This September, the Trump administration moved to block the proposed acquisition of a US semiconductor company by a state-backed Chinese investment fund, citing a number of concerns that the deal posed for US national security. This move was the latest in a series of signs that national security reviews are becoming an increasingly important part of M&A regulation in a number of jurisdictions. This article will explore the latest regulatory developments in this area in the US and China context, considering their implications for both immediate M&A activity and broader economic relations between the two countries.
The Committee on Foreign Investment in the United States (CFIUS) is a federal government agency authorised to review any investment deals that result in a foreign entity acquiring control over any US company in order to determine whether such a deal might affect American national security interests. Since a legislative amendment in 1988, the President has possessed the authority to block any covered transaction that might impair US national security interests. Subsequently, further changes to legislation in 2007 have expanded CFIUS powers by broadening the definition of ‘national security’ and creating a presumption that the committee would further investigate any cases that involved ‘critical infrastructure.’
The Lattice Ruling and Its Implications
Earlier this year, President Trump followed a recommendation from CFIUS to block the $1.3bn acquisition of Lattice, an American semiconductor manufacturer, by a state-backed Chinese investment fund. The CFIUS report cited a number of national security concerns including the risk of transferring sensitive intellectual property to China, the ‘importance of semiconductor supply chain integrity’, and concern about the Chinese government’s support for the acquisition. Patrick Moorhead, a chips analyst, said that the ruling could be explained by the fact that programmable silicon chips are often incorporated into weapons and defence systems operated by the US military, thus highlight the US’s concern that sensitive military technology would potentially have been transferred to the Chinese government.
The Lattice ruling highlights the growing scrutiny being applied by the US to Chinese inbound investments and the political momentum behind national security reviews. The ruling comes in the wake of a decision by the Obama administration late last year to block the Chinese acquisition of Aixtron, a German semiconductor company, after a similar recommendation by CFIUS. Like the Lattice ruling, the committee had cited concerns relating to the military application of the technology held by Aixtron.
Meanwhile, there is a strong lobbying effort by members of US Congress to increase the powers of CFIUS even further. Some legislators are pushing for a wider definition of ‘national security’ to include considerations of media control and ‘soft power’ after one of Hollywood’s biggest production companies was purchased by a Chinese conglomerate. There are also hopes to expand CFIUS’s jurisdiction beyond M&A to cover other transaction structures such as minority investments and joint ventures.
As a report by law firm Kirkland & Ellis outlines, these latest developments have a number of implications for how US companies should conduct overseas deals. Firstly, it has become clear that if a deal has any direct or indirect link with a Chinese entity, this immediately elevates the deal’s risk. While CFIUS has jurisdiction to review controlling transactions from any country, all four deals that have been blocked by a US president after following its recommendations have concerned a Chinese company.
Secondly, companies will have to take account of new ways in which CFIUS will perceive a deal to contain national security concerns: this will include the use of lower-tech technology that is nonetheless sensitive if widely used by US government customers. And thirdly, companies may have to be prepared to have a wider scope of transactions, such as minority investments and joint ventures, scrutinized by CFIUS in light of calls to expand its jurisdiction.
National Security Review in China
Coinciding with the development of CFIUS and its growing importance to the US M&A market, the Chinese government has instituted its own system of national security review for its own economy. In 2011, pursuant to a notice issued by the State Council, the Ministry of Commerce (MOFCOM) established a panel responsible for conducting national security reviews of foreign investments in domestic Chinese companies. Like CFIUS, the MOFCOM panel has the statutory authority to investigate foreign M&A deals and to recommend that the transaction be blocked or subject to modifications in order to make it compliant with national security concerns. The MOFCOM panel’s scope of review and powers were then further clarified in the the 2015 PRC national security law.
It can be tempting to characterise the MOFCOM panel as ‘China’s version of CFIUS’. Arguably, the very formation of the panel can be seen as a political reaction to CFIUS, as its formation came immediately in the wake of a decision by CFIUS in 2011 to block a merger between Huawei and 3Leaf.
However, as outlined in academic literature and law firm reports, there are a number of substantial differences between the two systems that the business community must take into account. Firstly, China’s definition of what constitutes a ‘national security’ concern is much broader. While CFIUS is able to review control over assets constituting ‘critical infrastructure’, it excludes ‘economic security’ as a consideration.
