Moran: Toward a Multilateral Framework for Identifying National Security Threats Posed by Foreign Acquisitions: With Special Reference to Chinese Acquisitions in the United States, Canada, and Australia


This paper presents a framework for differentiating between foreign acquisitions of companies that might plausibly pose a national security threat to the home country of the target acquisition and those that do not. This framework originally derives from the experience of the United States. The framework is then shown to be relevant and useful for foreign acquisitions in Canada and Australia. In each case, Chinese acquisitions of US, Canadian, or Australian firms are highlighted. The paper concludes by arguing that this framework can serve as an effective nondiscriminatory basis for separating genuine from implausible national security threats from foreign acquisitions across OECD states, to include all countries around the world.


An important contribution!  Download it here.

CIC's Chief, Gao Xiqing, Says the CIC is "Stigmatized" in the U.S.

Not a lot of argument from me, and I’m skeptical that the CIC can do much about it except 1) continue to invest in a commercial manner, and 2) complain about it once in a while, as they seem to be doing already.

Here are some comments from a recent WSJ article


The U.S. is telling China’s $500 billion sovereign-wealth fund to “go away,” according to the fund’s top executive, in the latest sign of strained investment ties between the world’s two largest economies.

During the financial crisis, “we were sort of welcome” in America, said Gao Xiqing, head of China Investment Corp., in a panel discussion on Sunday at the Boao Forum for Asia. Since then, “somehow we’ve become stigmatized,” he said, adding that “there have been quite a few cases where the U.S. says ‘go away.'”


Mr. Gao didn’t offer details. However, he later told a questioner at the panel, the mayor of the U.S. city of Bellevue, Wash., that the mayor’s own state had lately turned down an investment by CIC.

“Try again,” the mayor, Conrad Lee, told Mr. Gao.

Mr. Lee later told The Wall Street Journal that he is looking for Chinese investment to fund a toll road needed to bring high-technology investment to Bellevue. U.S. mayors “think Chinese money is good,” Mr. Lee said, “but [some] politicians look at Chinese investment as suspect.”

China is still investing in the U.S., of course, and more now than ever: 

According to Rhodium Group, a New York consulting firm that tracks Chinese outward investment, companies there invested $6.3 billion into U.S. companies and projects between January and September, the most recent statistics available. That was more than the $5.8 billion invested in all of 2010, the previous record for annual investment. U.S. officials also recently approved a deal that allowed Chinese state-run oil company CnoocLtd. to acquire Canada’s Nexen Inc., a deal that gave Cnooc significant assents in the Gulf of Mexico.Still, Chinese companies and officials have complained about U.S. barriers to entry in a number of industries. Most recently, Chinese officials criticized U.S. legislation that effectively banned federal dollars from being spent on information technology from companies “owned, directed or subsidized by the People’s Republic of China,” amid concerns that they could represent a security risk.

Mr. Gao said that CIC is still heavily invested in the U.S. “I’m not diminishing it, but I’m not hanging everything in one tree,” he said. “The U.S. is not one of the most welcoming countries in the world for us.”

New Research: "Sovereign Investing and Corporate Governance: Evidence and Policy"

I have posted to SSRN a draft of a new paper entitled “Sovereign Investing and Corporate Governance: Evidence and Policy.” Here is the paper’s abstract:

Discussions of corporate governance often focus solely on the attractiveness of firms to investors, but it is also true that firms seek out preferred investors. What, then, are the characteristics of an attractive investor? With nearly $6 trillion in assets, sovereign wealth funds (SWFs) are increasingly important players in equity markets in the United States and abroad, and possess characteristics that firms prize: deep pockets, long-term (and for some, theoretically infinite) investment horizons, and potential network benefits that many other shareholders cannot offer. However, despite their economic power, their reach, and their general desirability as investors, SWFs are almost entirely disengaged from corporate governance matters in U.S. firms. Indeed, with the exception of Norway’s Government Pension Fund-Global, SWFs are notable primarily just for their passivity as shareholders.

Given the domestic and external political and regulatory factors that discourage SWF engagement in corporate governance in the United States, how can SWFs provide appropriate stewardship over their equity investments? The article answers this question by describing how SWFs and regulators can create the crucial “space” necessary for SWF engagement in corporate governance. The analysis proceeds in three substantive sections. Part I lays out a definition of SWFs and describes SWF investment patterns. Part II reviews empirical evidence on SWF investment behavior and the effects that the investment has on firm values, and then examines evidence on SWF activities in corporate governance. Part III discusses the key factors that limit SWF involvement in corporate governance activities. Part IV describes how, given these limitations, SWFs may engage in governance without triggering regulatory reprisals, and how regulators can encourage SWF investment and engagement.

