USA Inbound Acquisitions & Investments Blog : Inbound Investment Lawyer & Attorney : Sullivan & Worcester Law Firm : Mergers & Acquisitions, Cross Border Investments

In a headline-grabbing inbound acquisition deal, General Motors Corp. and Sichuan Tengzhong Heavy Industrial Machinery have reportedly reached definite agreement on the terms of the sale of GM’s Hummer Brand by early 2010 for approximately $150 million. According to a Reuters report appearing in The New York Times, Tengzhong has begun to seek Chinese regulatory approval for its purchase of the Hummer brand, Hummer trademark and manufacturing expertise. The report surmises that three Chinese regulatory bodies – the Ministry of Commerce, the National Development and Reform Commission and the Ministry of Industry and Information Technology. In our post of last June 15, we noted that Chinese regulators could have a significant role in the purchase.

There also are questions as to what U.S. regulatory approvals may be required. Reuters reports that approvals from U.S. regulators are required, but doesn’t specify which regulators. Although far reduced in size from the original $500 million estimate, the $150 million price exceeds the minimum size for filing with the antitrust regulators in the Department of Justice and the Federal Trade Commission. There seem to be few tangible assets changing hands – no plants, no real estate, no equipment. The reports suggest that only intangibles are being bought and sold. Therefore, the key question becomes whether the parties have obligated themselves to make a voluntary filing with CFIUS. In posts earlier this year, we raised the question of whether sales of U.S.-based automotive businesses to offshore buyers would trigger review under the Foreign Investment and National Security Act of 2007 (FINSA). Review under that statute could interpose a 30-day review period plus an additional 45-day period if an investigation is warranted. The descriptions of the deal, structured as the purchase and sale of intellectual property whose value lies in the marketing of the product and certain manufacturing rights, suggests that the parties have taken reasonable steps to minimize those factors that could lead to an adverse regulatory outcome.

It even is possible that GM, Tengzhong and their advisors are so confident of their structure that they will elect not to make the filing with CFIUS which, after all, is voluntary. The deal apparently has provisions that will save 3,000 U.S. jobs through 2011. It may be unlikely that a U.S. regulatory body will risk adding those workers to the already sizeable portion of the workforce that is unemployed. Although there could be regulatory risk, it may not be high for GM. CFIUS could, however, have an interest in fully analyzing the ownership and business relationships of Tengzhong and its 20% partner, Suolang Duoji, to determine whether there could be control by the PRC government.

GM has not yet filed the definitive agreement with the Securities and Exchange Commission. Under SEC rules it has until later the week to file the agreement if it is “material” agreement. Once filed, a review of the agreement should disclose whether the parties will make their voluntary CFIUS filing. 

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Earlier this month the U.S. State Department clarified its position on the importance of inbound foreign direct investment (FDI) to the U.S. economy. State released a fact sheet on July 1 entitled "The State Department, Open Investment, and American Jobs."  The fact sheet underscores the importance of FDI to economic growth and job creation in the U.S.

The fact sheet credits the Committee on Foreign Investment in the United States (CFIUS) with concluding action on over 150 transactions in 2008. This represents an increase of at least 9% over the 138 transactions that CFIUS reviewed in 2007. Of the 2008 transactions, 92% were mergers and acquisitions of U.S. businesses. The balance was likely to have been joint ventures or loan transactions. The State Department points out that, as a result of its membership on CFIUS, it has a direct role in the rulings that the panel makes.

Without doubt, inbound acquisitions and investments are quantitatively significant. In 2006, U.S. inbound FDI totaled $236.7 billion, or 1.8% of GDP. U.S. affiliates of foreign firms spent $395.8 billion on U.S. payrolls and $34.3 billion on U.S. R&D.

Because of these direct economic effects, the State Department wants its message to be crystal clear:

The United States has a significant stake, as both the world’s largest source and recipient of foreign direct investment, in working with our economic partners both multilaterally and bilaterally to implement policies that facilitate global investment flows.

