Asian investors face challenging M&A market in US

Geopolitical security concerns are increasingly influencing US economic policy direction, and the recent tightening of M&A regulations poses a challenge for Asian investors

Chinese and other Asian companies planning to acquire US businesses face additional complexities securing M&A deals, as a law that came into effect last year starts to bite.

The Foreign Investment Risk Review Modernization Act (FIRRMA), a new US law that took effect on August 13 2018, contains a number of provisions that modify the scope and responsibilities of the Committee on Foreign Investment (CFIUS) in the United States. 

CFIUS is the controversial multi-agency committee that is authorized to review and prohibit any foreign acquisition of a US business that could threaten US national security.

In general, CFIUS jurisdiction applies only to covered transactions, which are any merger, acquisition or takeover resulting in foreign control of any person engaged in business in the US. But CFIUS has faced a number of operational challenges over the years as foreign investment transactions have increased in number and complexity.

FIRRMA seeks to address those challenges and has expanded CFIUS' jurisdiction to cover certain non-controlling investments, particularly those related to critical technologies, critical infrastructure or a US citizen’s sensitive personal data, unless the investment is truly “passive”.

While FIRRMA modernizes CFIUS and provides more clarity on its scope and jurisdiction, the detailed implementing guidelines still need to be worked out. Asian investors seeking to invest in the US through M&A are advised to tread carefully.

"One of the issues with this whole area of regulation is it introduces uncertainty into the transactions. That can cause investors not to go ahead with the transactions. It can make transactions take longer to complete and be a bit more expensive. Certainly, the advice that clients would get from us, if there are red flags in terms of the focus of the industry or the nature of the buyer, would be to talk to your CFIUS advisors as early as possible,” says Mark Uhrynuk, partner at Mayer Brown, who advises clients on cross-border M&A.

FIRRMA has identified several types of investments as potential threats to US national security.

The first one relates to real estate acquisition. 

“Investments in real estate located in sensitive areas can be directly covered. It doesn’t just have to be in connection with the acquisition of a business. So there has been some clarity around how it applies to real estate transactions,” Uhrynuk says. 

FIRRMA defines sensitive areas as those property located within or in close proximity to an air or maritime port, US military installation, or any other property of the US government determined to be related to national security.

The second type of investment relates to minority investments, particularly in private equity-type structures, that might not be controlled by the foreign investor but nonetheless provides the investor access to sensitive information or technology of the US business.

The third type of investment specifically addresses the threat from China and relates to joint ventures (JV), where the technology developed by the US company to be acquired will be transferred to the JV firm.

The fourth type of investment identified by FIRRMA can be any deal that is structured to circumvent CFIUS. This is a catch-all provision that is intended to provide US regulators with the flexibility to implement FIRRMA.

“These changes are intended to ensure CFIUS covers transactions that may be structured to avoid the application of the rules because typically in its old form the law focused on controlling investments. Now, CFIUS would take a broad view of the definition of 'control'. CFIUS is going to cover certain non-controlling investments and take a limited view of what truly passive investment means,” Uhrynuk says.

The impact of FIRRMA will bear down on all Asian companies seeking to invest in the US, not just Chinese, particularly those that are government-owned or are linked to national government entities.

Government connections to investors cause concern. “The transaction may not involve industries where there is obvious risk, but there are some red flags if, for example, the buyer has a government-related investor, is government controlled, or is a state-owned enterprise,” Uhrynuk says.

Companies should be aware of these regulations at the early stages of any M&A process. “Very early on and often before M&A negotiations proceed, we pull in our regulatory experts to help map out the likelihood of required filings and related approvals. This is not just about national security regulations like CFIUS but also issues relating to anti-trust and merger control,” Uhrynuk says.

FIRRMA has set out some accountability for CFIUS in the processing of filing applications. The rules have changed to include a process for voluntary application if the acquiring company does not fall into the mandatory categories for CFIUS application.

Under FIRRMA, mandatory filings with CFIUS will be required for certain transactions. This requirement will cover any investment by a foreign person in which a foreign government has, directly or indirectly, a substantial interest, which results in the foreign person acquiring, directly or indirectly, a substantial interest in a US business.

“One difference under the new law is that for certain transactions, a filing is now mandatory. CFIUS now has the ability to charge a fee, and penalty provisions may also apply,” Uhrynuk says.

FIRRMA also defines the timetable for processing CFIUS applications in order to address complaints from previous applicants of long delays in the processing of applications.

“For deals that do not involve any real national security issues, there are timetable guidelines to help a buyer through the approval process,” Uhrynuk says.

Now that legislation has been enacted, some stability should begin to return to the market as there is a degree of certainty that flows from FIRRMA. However, Uhrynuk warns investors that the “devil is in the detail” as the implementations of the regulations unwinds.

Parties considering cross-border transactions or investments in which a foreign person proposes to acquire interests in a US business should be familiar with the CFIUS process as modified by FIRRMA.

"If such a transaction involves any of the critical or emerging and foundational technologies as mentioned in FIRRMA, we would recommend undertaking a thorough assessment and submitting the proposed transaction for CFIUS review," said Uhrynuk.