AIG's Airplane Leasing Unit Sold to Chinese Consortium, and Wanxiang Wins Auction for A123

The big news over the weekend is that China is buying.  First, a group of Chinese firms, led by New China Trust (which, as I review their website, appears to be a state-controlled enterprise), has agreed to buy 80% of ILFC.  Here’s some details from a Reuters report:

American International Group Inc (AIG.N) is to sell nearly all of ILFC (ILFC.N), the world’s second-largest airplane leasing business, to a Chinese consortium for up to $4.8 billion, giving the fastest growing aviation market easier and cheaper access to planes.

Chinese firms have shown interest in aircraft leasing before, and the deal would give China access to a global network of about 200 airlines in 80 countries. China is already ILFC’s largest market with 180 planes operating there, giving it 35 percent market share.

“It’s the biggest deal we have in the aircraft leasing world and it’s very ambitious,” said Paul Sheridan, head of Asia at aviation consultancy firm Ascend Advisor. “We believe there are not enough aircraft on order in China at the moment. It will help Chinese airlines get more aircraft.”

The deal will be subject to CFIUS review.  I believe that the deal will move through CFIUS quickly, particularly because the business would not seem to be related to national security as CFIUS defines that term. 

A more difficult issue is presented by the sale of assets to the North American subsidiary of Wanxiang, a Chinese auto parts maker, which was the winning bidder in an auction for the assets of the bankrupt A123 Systems.  Importantly, the sale of A123 assets will not include the company’s military contracts or other deals with the US government.  The New York Times reports:

In addition to the approval of the bankruptcy judge, the deal requires the approval of the Committee on Foreign Investment in the United States, a broad-based group led by the Treasury Department that reviews foreign takeovers of American companies.

Mr. Ni expressed confidence that Wanxiang was the best owner for A123, when it would need considerable investment to meet production commitments for automakers like Fisker Automotive and General Motors. “We are committed to making the long-term investments necessary for A123 to be successful,” he said.

A123, which is based in Waltham, Mass., was once one of the most promising recipients of federal loans under the Obama administration’s $2 billion program to stimulate the electric-car industry in the United States.

These cases are important tests for CFIUS.  The A123 deal had early resistance, as Reuters reported

Senators John Thune and Chuck Grassley sent a letter on Tuesday to Energy Secretary Steven Chu questioning the continued investment in A123, the first official congressional inquiry into the company’s tie-up with a Chinese company.

“Billions of U.S. taxpayer dollars have flowed to foreign companies through the Recovery Act, and we are concerned that the recent announcement could lead to even more taxpayer dollars going overseas,” Thune and Grassley wrote in the letter.

They asked the Energy Department how it would handle the remainder of A123’s grant and whether the company would need those funds if the Wanxiang deal came to fruition.

The lawmakers also asked whether there were any assurances that U.S. government-backed intellectual property would not go to the Chinese company and if manufacturing jobs would remain in the United States.

Given the mitigation arrangement in place–no sensitive assets are going to be part of the deal–the national security issues seem to be moot.  Once national security that is taken out of the equation, the primary focus of the directors as fiduciaries is to get the highest amount for the creditors. 

I’m expecting these deals to go through, and I will be surprised and disappointed if they do not.

Are Huawei and ZTE State-Owned Enterprises?

The House Intelligence Committee seems to think so.  The designation of a company as a state-controlled enterprise has important effects under the rules governing the Committee on Foreign investment in the United States (CFIUS): deals resulting in control of US enterprises by foreign government-controlled entities will automatically be formally investigated by CFIUS.

Gauging state control over an enterprise is not an easy task, as the official report explains:

Chinese telecommunications companies provide an opportunity for the Chinese government to tamper with the United States telecommunications supply chain. That said, understanding the level and means of state influence and control of economic entities in China remains difficult. As Chinese analysts explain, state control or influence of purportedly private-sector entities in China is neither clear nor disclosed. The Chinese government and the Chinese Communist Party, experts explain, can exert influence over the corporate boards and management of private sector companies, either formally through personnel choices, or in more subtle ways. As ZTE’s submission to the Committee states, “the degree of possible government influence must vary across a spectrum.”

The Committee thus focused primarily on reviewing Huawei’s and ZTE’s ties to the Chinese state, including support by the Chinese government and state-owned banks, their connections to the Chinese Communist Party, and their work done on behalf of the Chinese military and intelligence services.

Interestingly, the House Report often focuses on what it did not find, i.e., evidence that Huawei and ZTE were not connected in important ways to the government, the Chinese Communist Party, or the People’s Liberation Army. 

The report’s recommendations are severe. Among them are:

Recommendation 1: The United States should view with suspicion the continued penetration of the U.S. telecommunications market by Chinese
telecommunications companies.

