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CFIUS weekly news roundup: April 19

April 19, 2018 by in CFIUS Insights

It was another dramatic week in the world of CFIUS, international trade and cyber security. First, a few pieces of free advice:

One, if you announce an intended acquisition, such as the VW acquisition of Navistar, and the target’s homepage has pictures of military equipment, you should plan to file with CFIUS.

Two, Allergan, a U.S. pharmaceutical company, should absolutely play up the CFIUS angle in a bidding war against Takeda for Shire Pharmaceuticals. Shire focuses on treatments for rare diseases, which likely includes access to personal identifier information, protected health information and other sensitive information—I’ve worked on several transactions where this information was of interest to the CFIUS agencies. How could Allergan do this? Possibly by taking the Qualcomm precedent of unilateral filings one step further, by preemptively unilaterally filing with CFIUS and arguing no CFIUS jurisdiction over Allergan’s acquisition. This would provide an important leg-up over Takeda in the bidding war. Takeda’s best defense would be to offer to close over CFIUS and bear all risk of adverse CFIUS action post-closing. As a process matter, CFIUS would be unlikely to accept any filing while there are multiple bidders—it typically rejects filings for “speculative” transactions—but as a signal to Shire shareholders, the moves would be useful.

Now, onto trade dramatics:

We’ve only just begun: The WSJ reported that the U.S. is considering initiating a second Section 301 investigation into Chinese trade practices, this time as they relate to Chinese restrictions on U.S. tech companies participating in the Chinese technology industry, notably in cloud computing and other high-tech sectors in China. Although not discussed in the reporting, China’s recently-passed Cyber Security Law explicitly requires network operators to store “important data” within China (either by investing directly in servers in China, or by outsourcing storage to local service providers such as Huawei, Tencent or Alibaba) and to make such data available to authorities upon request. Similar to the Section 301 investigation relating to steel and aluminum trade policies, which led to tariffs, the findings of a Section 301 investigation into Chinese practices in the technology space could serve as the basis for additional U.S. measures to be imposed on China.

Meanwhile, China offered a carrot to U.S. automakers, this week announcing that in the next five years it will loosen requirements that foreign auto makers partner with Chinese businesses to manufacture automobiles in China. The contrast here is of note: The U.S. is opening an investigation into the high technology sector, while China is signaling an end to protectionism in a lower-tech, manufacturing-based industry.


Frontroom diplomacy: China is lobbying U.S. allies in Europe to “stand firm” with China against U.S. protectionism. As we’ve discussed before, countries in the developed world have significant leverage as the U.S. and China scramble to consolidate alliances, although the reaction from individual EU nations was reportedly cool. Meanwhile, in the developing world, China’s trillion dollar “belt and road” infrastructure construction project across Asia and Africa is winning friends, while also rapidly enabling China to project strategic power in the region. The initiative is not without its critics, of course, including those who question its morality, those who question its economic viability, and those who question (or rather fret over) its strategic effect.

Bean counting: For an example of the impact the mere threat of a trade war is having, one can look to the price of soybean futures, which lost approximately 10% of their value at one point, dropping from $10.40 a bushel to $9.90 a bushel, given the fear of the bottom dropping out of the demand for U.S. soybeans. Separately, the price of steel has begun to rise in anticipation of tariffs on the Chinese imports.

The empire strikes back again: In addition to its plan to impose tariffs on U.S. soybeans, China recently imposed a 178% anti-dumping tariff on U.S. sorghum. Similar to the tariffs on soybeans, this move will also cut deep in Trump country, as the top producers of sorghum are Kansas, Texas, Colorado, Oklahoma, Nebraska and South Dakota.

Can you hear me now? I said “Sanctions.” The US and UK, again apparently in concert, moved against Chinese telecommunications equipment giant ZTE.  Founded in 1985 as an offshoot of the Chinese aerospace ministry, ZTE previously pleaded guilty to illegally trading with North Korea and Iran, including helping to smuggle banned U.S. equipment into both countries. ZTE previously paid a $900 million settlement and agreed to adopt a compliance program. The US imposed sanctions on ZTE, cutting it off from doing business with U.S. companies anywhere in the world, for violating that settlement agreement. The UK move comes via a forcefully worded letter from the National Cyber Security Centre discouraging UK telecom companies from utilizing ZTE equipment, citing its Chinese government ownership as a national security concern.

Plenty of router buyers in the sea: Perhaps sensing the headwinds, Chinese telecom equipment giant Huawei (and theoretical competitor of ZTE) announced that it was moving on from trying to enter the U.S. market. Huawei has for years sought a foothold into the U.S., but has had acquisitions blocked by CFIUS, has been cut out of network buildouts, and has lost a handset deal with AT&T. Even Best Buy cut off the company from selling devices in its stores.

They don’t make air raid sirens like they used to: The US and UK issued a joint warning that Russian state-sponsored actors are deliberately targeting critical western infrastructure with a series of cyber intrusions—including against individual/private internet users. According to the warning, Russia is trying to seize control of connectivity, including routers, firewalls and network intrusion detection systems, with a view to espionage, intellectual property theft or pre-positioning for offensive action. Said the US Homeland Security department (JTA here; British version here).

Whales in the lobby: Anyone doubting the security concerns relating to edge-of-network equipment such as handsets, laptops, etc., should consider this anecdote, originally relayed by Darktrace. Hackers were able to penetrate a casino’s network by going through a smart thermometer attached to a fish tank in the casino lobby. From there, they gained access to the casino’s “high roller” list and exfiltrated the information from the casino’s network. As the “Internet of Things” expands to include hundreds of small devices, the surface area of attack for hackers is growing significantly.


CFIUS Reform:

Who opposes the opposition? Bloomberg reports that numerous U.S. tech companies are engaged in extensive lobbying to eliminate the provision in the CFIUS reform bill that would require joint ventures with foreign companies to undergo a CFIUS review. House Republicans cite concerns that broad-based rules will be overly restrictive. Removing the joint venture provision would gut a key component of the CFIUS reform effort.

All is not quiet on the Eastern front: Chinese direct investment in the US plummeted from $46.5 billion in 2016 to $29.7 billion in 2017. Chinese companies cite a lack of transparency and a non-level playing field at CFIUS as primary concerns about investing in America.

Sometimes say never: This article in Economics 21 makes the quite reasonable point that certain sectors that may not consider themselves central to U.S. national security (such as, the article says, semiconductors—although that’s a questionable premise) deserve notice that they are subject to CFIUS oversight. Having worked on these matters for long enough to see how the perspective has broadened from defense- and telecommunications-oriented companies to include semiconductors, emerging technologies, financial institutions and companies with access to consumer information, I can assure readers that the nature of concerns can shift so rapidly that CFIUS would never voluntarily provide guidance on “covered” sectors, thereby granting a pass on others.

And finally, an important piece of miscellaneous news: DOD is considering setting up a Joint Office to coordinate its activity in the artificial intelligence space. You wonder who–or what–came up with that idea. Meanwhile, China has decreed that it shall dominate the world in AI by 2030—and the President of China was spotted in possession of a book on the topic by one of the industry’s leading experts. I’ve read it–it’s difficult enough in your native tongue.

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