Trump Blocks Qualcomm Acquisition to Preserve U.S. Dominance in 5G and Important Supply Chains (Part 2)
Last Monday, as
reported on by V&E, President Trump put an abrupt halt to Singaporean chipmaker
Broadcom Ltd.’s efforts to acquire U.S.-based Qualcomm Inc., when he issued an executive
order blocking the acquisition for national security reasons. The order
followed an investigation into the proposed transaction by the U.S. Committee
on Foreign Investment in the United States (“CFIUS” or the “Committee”) which
found that the acquisition threatened U.S. leadership in the 5G
standards-setting process and could potentially disrupt important Qualcomm
product supply chains to U.S. military and government security agencies. The
President’s order appears to be another sign of how the U.S. increasingly views
a strong domestic technology sector as an integral part of its overall national
security strategy.
Beyond national security, the saga reveals other
important implications for companies that deal with CFIUS. Both Broadcom and
Qualcomm recognized that CFIUS’s review of the transaction would have
significant ramifications on the deal, and each company attempted to influence
the Committee’s review in a way that would give it an advantage. How they did
so, and how CFIUS ultimately reacted to those attempts, provide important
lessons for companies that find themselves in a similar situation.
Actions To Avoid CFIUS Jurisdiction During A Review Are Not Well Received
CFIUS reviews foreign acquisitions of U.S.
businesses. Days before Broadcom made its first bid to acquire Qualcomm, its
CEO announced
at the White House that it planned to redomicile in the U.S. The company
cited Republican tax efforts as the impetus. Over the past few years, we know a
number of companies have moved their headquarters outside of the U.S. by
allowing a foreign company (usually a smaller company) to acquire the U.S.
company. These were called inversions. The “inversion transaction” resulted in
a foreign acquisition of a U.S. business and many were subject to review by
CFIUS. But in this case, Broadcom was going to move its headquarters to
the U.S. There are many that have speculated the goal of this effort was not to
obtain favorable tax treatment but to avoid CFIUS review. If the strategy was
to avoid CFIUS review, it fell short of the mark.
Initially, Broadcom anticipated it would
redomicile sometime in the spring of 2018, but sought to move up the date around
the time CFIUS became involved. Before Broadcom could do so, CFIUS issued an interim
order on March 4, 2018, which prevented Broadcom from taking any action
toward redomiciling in the U.S. without providing 5 business days’ notice. The
order also postponed Qualcomm’s Board of Director elections by 30 days in order
to allow CFIUS to continue its investigation. Despite the order, Broadcom
continued its attempts to redomicile without providing the requisite notice. In
response, on March 11, CFIUS issued a letter
characterizing Broadcom’s actions as attempts to “shorten the time period for
CFIUS investigation” and therefore requested Broadcom to furnish it with any
written materials it considered relevant to the investigation by noon on March 12
— the next day. CFIUS indicated Broadcom would have no additional opportunity
to submit information thereafter. What is uncommon was that CFIUS took the view
that redomiciling altered the timing of CFIUS’s review, where we would have
expected such a move to obviate CFIUS’s ability to conduct the review.
Hostile Takeovers and CFIUS
In a typical merger situation, parties agree to
jointly submit the transaction to CFIUS review. Here, Qualcomm made a
unilateral filing, not a joint filing, and CFIUS ultimately initiated an
investigation. Some have suspected that Qualcomm made that filing to ward off
Broadcom, perhaps using CFIUS as a weapon. But that weapon can backfire. The
Boards of public companies must act in the shareholders’ interest, and
submitting a transaction to CFIUS review and identifying a national security
risk may effectively fire all of one’s ammunition prematurely. That is, once
cast as a national security concern, it may be difficult to reverse course.
CFIUS Continues to Issue Interim Orders During its Review
Importantly, while performing these
investigations, CFIUS has broad authority to “take any necessary actions in
connection with the transaction to protect the national security of the United
States.” 50 U.S.C. § 4565(b)(2)(A) (2012). Furthermore, it can “enforce any
agreement or condition with any party to the covered transaction in order to mitigate
any threat to the national security of the United States that arises as a
result of the covered transaction.” 50 U.S.C. § 4565(l)(1)(A) (2012). CFIUS
cited these provisions in justifying its interim order in this case, and it
seems likely that the Committee will continue to exercise its broad authority
to issue such orders when its deems necessary.
* * *
In sum, Broadcom’s thwarted attempt to acquire
Qualcomm teaches several important lessons about the process and substance of
CFIUS review. This is a reminder for companies intent on engaging in
transactions subject to CFIUS jurisdiction to pay close attention to the
Committee, its priorities, and its past practices. Likewise, companies may wish
to consider the example of Qualcomm’s effort to “weaponize” CFIUS review as a
defense to a hostile takeover. Working with experienced counsel, companies must
seek to assess the potential benefits and pitfalls of the CFIUS regime.