  • The United States Intelligence Community (IC) must remain vigilant and focused on this threat. The IC should actively seek to keep cleared private sector actors as informed of the threat as possible.
  • The Committee on Foreign Investment in the United States (CFIUS) must block acquisitions, takeovers, or mergers involving Huawei and ZTE given the threat to U.S. national security interests. Legislative proposals seeking to expand CFIUS to include purchasing agreements should receive thorough consideration by relevant Congressional committees.
  • U.S. government systems, particularly sensitive systems, should not include Huawei or ZTE equipment, including component parts. Similarly, government contractors – particularly those working on contracts for sensitive U.S. programs – should exclude ZTE or Huawei equipment in their systems.

Recommendation 2: Private-sector entities in the United States are strongly encouraged to consider the long-term security risks associated with doing business with either ZTE or Huawei for equipment or services. U.S. network providers and systems developers are strongly encouraged to seek other vendors for their projects. Based on available classified and unclassified information, Huawei and ZTE cannot be trusted to be free of foreign state influence and thus pose a security threat to the United States and to our systems.

The report also calls for greater transparency from Chinese firms, and this really is a necessity.  The trouble for China is that the activities of just one or two SOEs taint  investment activity by any of China’s state-controlled enterprises.  If China Investment Corporation is concerned with the politicization of CFIUS process (and I agree that this is a serious concern), it can place some of the blame within China’s own borders; lack of SOE transparency may provide cover for protectionist responses just as it may generate real concerns with national security.

Chinese-Owned Company Sues over CFIUS & Presidential Rejection of Windfarm Deal

The Financial Times reports that a Chinese-owned company was recently blocked from running some windfarms near a military test facility in Oregon.  Now, the company plans to sue President Obama on the grounds that the presidential order blocking the transaction–issued pursuant to his powers under the Defense Production Act of 1950, as amended by the Foreign Investment and National Security Act of 2007–was unconstitutional.  Under the federal statute,

The President may take such action for such time as the President considers appropriate to suspend or prohibit any covered transaction that threatens to impair the national security of the United States.

Ralls, the company at issue, is owned by two Chinese nationals.  Typically, if issues about national security arise in foreign investment cases, the U.S. government and the investors are able to enter a “mitigation agreement” that is intended to regulate the investment so that it does not present a national security risk. In this case, for whatever reason, no agreement was reached and the transaction was blocked.  A presidential order blocking a transaction is a rare occurrence: this is the first such instance since 1990.  A suit is even more rare.  From the FT:

No one has ever before sued the US president over this type of ruling, but Ralls argues that Mr Obama exceeded his powers when he blocked the project and without giving a detailed justification.

On Friday afternoon, Mr Obama issued an order compelling the company to sell within 90 days four wind farm sites in Oregon, and to clear all its equipment and structures off the sites within 14 days.

He also asserted the right to interview Ralls’ employees and advisers and to inspect its documents and computer records in the US, to ensure that the order had been carried out in full.

The statement said: “There is credible evidence that [Ralls] . . . might take action that threatens to impair the national security of the United States,” but gave no further details.

Ralls believes that the order may have been politically motivated.  The CFIUS process is susceptible to political manipulation, especially given the lack of review of CFIUS decisions (by the committee itself of the President).  This should make it tough for Ralls:

Lawyers not involved in the case said Ralls would face an uphill battle to win its case against Mr Obama, with courts generally reluctant to challenge presidential decisions relating to national security.

Stephen Mahinka of Morgan Lewis & Bockius in Washington said the case reflected the problems caused by the opacity of the Cfius process. “From the US point of view of attracting foreign direct investment, it is counterproductive to be so non-transparent,” he said. . .

 . . . However, Natalie Wyeth Earnest, a spokeswoman for the Treasury department, said: “They could try to pursue a lawsuit, but the Cfius statute clearly states that the president’s actions are not subject to judicial review.”

That is no exaggeration.  The statute indeed says the following:

The actions of the President under paragraph (1) of subsection (d) and the findings of the President under paragraph (4) of subsection (d) shall not be subject to judicial review.

That is not to say that the statute itself could not be declared unconstitutional, although it is not unusual for a federal statute to declare that executive action taken pursuant to the statute is non-reviewable (in immigration law, for instance).

The order requires Ralls to divest of its interests in the windfarms within 90 days, and to remove “all items, structures, or other physical objects or installations of any kind (including concrete foundations) that the Companies or persons on behalf of the Companies have stockpiled, stored, deposited, installed, or affixed on the Properties” within 14 (!) days.

Would the President have made this order in a non-election year, when the issue of whether he has “stood up to China” had not been repeatedly raised by Mitt Romney?  I don’t have an answer to that, and the concern that I can’t say “yes” with certainty to that question is undoubtedly shared by many foreign investors.