In contrast, the 2011 NSR notice explicitly grants MOFCOM the power to include economic concerns, such as the impact on domestic capacity, ‘basic social order’ and domestic R&D capabilities, as part of its analysis. Secondly, MOFCOM panel rulings have more powerful implications. While CFIUS can only make non-binding recommendations to the President, the Chinese panel has authority to take its own action, including the power to divest the transaction.
In theory, this suggests that MOFCOM will develop to become a more interventionist regulatory body as compared to its American counterpart, reflecting China’s continuing evolution as a mixed economy. Nonetheless, there is certainly an element of ‘wait and see’ with the institution. There are yet to be measures taken by the Chinese government to implement its rulings. So far, MOFCOM has not moved to block any transaction on national security grounds.
Implications of Developments for US-China Business Relations
In the short-term, we can expect national security reviews to be a significant hurdle for US-China M&A deals that some companies will not be able to clear. This is proving to be the case for many high-profile potential takeovers by Chinese investors seeking to buy American companies. For example, a former affiliate of Jack Ma’s Alibaba Group, Ant Financial, is expected to initiate a third attempt for CFIUS approval of its takeover of MoneyGram International after the panel rejected its two previous proposals. The outcome of this case will set an important precedent for the regulatory approach to US-China financial services deals.
In the longer-term, we may see the merger review process become only further politicised, especially if the Chinese MOFCOM panel moves to block acquisitions by US companies. It is not hard to envisage a ‘tit-for-tat’ exchange between the two countries. In light of the ever-increasing protectionist sentiment being signalled by the Trump administration and some members of Congress, national security review may grow to become a significant point of contention between these two world powers on matters of economic policy.
Venezuelan Digital Currency Backed by Oil
Venezuela has announced plans to launch a digital currency, “the petro”, backed by the country’s oil and mineral reserves. The petro aims to help ease the country’s monetary crisis but sceptics claim the proposal has no credibility and will not help those in extreme need.
Why It’s Important
Hyperinflation has eroded the Venezuelan bolivia’s value by 97% this year, making imports incredibly expensive and causing many to abandon trust in the currency. The country’s oil reserves made up 95% of its exports in 2016, while oil and gas extraction accounted for 25% of GDP. Rich supplies of resources provide some initial credibility to the proposal, but President Maduro’s questionable track record when it comes to monetary policy is making many sceptical about the proposal. His currency controls and money printing have only added to the monetary crisis. Maduro has not announced when the digital currency would come into use or any details regarding how the country would create such a system.
Opposition leaders argue the country’s shortages of food and medication are far more pressing and that the digital currency will not address this. The digital currency may provide a more trusted medium of exchange, but it is unlikely to help those in excessive poverty.
The US Senate Approves the Republican Tax Bill
During the early hours of Saturday morning, the Senate passed the Republicans’ landmark bill in what could become the USA’s first tax overhaul since 1986 and the first legislative success of the Trump presidency. Meanwhile, Democrats have denounced the bill as essentially a handout to the wealthy that will disproportionately squeeze other segments of society.
There is also a strong feeling among many Democrats and Republicans that the bill was hastily drafted and improperly thought through. Democrat senator Chuck Schumer said:
“I have not seen a more regressive piece of legislation, so devoid of rational, so ill-suited for the condition of the country”.
For Trump, however, this is a victory and a step towards making good on some of the policy promises that formed his election manifesto. So far, the Trump presidency has been characterised by racial tensions, a failure to repeal Obamacare and no sign of the infamous border wall being built. Accordingly, the President made his feelings known on Twitter following the Senate’s approval of the tax bill.
We are one step closer to delivering MASSIVE tax cuts for working families across America. Special thanks to @SenateMajLdr Mitch McConnell and Chairman @SenOrrinHatch for shepherding our bill through the Senate. Look forward to signing a final bill before Christmas! pic.twitter.com/gmWTny3SfS
— Donald J. Trump (@realDonaldTrump) 2 December 2017
The tax bill is not yet in the clear, however. It will now be amalgamated with legislation that has passed through the House of Representatives. This process will commence next week and it is likely that there will be further complaints from Democrat lawmakers.
Meanwhile, business groups, who will be the primary beneficiary of the tabled plan to reduce corporation tax from 35% to 20%, have welcomed the bill’s progress. Jamie Dimon, JPMorgan’s CEO, congratulated the Senate and said that the reforms would “boost [our] economy and benefit American workers.”
It is yet unclear what impact the tax cuts will have on the USA’s national budget. Despite Trump’s promise to balance the nation’s books, a congressional watchdog has recently said that Trump’s tax plan will send the deficit soaring and only put slightly more cash in the wallets of millions of ordinary American families across the country.
