Identifying Those Mergers, Acquisitions and Investments That Are Subject to U.S. Government Regulation
Analysts and others who follow mergers, acquisitions and other foreign direct investment into the United States can often be frustrated in their attempt to learn what inbound deals are being subjected to U.S. governmental scrutiny. Other than occasional press releases, little useful information that is transaction-specific seems to be available. There was press coverage of the proposed merger transaction among affiliates of Bain Capital Partners, 3 Com Corporation and Huawei Technologies of China in 2007 and 2008. That transaction did not survive govenmental scrutiny. More recently, in mid-May of this year, Rio Tinto and Chinalco announced that they had obtained U.S. government approval for both the proposed issue of convertible bonds to Chinalco and the indirect minority investment in Kennecott Copper Coporation, as contemplated by their February 2009 strategic transaction.
The Committee on Foreign Investment in the United States, known by its acronym CFIUS, is the regulator that oversees foreign direct investment, make certain limited information available. On November 14, 2008, CFIUS, sent its most recent Annual Report to Congress. CFIUS operates under The Foreign Investment and National Security Act of 2007, or FINSA . FINSA mandates that CFIUS prepare and send this report. One month later, CFIUS made available to the public an unclassified version of the report that presents only aggregate information. The 2007 Annual Report covers the years 2005, 2006 and 2007, when there was considerably more inbound M&A and inbound investment activity into the U.S., as well as more cross-border transaction activity generally, than currently.
The unclassified version of the report does not identify the foreign persons or the U.S. businesses involved. The data is segmented by business sector of the U.S. business and by nationality of the foreign person. There is no specification of whether the basis of the national security considerations was the nexus of the U.S. business with U.S. national security or the identity of the acquiring foreign party.
Some of the data in the report, however, is helpful in determining those standards that buyers and sellers are following. CFIUS’ annual report states that, in 2007, parties filed 138 notices of transactions with CFIUS. The unclassified version of the report provides only aggregate data with respect to the filed submissions. To summarize, for 2007:
- of the 138 filed notices, ten notices (7%) were withdrawn during the CFIUS national security review and five (4%) were withdrawn during the CFIUS national security investigation;
- the parties to three of the five transactions that withdrew their filings during investigation subsequently refiled them, and the refilings led to conclusion without action;
- the parties to two other transactions withdrawn during investigation abandoned their transactions; and
- the parties to the remaining withdrawn application restructured the transaction such that the foreign party no longer gained control over the U.S. person.
The report does not indicate whether or how many of the transactions that were withdrawn during the national security review were later resubmitted with or without restructuring. Unlike 2006, when the President acted to suspend two transactions, the President did not suspend or prohibit any transactions during 2007.
In response to FINSA’s mandate that the report provide “[s]pecific, cumulative and, as appropriate, trend information,” the annual report presents aggregate statistics regarding 313 transactions for the period 2005 through 2007. In summary, during those three years, 24 notices (8%) were withdrawn during the CFIUS national security review, 15 notices (5%) resulted in investigations and 2 notices (1%) resulted in a Presidential decision. Although the statistics indicated that the number of notices filed increased year-to-year from 64 to 111 to 138, the data, presented below, show no other clear trends.
Source: CFIUS 2008 Annual Report
To put these numbers of filings in to context, the number of transactions in which foreign buyers acquired U.S. business were substantially larger. CFIUS filings were made only in a small fraction of cases. According to Capital IQ, there were 657 completed inbound acquisition transactions in 2005, 889 in 2006 and 1,076 in 2008. The percentage of these transactions as to which the parties filed CFIUS notices were 10% in 2005, 12.5% in 2006 and 12.8% in 2007, or an overall percentage of 11.9% for the three-year period. The trend line is moving upward, although only slightly so.
Pursuant to the mandate in FINSA, the report analyzes the notices that were filed during the three-year period by business sector and the countries originating the transactions. This is the data that may be most useful to determine what parties have chosen to voluntarily submit their notices. The business sectors represented and the most-often reported business segments within those sectors, measured by percentage of the total 313 filings, were:
Source: CFIUS 2008 Annual Report
Business sectors of business segments with respect to which parties made filings, but not in statistically significant (i.e., 5% or more) numbers, included:
- Chemical (within Manufacturing) – 12 filings
- Primary metal (within Manufacturing) – 7 filings
- Machinery (within Manufacturing) – 16 filings
Within the 51 Computer and Electronic Product segment filings were filings by businesses that manufacture semiconductors and other electronic components (21 filings) and that manufacture navigational, measuring, electromedical and control instruments (13 filings). Within the 52 Professional, Scientific and Technical Services segment filings were businesses that provided architectural, engineering and related services (21 filings) and that provided computer systems designed related services (also 21 filings).
Because FINSA prohibts CFIUS from presenting transaction-by-transaction data, parties looking for precedent or practices by others will benefit by keeping these statistics in mind. Given the business risks for failing to file the voluntary notice, the parties are well-advised to make conservative judgments and build compliance with the filing process into their deal budgets and timelines. Qualified legal advisors can assist buyers, sellers, investors and investees in complying with U.S. government review efficiently and effectively.
