On March 12, 2018, President Trump issued an Executive Order blocking the proposed $117 billion hostile takeover of Qualcomm Incorporated by Broadcom Limited following a recommendation from the Committee on Foreign Investment in the United States (“CFIUS”). The Executive Order relied on evidence claiming that, through its intended takeover of Qualcomm, Broadcom may take action that could impair the national security of the United States. The President's Order prohibited not only the proposed takeover but also any substantially equivalent transaction and disqualified all individuals proposed by Broadcom for Qualcomm’s Board of Directors.
The Executive Order caps off several weeks of strained public discord between the companies involving the U.S. Government. Qualcomm initially rejected an unsolicited takeover bid from Broadcom in November 2017, announcing that the Qualcomm board concluded Broadcom’s $130 billion offer “dramatically undervalues Qualcomm.” After unsuccessful negotiations, Broadcom looked set to move forward with a hostile takeover at Qualcomm’s annual stockholders meeting and election of directors, which was scheduled for March 6; however on March 4, CFIUS ordered Qualcomm to postpone its annual by 30 days to afford CFIUS time to fully investigate the proposed acquisition.
Qualcomm then publicly released a letter to lawyers for the two companies from the U.S. Department of Treasury, dated March 5, explaining that CFIUS’s order was intended to address several potential national security concerns relating to the proposed takeover. In the letter, Deputy Assistant Secretary for Investment Security Aimen Mir identified Qualcomm as a global leader in the development of innovative technology used for wireless products, including the current development of 5G technology. Citing Broadcom’s proposed debt financing for the transaction and claiming Broadcom had a history of defunding research and development in companies it has acquired, Mir stated that any reduction in Qualcomm’s long-term technological competiveness would impact U.S. national security due to Qualcomm’s role in the U.S. telecommunications infrastructure and as a supplier to the U.S. government, particularly the Department of Defense.
Mir also hypothesized that any weakening of Qualcomm’s position could allow China to expand its influence in the area of 5G technology ahead of the United States, as Chinese companies, including Huawei, have increased their investments in 5G development. Following Qualcomm’s release of the March 5 letter, Broadcom released a public statement and sent a letter to Congress expressing a commitment to make the United States a global leader in 5G technology and pledging to create a $1.5 billion fund focused on wireless technology innovation.
The President’s authority to review this transaction is based in Section 721 of the Defense Production Act of 1950, as amended by the Foreign Investment and National Security Act of 2007 (FINSA). That statute grants the President authority to take any action necessary to “suspend or prohibit” any transaction that results in control of a U.S. business by a foreign entity (a “covered transaction”) if he or she determines that the transaction potentially threatens U.S. national security. Broadcom was founded in the United States but incorporated in Singapore in 2015, and is, therefore, considered to be a foreign entity for purposes of this national security review. In November 2017, Broadcom announced its intent to move back to the United States, which would have exempted the transaction from review by CFIUS and negated the President’s authority to block the transaction under the Defense Production Act. On March 12, prior to the release of the Executive Order, Broadcom announced that it expected to complete redomiciliation by April 3, just before the end of the 30 day period set forth in CFIUS’s interim order. That announcement most likely prompted the President to issue the Executive Order before Broadcom’s redomiciliation could be completed.
Broadcom issued a statement in response to the Executive Order that it is reviewing the order but “strongly disagrees that its proposed acquisition of Qualcomm raises any national security concerns.” We expect that the Executive Order could spur litigation by either Broadcom or Qualcomm shareholders, but any such litigation would face a steep uphill battle given the courts’ historic deference to the President’s power to make decisions related to national security and the provision of the Defense Production Act that the actions of the President under the Act “shall not be subject to judicial review.”
In 2014, the U.S. Court of Appeals for the District of Columbia Circuit reviewed an Executive Order issued by President Obama prohibiting the acquisition of four American-owned wind farm companies by Ralls Corporation. Read our discussion of the Ralls case here and here. The Circuit Court concluded that the Executive Order applicable to that case, which deprived Ralls of its property interests by forcing the divestiture of the wind farm companies, did so without due process of law because Ralls was not given access to the unclassified evidence on which the decision was based, nor was Ralls given an opportunity to rebut that evidence. In this case, the March 5 letter to Broadcom appears to have been drafted, at least in part, to demonstrate that the government did provide the requisite notice to Broadcom regarding national security risks posed by the proposed transaction. Still, the question remains why any alleged concerns over any disinvestment by Broadcom in 5G technology could not be appropriately addressed by a mitigation agreement rather than an absolute prohibition.
It is uncertain whether an Executive Order issued pursuant to the authority provided under the Defense Production Act would remain viable if the party barred from completing an acquisition was no longer a foreign party. Should Broadcom complete its redomiciliation, that issue may be raised for the first time. The Executive Order includes a provision that prohibits any “device entered into or employed for the purpose of, or with the effect of, avoiding or circumventing this order,” which appears possibly to be directed at preventing Broadcom from re-incorporating in the United States for the purpose of acquiring Qualcomm. In that circumstance, the relevant question would be whether that provision remains permissible under the President’s power to “suspend or prohibit” a “covered transaction” if the transaction was no longer covered.
This is only the fifth transaction to be blocked by a president based on a recommendation from CFIUS. In recent years, transactions involving Chinese investments have faced heightened scrutiny, but this Executive Order indicates that parties to transactions involving emerging technologies, including those in the telecommunications arena, should be prepared to face increasing levels of scrutiny regardless of the nationality of the foreign investor. Accordingly, parties contemplating transactions involving investment from outside the United States should consult with counsel early in order to determine whether a transaction is subject to CFIUS review. Knowledgeable counsel can assist in evaluating the proposed transaction in light of current CFIUS actions and may be able to minimize needless expenditures of time and resources on transactions that are unlikely to ever receive CFIUS approval. Counsel can also assist parties in structuring transactions and presenting proposed transactions to CFIUS in ways that maximize the likelihood of CFIUS approval.