On January 22, 2016, Philips announced that it had stopped selling 80% of Lumileds' shares to Chinese investors due to opposition from CFIUS, the US national security approval authority, and would seek transactions with other potential buyers. Such a “win-win†transaction has failed because of the US national security approval. The CEO of Philips said with disappointment that CFIUS's objection was unexpected to both parties, and no one would have thought that the US government would oppose a sale of lighting equipment. What disappoints Philips is that since the two parties did not consider the national security approval as a “blocker†in the transaction, there is no common “reverse break-up fee†in the transaction documents. Investor Sands from China. Jiangchuang Investment has no contractual obligation to pay Philips a break-up fee when the national security approval is not obtained.
Why does the US government oppose such a M&A transaction that does not seem to have any national security concerns? Is there any lawfulness in the US government's national security review? How do Chinese companies allocate government approval risks in transactions in the process of going global? This article will do an interpretation.
The deal, which was opposed by the US government, is an 80% stake in Philips' Lumileds, which is one of the strategic plans for Philips to divest its lighting assets and want to sell its remaining lighting assets separately. A closer look at Lumileds will reveal that the company is far from being as simple as the Philips CEO’s claim that "I don’t understand why the US government is preventing us from selling light bulbs to Chinese." Since CFIUS's objection is confidential and there is no specific reason for its opposition to the transaction, we can still draw some inspiration from the analysis of Lumileds' specific circumstances.
First of all, Lumileds has the world's leading lighting technology. When transferring the company's equity, many of the company's patented technologies will also be included in the hands of Chinese companies. When the US government conducts a national security review of M&A transactions, it involves The review of advanced technology M&A transactions is particularly cautious – involving advanced and sensitive technology M&A transactions that will face more difficult national security reviews;
Secondly, the general lighting products and automotive lighting equipment produced by Lumileds are widely used in the US market. Imagine that the lighting products and automobile lighting equipment in many cities in the United States are produced by a Chinese-controlled company. Will this raise national security concerns for the US government reviewing the transaction? Are these lighting devices used on military equipment?
Third, the background of the state-owned large enterprises of Nanchang Industrial Holding Group Co., Ltd. in the Chinese investor group will inevitably bring some hints of M&A transactions supported by the “Chinese governmentâ€.
From the analysis of the existing facts, such an M&A deal that the US government opposes does not seem to be as simple as a “light bulb transactionâ€. This raises a wake-up call for Chinese companies going abroad: in the context of Chinese companies’ M&A transactions have become one of the most important targets for US national security review, adopting national security approvals for US M&A transactions. It is necessary to assess the risk of national security review of transactions for a cautious and conservative attitude.
Is there any law in the US national security approval?
From the report submitted by CFIUS to Congress in 2015, we can draw some rules of the US national security review:
First, although “national security†is not defined in the relevant bills, it generally involves the US government, involves advanced technology, involves the defense industry or military, involves neighboring military bases, involves infrastructure, and Energy, research and development involving the ban on export technology in the United States, sensitive information, government contracts, foreign government control, etc. will be subject to strict national security review;
Secondly, the M&A transactions conducted by Chinese companies have become the “big players†of the US national security review. In 2011-2013 (CFIUS's recent statistics are only available in 2013), M&A transactions from China have become the most subject of review, accounting for nearly 20%. %;
Third, in the US national security review, almost half of the transactions will enter the second review period, meaning that the parties will provide more information to the US government to eliminate national security concerns;
Fourth, in the event that more transactions are unable to complete the security review within the time limit set by the national security review, the method of first withdrawing the application and resubmission is adopted to recalculate the time limit for the security review (the first phase of 30 days + the first The second phase is 45 days + the US president decides 15 days);
Fifth, in the US national security review, both parties to the transaction can obtain approval through the so-called National Security Risk Mitigation Agreement, such as the use of stripped sensitive assets, only authorized authorized personnel to access certain technologies or information, only allowed Americans handle certain products or services, prohibit acquirers from entering relevant places, and so on. Under the national security risk mitigation measures, the US government has further strengthened supervision and management after mergers and acquisitions, and it will always supervise the implementation of the National Security Risk Mitigation Agreement.
