Executive Order (the “Order”) on March 12, 2018, putting an apparent end to Broadcom Limited’s (“Broadcom”) hostile takeover of Qualcomm Incorporated (“Qualcomm”). Broadcom and Qualcomm, both giants in the wireless and broadband communications industry, are no strangers to complex deals. Broadcom’s $5.5 billion acquisition of Brocade, and Qualcomm’s $40 billion public offer for NXP Semiconductors, were both pending when Broadcom launched its takeover effort after being rebuffed by Qualcomm. Broadcom eventually completed the Brocade transaction after promising to re-domicile from Singapore to the United States in response to opposition it faced from the Committee on Foreign Investment in the United States (“CFIUS”). Broadcom had nearly completed the re-domicile process when the Order issued, meaning that the President accepted CFIUS’ recommendation and chose to intervene and to prohibit what would have been a domestic takeover before the re-domicile process could be completed. The decision illustrates how far CFIUS is willing to stretch its jurisdictional reach, both as a matter of process and substance. While this case presents perhaps an extreme example, legislation introduced in this Congress to reform the CFIUS process suggests CFIUS will be increasingly aggressive in asserting its jurisdiction.

When Domestic is Foreign

When Congress enacted the so-called Exon-Florio amendment[1], the statute that provides the underlying authority for the actions taken by CFIUS and the President in this matter, it did so with the intent to treat foreign investment differently, to subject such investment to a national security screen. The authority that CFIUS has to review, and the President to block, foreign investment on national security grounds applies only to acquisitions that could result in a foreign person having control (broadly speaking) of a US business. Broadcom is incorporated in Singapore, but it retains much of the US personality of its predecessor company, which was founded and incorporated in the United States. Two years ago, it choose to move its headquarters to Singapore when it merged with Singapore-based Avago Technologies Ltd. (“Avago”) to form Broadcom in a transaction approved by CFIUS. Today, Broadcom is traded on the NASDAQ Global Select market; its largest shareholders are US institutional investors (such as Blackrock and Vanguard); many of its board members are US citizens; it has extensive operations in the United States; and it was a couple of weeks away from re-domiciling to the United States. Yet CFIUS initiated an agency review of the proposed hostile takeover five weeks after receiving a unilateral voluntary notice from Qualcomm on January 29, 2018. By March 5, CFIUS already had determined that the deal could pose a risk to US national security, and issued an Interim Order intended to maintain the status quo until CFIUS could evaluate more fully the potential national security risks posed by the takeover before Broadcom could complete its re-domiciliation process. CFIUS was taking no chances; in an unprecedented move, the Interim Order required Qualcomm to delay the shareholders’ meeting at which the Broadcom slate was to be presented, and Broadcom to give CFIUS advance notice of any steps taken to re-domicile. CFIUS would later complain in a letter issued to the parties on March 11 that Broadcom breached the Interim Order notice requirement.[2]

President Trump’s Order blocking the takeover issued a week later, again before Broadcom could complete the process, and in fact, before Qualcomm shareholders even had a chance to vote on the slate of independent directors that Broadcom proposed for election to Qualcomm’s board. The sheer speed at which these steps were taken is unprecedented given that a CFIUS review typically takes months, not weeks.

One might argue that CFIUS intended to send a message that simply re-domiciling cannot be a means of evading CFIUS jurisdiction. In this case, however, Broadcom’s US identity went much deeper than where its headquarters was located, and it would not explain why CFIUS thought it needed to take action to stall the Qualcomm shareholder vote.

Redefining “National Security”

In a letter to the parties dated March 5, 2018, CFIUS stated that it had identified potential national security concerns with respect to “the risks associated with Broadcom’s relationships with third party foreign entities and…[its] business intentions with respect to Qualcomm.”[3] The letter does not elaborate on the seemingly classified third party relationships, but does go to great lengths to enumerate the “business intentions” to which CFIUS objected. The Order later stated that there is credible evidence to believe that Broadcom, exercising control of Qualcomm, might take action that threatens to impair the national security of the United States.

Exon-Florio permits CFIUS and the President to take action to address national security concerns. The statute does not define national security, but rather includes a non-exhaustive list of factors that CFIUS should consider when determining whether a transaction might implicate national security concerns. These factors serve as a starting point, but CFIUS ultimately has broad discretion. Because CFIUS has the ability to define the scope of its own regulatory authority, what constitutes a potential or actual risk to national security evolves over time as CFIUS identifies new risks. This broad discretion can lead to surprising results, including extensive investigations, abandoned deals, and/or mitigation measures related to acquisitions (for example, of hotels, a pork producer, insurance companies, and health care companies), as CFIUS grapples with the risks posed by proximity to sensitive sites and access to sensitive datasets.

In this case, the business intention concerns are largely focused on whether Broadcom would stunt Qualcomm’s drive to innovate, which CFIUS views as important to US national security. The letter cites Qualcomm’s unmatched R&D and technological leadership in standard setting, and alleges that Broadcom’s intentions would undermine those strengths by leveraging Qualcomm with debt and changing its licensing practices. This concern, however, is not rooted in Broadcom being a foreign entity – a domestic private equity firm might equally leverage Qualcomm or change its licensing practices and CFIUS would have no jurisdiction to address those decisions.[4]

The China Effect

This is the first prohibition order under Exon-Florio that is not directed to a Chinese person. Since Exon-Florio was enacted in 1988, there have been only five prohibition orders, and the previous four were all directed to Chinese acquiring persons. It is notable that only two prohibition orders were issued in the first nearly 25 years following enactment, while three orders have been issued since 2016. A few transactions not involving Chinese persons have been abandoned in the face of CFIUS opposition before a prohibition order could issue, but again, the majority of such cases involve Chinese persons.

While CFIUS’ March 5 letter merely refers to “the risks associated with Broadcom’s relationships with third party foreign entities,” one might speculate that this concern relates to Broadcom’s relationship with Huawei, a Chinese company that CFIUS has viewed as posing a threat to US national security. This seems an unusually attenuated and largely pre-existing threat, however, because both Broadcom and Qualcomm have relationships with Huawei.

An Unprecedented Future

CFIUS and President Trump demonstrated a willingness to take unprecedented action to prohibit what presumably would have been a domestic investment outside of CFIUS’ jurisdiction a couple weeks later. The question remains whether any other aspect of Broadcom’s profile might cast it, in CFIUS’ view, as a foreign person once re-domiciled. While this transaction might be viewed as an extreme case, legislation introduced in Congress – the Foreign Investment Risk Review Modernization Act of 2017 (“FIRRMA”) – proposes to expand CFIUS’ jurisdiction and the scope of what constitutes a national security concern. Such sweeping changes would not be limited to one case, one industry, or one administration. If enacted, FIRRMA would for the first time subject certain real estate transactions, including leases, to national security review by CFIUS. Again for the first time, certain outbound contributions of critical technology, which are already subject to existing export control authorities, would be subject to CFIUS review. Minority investments that provide access to any non-public information would be subject to review even if no control rights convey. The President would have the authority to block such transactions without judicial review. These changes could substantially increase a workload that CFIUS is already struggling to manage and result in many more unprecedented actions.