SAUPO Presentation April 2016 by Philip C. Thompson

1. SAUPO SYMPOSIUM
ASIA–USA PARTNERHIP OPPORTUNTITIES
TECHNOLOGY AND INNOVATION
CHINA’S STRUCTURAL REBALANCING
STRATEGIES FOR INVESTMENTS IN
EMERGING INDUSTRIES
Presented by Philip C. Thompson,
Partner
Moore Ingram Johnson and Steele, LLP
April 22, 2016

2. CHINA’S FIVE-YEAR PLAN (13TH) AND ITS IMPACT ON
FOREIGN DIRECT INVESTMENT
Due to slowing of China’s GDP growth and a weak global economy,
China’s new Five-Year plan initiated in 2015 under the slogan “Made in
China 2025” entails supply-side initiates such as a commitment to
high-end manufacturing and labor intensive services, as well as a state
directed focus on strategic investment in emerging industries such as
bio tech and internet-plus (e.g. cloud and Big-Data based e-commerce)
and alternative energy. Due to China’s large foreign exchange reserves
surplus, it is predictable that Chinese direct investment in United
States businesses will continue to grow. From 2005 through 2015 the
total value of China’s investment and development transactions
worldwide exceeded U.S. $1.2 trillion. In the 1st Q of 2016 the projected
value of Chinese M&A of overseas businesses by Chinese companies
total U.S. $113 billion, whereas Chinese outward investment for
CY2015 was approximately U.S. $110 billion. 1
1 Data accessed from materials presented at the 17th Annual China Development Forum held in Beijing
March 19-21, 2016. See “China’s 13th Five-Year Plan by Stephen Roach, Professor Yale University.
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3. U.S. CONGRESSIONAL CONCERNS OVER CHINESE
INVESTMENTS IN U.S. INDUSTRIES
BACKGROUND
In November 2012, the U.S. China Economic and Security Reviewing Commission on
Intelligence, published a report on the security threat posed by Chinese companies doing
business in the United States, and “about the potential economic distortions and national
security concerns arising from China’s state-supported and state-led economic growth, in
particular economic concerns over the possibility that state-backed Chinese companies
choose to invest based on strategic rather than market-based considerations.”
The report resulted in recommendations for amendments to the Foreign Investment and
National Security Act of 2007 (FINSA)2 which was implemented and signed into law by
President Bush in 2008 to ameliorate concerns over foreign direct investment in U.S.
Those recommendations were for the Committee on Foreign Investment in the United
States (CFIUS) to: (1) Require a mandatory review of all “Covered Transactions”3 by
Chinese state-owned and/or state-controlled companies investing in U.S.; (2) add an
economic benefit test to the existing national security risk tests, and (3) prohibit
investment in a U.S. industry by a foreign company whose government prohibits U.S.
investment in same industry.
2 Section 21 of the Defense Production Act of 1950 (the Exon-Florio Amendment of 1988), as amended by the Foreign
Investment and National Security Act of 2007 (50 U.S.C. App 2170).
3 “Covered Transaction” defined as a foreign person or entity’s acquisition of control of a U.S. business with products,
services, or intellectual property that presents a national security concern.
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4. COMMITTEE ON FOREIGN INVESTMENT IN UNITED STATES
CFIUS REVIEW OF CHINESE M&A INCREASES
CFIUS is an interagency committee that reviews foreign acquisitions of
investments in U.S. businesses which pose national security risks and is
charged with responsibility of mitigating those risks, and if such risks cannot
be mitigated adequately CFIUS must recommend to the Executive Branch that
such proposed transaction be blocked.
The Committee is comprised of 9 fixed members: the Secretaries of Treasury
(Chair), Justice, State, Defense, Homeland Security, Commerce, Energy;
Labor and National Intelligence (both ex officio); the Attorney General and the
U.S. Trade Representative; and by Executive Orders, the Directors of the
Office of Science and Technology.
CFIUS is required by law (Section 721(m)(2) of FINSA) to provide the U.S.
Congress each year with a classified report on covered transactions. On
February 19, 2016, CFIUS issued its 2015 “Public/Unclassified Version” which
focuses on 2014 Covered Transactions. Foreign direct investment in the
United States peaked in 2007 prior to the global financial crisis and has not
fully recovered; however in CY2014, the number of transactions reviewed by
CFIUS (147) increased by more than 50 percent.
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5. COMMITTEE ON FOREIGN INVESTMENT IN UNITED STATES
CFIUS REVIEW OF CHINESE M&A INCREASES
There continues to be an upward trend since 2012 of Chinese companies or investors having
filed the greatest numbers of CFIUS notices with a total of 24 (16.3%), not including the
CFIUS notices originating in Hong Kong (collectively 20%). See Table from CFIUS Report.
The Report reflects that due to the complexity of analyzing Chinese M&A and investments,
there will likely be disproportionately higher numbers of transactions reported to CFIUS
originating in China and Hong Kong which are voluntarily withdrawn or abandoned
following a review by CFIUS. Also, another significant trend reflected in the 2015 Annual
Report is that the largest numbers of M&A transactions in the critical technology sector
occurred in the information, energy and electronics technology industries, both of which
are Target industries in China’s new Five-Year Plan.
Several recent examples of CFIUS review of foreign investments for national security
reasons:
January 2016: Philips, the Dutch electronics conglomerate terminated its written
agreement to sell 80.1% in its LED components business to Chinese Private Equity fund GO
Scale Capital for U.S. $2.0 billion due to regulatory concerns by CFIUS.
February 2016: Quasi-state controlled Tsinghua Unigroup abandoned its offer to invest U.S.
$3.775 billion for an appropriate 15% ownership in California-based Western Digital due to
CFIUS concerns over potential national security risks.
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6. CFIUS ANNUAL REPORTS TO CONGRESS
REPORT PERIOD: CY 2014
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7. COMMITTEE ON FOREIGN INVESTMENT IN UNITED STATES
CFIUS REVIEW OF CHINESE M&A INCREASES
March 2016:
Following reports that U.S. crane manufacturer Terex Corp. has
received an unsolicited U.S. $4.9 billion offer from Chinese heavy
equipment manufacturer Zoomlion, the House Armed Services
Committee has requested CFIUS to conduct a review of the proposed
transaction due to national security concerns over certified American
military contracts.
April 2016:
CFIUS will likely the review China National Chemical takeover bid of
Syngenta AG, a Swiss seed and pesticide company for U.S. $46 billion.
With production and storage facilities in the U.S. due to CFIUS
concerns about potential hazardous risks to the U.S. food-supply.
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8. CONCLUSION
A primary responsibility of CFIUS is to determine whether there is credible
evidence of a coordinated strategy by foreign governments or investors to acquire
critical technology companies in the United States. Based upon its assessment of
transactions reported to CFIUS in CY2014, the U.S Intelligence Community (USIC)
believes that there may be such a coordinated effect among foreign governments or
investors, particularly China, to acquire U.S. companies involved in research,
development or production of critical technologies for which the United States is
leading producer.
[Note: Information supportive for this conclusion is provided in the classified
version of the CY2014 Report.]
Based upon the state directed focus in China’s new Five-Year Plan on strategic
investment in emerging industries world-wide it is logical to expect increased
scrutiny by CFIUS and Congress on Chinese proposed investments in U.S. “critical
technology” businesses. In recent articles American policy makers are advocating
aggressive measures to counter balance and prevent theft of intellectual property
relative to sensitive technology.
These commentary and materials are for general information purposes and do not
constitute legal advice or create any attorney-client relationship.
© 2016, Moore Ingram Johnson & Steele, LLP
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