State’s pronouncements and their forceful delivery add to the expectation that inbound FDI will assist in pulling the U.S. economy out of its current slump.

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Our latest post last week referenced the June 2009 Peterson Institute policy brief discussing China’s outbound foreign direct investment, authored by Daniel H. Rosen and Thilo Heinmann. The paper points out that global economic turbulence has made potential outbound investors in China hesitant to go abroad, citing three compelling pieces of evidence:

• The value of approved nonfinancial overseas projects announced in Q1 2009 decreased to $3.7 billion from more than $10 billion in Q1 2008.
• A recent study reported that more than 50% of Chinese firms are scaling back their overseas investment plans. 
• Chinese government has withheld approval for deals in the financial sector and chastised firms in other sectors for their overseas investment plans.

The brief predicts that despite these “short-term anxieties,” OFDI by China will increase substantially in both the medium and long terms. The key driver behind the increase is China’s need to transform its model for achieving internal growth from domestic manufacturing alone to more integrated activities carried on internationally. 

If, however, there is reluctance or unwillingness on the part of Chinese firms to make outbound direct investments, then to what extent are these attitudes attributable to changes in investment review policies of investee nations.

The issue of review policies by recipient nations is taking central stage. The brief predicts that China’s OFDI will increasingly target higher-value assets in advanced economies, such as high technology firms. As it targets these businesses, governments and businesses alike may raise national security rationales to impede the investments. In anticipation of this transformation the brief warns that potential recipients of Chinese investments may use national security inappropriately as a basis for blocking investments and requests clarity as to which business sectors are not available for OFDI investment. 

With specific reference to the U.S., the brief notes that earlier efforts to expand the U.S. investment review system to include economic security were resisted. The discussion, however, is restarting. This reaction is due to the perception that China’s government is robustly involved in its nation’s businesses. The brief argues that

• Chinese executives need clear U.S. policy to determine beforehand whether bids may be rejected on national security grounds and
• greater clarity on this issue would benefit the United States by maximizing its asset values and preventing retaliatory treatment abroad.

The brief points out that many governments have tightened investment rules in recent years in response to increased outbound investments from China and the Middle East. A chart included makes the point convincingly: 

On that basis, the brief asserts that in many countries investment protection is growing, investment rules lack transparency and domestic interest groups affect the review process. The attempted takeover of Unocal by Chinese National Offshore Oil Corporation and the involvement of Huawei Technologies in Bain Capital’s attempted acquisition of 3Com Corporation are cited as examples.  As a result, politicized reviews are an obstacle in the view of outbound investors. 

Businesses throughout OECD economies are likely to receive investment offers from Chinese firms in the near future. Consequently, the brief advises that it is imperative, in light of the many benefits to arise from China’s OFDI, that each country, including the U.S., consider the broad image of policy issues and articulate an approach conducive to that incipient inbound investment.

Last week also brought reports that Chinese security officials had detained four Rio Tinto executives on grounds that the four had stolen state secrets.  According to the Australian CEO World blog, the arrests have shocked both the business world and the Australian government.  Sources cited in the blog attributed the arrests to sensitivities in the Chinese leadership arising from economic stagnation and a search for scapegoats.  Australian press is reporting that China’s spy and security agencies have been promoted to top strategy-making positions for the purpose of managing China’s economy through the downturn.  Demonstrating that virtually every issue has an OFDI aspect, however, the China Securities Journal reported that shortly before last Thursday’s detentions the state-controlled Aluminum Corporation of China (Chinalco) bought $1.5 billion of Rio Tinto shares.  

The international reactions and press allegations are likely to make Chinese executives and officials even more reluctant to proceed with their OFDI plans and affect the receptivity of recipient economies as well. Resolution of the conflict will provide greater insight into when and in what ways expanded OFDI by China may materialize.  

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