On Monday evening, President Trump swiftly shut down Broadcom/Avago’s attempted hostile takeover of Qualcomm, thus protecting America’s national security interests in 5G and related technologies. The Committee on Foreign Investment in the United States (“CFIUS”) supported President Trump, as did a bi-partisan group of legislators.
President Trump’s decision is not subject to judicial review, although Ralls v. Comm. on Foreign Inv. In The U.S., 758 F.3d 296 (2014) permits judicial review of CFIUS’s administrative determination process. CFIUS itself is not authorized to block deals; it makes recommendations to the President, who alone has the authority to prohibit transactions due to national security concerns. He also has the authority to approve a transaction against CFIUS’s recommendation.
The president is not limited to only approving or disapproving a transaction. He may also modify and/or place conditions on a transaction after CFIUS review. For example, in 2006, on CFIUS’s recommendation, President George W. Bush approved French-based Alcatel S.A.’s acquisition of Lucent Technologies, Inc. based on two conditions: (1) Alcatel-Lucent agreed to a Special Security Arrangement (“SSA”) which restricted Alcatel’s access to the sensitive work of Bell Labs, Lucent’s research division, and to the U.S. communications infrastructure; and (2) CFIUS could reopen review of the acquisition whenever CFIUS believes that Alcatel-Lucent “materially fails to comply” with the SSA.
Broadcom/Avago is a Singapore-domiciled conglomerate. It had been pursuing Qualcomm since last fall, and was on the verge of forcing its slate of six board directors onto Qualcomm’s 11-member board; they would have voted in favor of a hostile takeover. Reportedly, Broadcom/Avago had already paid its proposed directors $100,000 each. Qualcomm is a U.S.-domiciled company, and is widely considered America’s premiere company in 5G and related technologies, some of which soon will be in automobiles and connected devices.
CFIUS is an interagency committee which has the authority to review mergers, acquisitions, or takeovers “by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States,” per 50 U.S.C. § 4565(a)(3). (“Person” in this context includes entities. In legal jargon, a human is a “natural person.”) The review is not limited to a transaction’s short-term effects; CFIUS may consider long-term potentialities. President Ford established CFIUS in May 1975. The Secretary of the Treasury chairs the committee. Voting members include the U.S. Attorney General, the Secretaries of Commerce, Defense, Energy, Homeland Security, State, the U.S. Trade Representative, and the head of the White House Office of Science & Technology. The Director of National Intelligence and the Secretary of Labor are ex-officio members. The President may grant authority to add other members as observers and/or participants on a case-by-base basis. Foreign acquisitions, especially hostile ones, of sensitive technologies are more likely to face CFIUS scrutiny, particularly in cases like this one where Qualcomm does sensitive work for the U.S. government.
Last week, CFIUS directed Qualcomm to delay the shareholder vote from March 6, 2018 to April 5, 2018. While CFIUS skipped its preliminary assessment period, it expected to take 30 days to review and analyze the proposed hostile takeover. In a situation like this, deal participants normally step back, provide CFIUS with any and all requested information, and let CFIUS do whatever it needs to do.
Broadcom/Avago, however, unwisely decided to artificially accelerate the process, particularly with respect to hastening its domicile change from Singapore to the United States, and took legally significant steps in Singapore. Additionally, on March 9th it sent an open letter to each Member of Congress, claiming, among other things, that it was “an American company in all respects but its legal domicile.” It is not clear why Broadcom/Avago was so focused on domicile change that it violated CFIUS’s interim order. First, a domicile change does not necessarily remove CFIUS jurisdiction from an already-existing review. Second, a simple domicile change would not have erased Broadcom/Avago’s extensive and influential foreign financial and technology ties, nor its ability to determine Qualcomm’s 5G competitiveness (or lack of it) if the hostile takeover had succeeded. Third, a domicile change should not and cannot be the primary analysis factor in a CFIUS review. For example, what if China North Industries Corporation (NORINCO), which is one of China’s main defense manufacturers, decided to domicile in the U.S.? Would that mean that it could make a hostile takeover bid for Raytheon without CFIUS or other national security scrutiny?
As a result, on Sunday, March 11, CFIUS notified Qualcomm’s and Broadcom/Avago’s outside counsel that Broadcom/Avago violated the interim order when it repeatedly “took action toward redomiciliation in the United States without providing five business days’ notice to CFIUS as required.” The next morning, Broadcom/Avago CEO Mr. Hock Eng Tan (sometimes referred to as Tan Hock Eng) apparently made things worse when he met with officials at the Pentagon to try to persuade them to approve the deal.
Two aspects of Broadcom/Avago’s hostile takeover attempt have not been well-covered. First is the involvement of Silver Lake Partners, Ltd., a private equity company based in Menlo Park’s fabled Sand Hill Road. Silver Lake has been key to Avago’s gobbling up various companies, including Broadcom (formerly a U.S. company, based in Irvine, CA), and it is also key to Broadcom/Avago’s hostile takeover attempt of Qualcomm. More specifically, managing partner and managing director Ken Hao has been guiding Broadcom/Avago and its CEO from the beginning. Silver Lake Partners often works with billions of dollars from China in its deals. For example, Hao established Silver Lake’s China offices and managed the company’s investments in the Alibaba Group and other related entities. Second is the involvement of activist investor group JANA Partners, LLC. On March 9th, Qualcomm installed Jeff Henderson as chairman of the board, replacing Paul Jacobs, son of company co-founder Irwin Jacobs. Henderson joined Qualcomm’s board in January 2016 pursuant to an agreement between Qualcomm and JANA, which has been vocal about its desire to see Qualcomm split its semiconductor and intellectual property licensing businesses, something that Broadcom/Avago certainly considered as a post-takeover option.
While CFIUS would have been concerned about Broadcom/Avago’s foreign financial ties, it also would have been concerned about Broadcom/Avago’s potential sale or spin-off of Qualcomm’s intellectual property and/or 5G businesses. Broadcom/Avago has a history of using a combination of enormous debt and foreign-related funding to swallow large entities, plus selling off their parts post-acquisition (something which Julia Roberts’ character in Pretty Woman compares to “stealing cars and selling ‘em for parts”). JANA’s support of Jeff Henderson lends credence to the possibility of a Qualcomm breakup if Broadcom/Avago controlled Qualcomm and its intellectual property. Even without a parts sale, Broadcom/Avago, as per its aggressive cost-cutting reputation, could have drastically cut Qualcomm’s significant investments in R&D and thus weakened U.S. technological leadership, leaving foreign competitors such as Nokia or Huawei to dominate the 5G and related technologies space. That is why CFIUS stated that “a shift to Chinese dominance in 5G would have substantial negative national security consequences for the United States.”
President Trump’s action is consistent with his blocking Canyon Bridge Capital Partners, LLC from acquiring Lattice Semiconductor Corporation, a U.S. chipmaker, in September 2017. Lattice makes programmable logic chips used in communication, computing, industrial, and military applications. Canyon Bridge is a private equity firm headquartered in California with operations in Beijing; a Chinese state-owned asset manager backs Canyon Bridge. President Trump and CFIUS determined that the transaction presented national security concerns which could not be sufficiently mitigated.
Foreign state-owned entities use their overseas commercial enterprises to advance their respective governments’ political and strategic agendas. This is especially true in certain sectors, such as telecommunications, semiconductor chips, and 5G, where foreign control of certain U.S. assets could support activities which are harmful to U.S. national security. Other countries such as Australia and India already forbid their Defense Ministry employees from using Chinese messaging and social media apps such as WeChat and Chinese hardware such as Huawei phones. Thus, the U.S. must continue to vigilantly protect its national security interests.