After understanding some of the rules of the US national security review, how should Chinese investors allocate government-approved risks in cross-border M&A transactions?
Government approval can be divided into several categories: the first category is anti-monopoly approval; the second category is national security approval; the third category is industry approval (such as financial industry, energy industry and other competent authorities).
The control of government approval risk in cross-border M&A transactions begins with identifying the types, institutions, and importance of government approval. In some sensitive industries, it is necessary to adopt a “conservative†attitude in identifying government approvals. For example, last year, Ziguang subscribed for 15%. Western Digital shares, although strictly not legally required to conduct a security review (not a "covered transaction"), the parties, in a prudent manner, still submit the transaction to the US government for security review – this is The attitude that should be taken when conducting mergers and acquisitions in sensitive industries; the second is to identify the government approvals for risk allocation in the transaction, the buyer can not bear too much risk of government approval, and must have risk control measures in the transaction documents, such as The degree of effort to obtain government approval obligations, the quantification of the consideration paid for approval, etc.; the third is to retain the possibility of commercial flexible exit.
Specifically, to do a good job of government approval risk control, the main points should be as follows:
First, focus on the level of effort to obtain government approval. When obtaining government approval, the degree of obligation that the buyer should adopt often becomes the focus and difficulty in the negotiation of M&A transactions between buyers and sellers. For example, whether Hell or high Water obligation should be adopted, that is, the buyer needs to complete the M&A transaction with the seller regardless of the circumstances, regardless of any unpredictable preconditions for the approval of the transaction by the government approval authority. Obligations are extremely cumbersome for the buyer of the transaction. The seller often insists that the buyer undertake such heavy obligations, and the buyer is generally only willing to undertake Commercially Reasonable Endeavors (commercially reasonable efforts, that is, commercially viable efforts) Degree) obligations. In recent large M&A transactions, it seems that the responsibility of Reasonable Best Endeavors to obtain government approval is an industry practice. When the government approval fails to be obtained, which party should bear the loss of time and money caused by the other party's failure to obtain approval is also one of the priorities of the negotiation between the buyer and the seller.
Second, try to quantify the cost of obtaining government approval. For example, national security review often requires the M&A party to provide “MitigationPlan†(National Security Risk Mitigation Plan), requiring the acquirer to divest relevant assets related to national security interests before or after the completion of the M&A transaction, at which point the buyer and the seller can agree in advance. Although it is necessary to use reasonable and best efforts to obtain government approval, it is unacceptable if the government requires the divestiture of certain key assets. For example, when obtaining anti-monopoly approval, the buyer stipulates the measurement of the divestiture assets, and the divestiture of more than a certain amount of assets can be rejected - for example, the big transactions of Halliburton and Baker Hughes over $30 billion. Both parties have agreed in advance in the transaction documents: Halliburton is obliged to divest assets valued at up to $7.5 billion in revenue based on the need for antitrust regulatory approval.
Third, when the buyer reserves unacceptable conditions in the process of government approval of the transaction (such as anti-monopoly approval, the government requires the separation of the most important assets, such as national security approval, the government requires the buyer not to act as an operator of any assets, etc.) The right to withdraw from the M&A transaction.
The failure of Philips and Chinese investors in the Lumileds equity transaction raised a wake-up call for all Chinese companies that went out: In the face of government approval, the difficulty was estimated to be sufficient, the homework was fully prepared, and the plan was done. A little more is something that should always be a concern in the M&A transaction – even a world-class company like Philips has insufficient estimates of the US national security review that the exchange faces, and thus does not follow the market practice to China in the transaction documents. The buyer asked for a “reverse break-up fee†related to government approval (for example, in Haier’s recent transaction with General Electric, Haier’s $200 million reverse break-up fee was not available for antitrust approvals. The regulations), Chinese buyers can get out of the market without paying any fees when the transaction fails to obtain approval.
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