How Trump Inadvertently Prompts Discussions of Unlikely Issues
In 1916, in a letter to David Lloyd George’s daughter, Winston Churchill admitted:
“I think a curse should rest on me – because I love this war. I know it’s smashing and shattering the lives of thousands every moment, and yet, I can’t help it, I enjoy every second of it”
Can Trump be considered the moral equivalent of World War One in terms of the mayhem he has wrought upon civilised notions of the way the world should be? Probably not, but the damage he has caused is nonetheless considerable. The juxtaposition of Trump with Churchill seems appropriate because, as the President dismantles so much of what has come to be normative behaviour in civilised society, he is inadvertently promoting a re-examination of the things that America holds dear – in the same way that the world has re-examined its opinion on war in the 100 years since Churchill made his aforementioned remark.
The fact that Trump was elected notwithstanding the revelations in the Access Hollywood tape has likely been responsible for women finally declaring enough to be enough. Would Harvey Weinstein, Kevin Spacey, Louis CK, Matt Lauer have been exposed in a Hillary Clinton administration? The fact that Trump’s tweets are ill-considered, often factually wrong and inflammatory, has promoted a sober discussion of how to deal appropriately with the issues of racism and immigration.
The fact that Trump is actively withdrawing from the theaters of international endeavor – trade, diplomacy and climate change – has led to a careful consideration of why those things might be important to Americans. The fact that Trump shamelessly panders to his base, regardless of collateral damage to broader public opinion, has resulted in a careful review of the stakes involved in tribal loyalty.
Sexual Assault and Tax Reform
Susan Collins, one of the senators for Maine, was asked at a recent Christian Science Monitor Breakfast whether, if Roy Moore were elected to fill the Alabama Senate seat vacated by Jeff Sessions, he should be unseated by the Senate. She stressed, firstly, that she protested his candidacy even before the allegations of sexual assault. She went on to say that the question of whether the Senate would have the right to unseat him if he were to be elected by the people of Alabama, accusations of sexual assault notwithstanding, was a very difficult one.
She is right. A trial in the court of public opinion has a different standard and different procedures from a trial in the justice system. An election is perhaps the most exacting kind of public opinion trial. An acquittal by the voters does not preclude future legal proceedings, but, while it is clear that NBC is within its rights to fire Matt Lauer, it is less clear that the US Senate or House of Representatives has the right to unseat Moore – if elected – or, respectively, John Conyers as Nancy Pelosi has urged.
Tax reform is currently top of mind in DC and, as this article is written, the Senate is close to passage of its bill. As it stands, neither Moore not Conyers will be voting for tax reform: Moore because the vote will likely pre-date his election; Conyers because he is a Democrat and votes for the bill that is presented to both Houses of Congress, after it has been to conference committee to sort out the differences between House and Senate versions, are expected to proceed along party lines.
Hypocrisy and Principle
Fitness to serve and uphold the values for which representatives are elected are both called into question by the context in which the current tax reform legislation is proceeding.
Mitch McConnell, Senate Majority leader made it clear in an interview in May 2017 that he believed any tax overhaul could not add to the growing budget deficit. Steve Mnuchin, Treasury Secretary, claimed the proposed tax reforms, which include a reduction in the corporate tax rate from 35% to 20% would pay for themselves.
The Joint Committee on Taxation was asked to conduct a macroeconomic analysis of the impact of the Senate Tax Cuts and Jobs Act bill – the so-called dynamic scoring report that would validate Mnuchin’s statements. The report revealed approximately $458bn of savings due to economic growth. That left a deficit increase over the next ten years of $1trn.
The report leaves the Republican party with the uncomfortable choice of passing a bill that contradicts its stated, fiscally prudent governing principle of not increasing the deficit or failing to pass tax reform, which, it is assumed, would have dire electoral consequences in 2018.In the court of public opinion as it stands in 2017, hypocrisy and lack of principle may prevail.
Churchill was a little ashamed of enjoying World War One. Should one be equally ashamed while watching the unravelling of the hypocrisies of the elite-world order? Perhaps, but there is a decent chance that, as public officials (Mike Flynn, for example) are convicted of lying in the service of their president and the unwinding of male privilege rolls through the power venues of Hollywood and Washington DC, hypocrisy and abandonment of principle may extract a price and the Republican Party may find that it has made a profound mistake.
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