United States: Broadcom-Qualcomm Blocked Deal Shows Expanding CFIUS Reach In High-Tech Sector

March 19, 2018 – President Trump's March 12 decision to block the proposed takeover of California-based semiconductor manufacturer Qualcomm by Singapore-based Broadcom Limited1 demonstrates the expanding CFIUS reach in the high-tech sector. If this $117 billion takeover had gone through, it would have been the largest technology merger in history. The President determined that there was "credible evidence" that Broadcom, after gaining control of Qualcomm, might "take action that threatens to impair the national security of the United States."2 The Executive Order prohibited not only the proposed acquisition but also any "substantially equivalent" transaction and disqualified all individuals proposed by Broadcom from standing for Qualcomm's board election.3

The March 12 decision and similar recent Presidential decisions demonstrate that the U.S. government is increasingly aggressive in deciding the fate of transactions involving foreign parties that relate to emerging technologies and that have some direct, or even indirect, nexus to China. The Broadcom-Qualcomm matter also shows that the Administration is focusing on economic and competition factors as a basis for raising national security concerns in such transactions. For future deals, U.S. companies in the tech sector can use the lessons from the thwarted Broadcom-Qualcomm deal to fend off hostile takeovers by foreign firms.

CFIUS Review of Broadcom's Proposed Takeover

President Trump's decision followed a review by the Committee on Foreign Investment in the United States ("CFIUS"). CFIUS is an interagency group chaired by the Secretary of the Treasury, which is authorized to review transactions that could result in control of a U.S. business by a foreign person. CFIUS may require mitigation measures or recommend that the President block a transaction that threatens to impair the national security of the United States.4

Qualcomm, in what appears to be an effort to fend off a hostile takeover by Broadcom, filed a unilateral notice to CFIUS in January. In early March, two days before the originally scheduled date of Qualcomm's annual stockholders meeting, CFIUS issued an interim order that Qualcomm postpone the meeting by 30 days, delaying a board election that would have given Broadcom majority control over Qualcomm's board while CFIUS continued its investigation.5 According to a publicly released letter from Treasury to lawyers for Qualcomm and Broadcom,6 CFIUS's interim measures were necessary to mitigate the potential national security risks "associated with Broadcom's relationships with third party foreign entities and the national security effects of Broadcom's business intentions with respect to Qualcomm." In the letter, which was issued a day after CFIUS's interim order, the Treasury Department expressed concern that an acquisition by Singapore's Broadcom could reduce Qualcomm's long-term investment in high-speed 5G wireless technology and weaken Qualcomm's technological competitiveness — which "would leave an opening for China" to take the lead in developing the next-generation technology.7 The letter specifically cited Huawei as one of the Chinese companies vying for dominance in 5G. The Treasury Department also posited that the proposed acquisition could limit or eliminate an important U.S. supplier of telecommunications equipment to U.S. federal defense agencies and hamper its partnership with the U.S. government addressing cybersecurity.

After the letter was released, Broadcom made a public statement8 and sent a letter to Congress,9 expressing a commitment to make the United States a global leader in 5G, and pledging $1.5 billion toward training and educating the next generation of wireless technology engineers in the United States. Broadcom also emphasized that it is "in every important respect an American company" – in terms of its origin, the makeup of its executive team, board of directors, and shareholders, and its substantial operations in the United States – also pointing out that the company was in the final stages of moving its legal domicile back to the United States. The headquarters shift had played a key role in garnering the CFIUS clearance for Broadcom's acquisition of California-based Brocade Communications last November. This time, however, neither the imminent headquarters shift nor Broadcom's plan to employ more than 25,000 workers in the United States was enough to persuade President Trump to allow the deal to proceed.

Stricter Scrutiny for High-Tech Companies with Any Potential Nexus to China

President Trump's March 12 decision was a departure from the CFIUS trend, in that the prohibited transaction did not involve a Chinese party. Presidential blocking of transactions is rare. This is only the fifth time a President has blocked a transaction under the CFIUS statute, and the past four all involved a Chinese acquirer. The fact that CFIUS was apparently concerned about the "risks associated with Broadcom's relationship with third party foreign entities" – speculated to be referring to Huawei – indicates that the current administration is expanding CFIUS's focus to transactions with an indirect nexus to China or the Chinese companies. As the Treasury Department's letter indicates, even the possibility that a foreign buyer could later make a business decision that might have the effect of boosting China's competitive position vis-à-vis a critical technology was a concern.

Transaction parties should expect heightened sensitivity when it comes to advanced technology, in particular relating to the defense, semiconductor, digital communications, and network security industries. Treasury Secretary Steven Mnuchin said, regarding the President's recent decision to block the acquisition of Lattice Semiconductor Corp. by a Chinese-funded private equity fund, that national security risks are raised by "the importance of semiconductor supply chain integrity to the U.S. government, and the use of Lattice products by the U.S. government."10 While CFIUS, in January, did approve Beijing-based Naura Microelectronics Equipment Co. Ltd.'s acquisition of a U.S.-based semiconductor manufacturing equipment producer, Akrion Systems LLC, that may be because the acquisition target makes equipment that processes and prepares semiconductors for use but does not manufacture semiconductors itself.

Proposed Legislation May Further Increase Scrutiny over High-Tech Transactions

A bill introduced in Congress last November – the Foreign Investment Risk Review Modernization Act of 2017 ("FIRRMA") – proposes to expand CFIUS's jurisdiction and the scope of what constitutes a national security risk. If enacted, FIRRMA would bring within the scope of CFIUS certain real estate transactions, for instance buildings close to U.S. military facilities. FIRRMA would also expand CFIUS's jurisdiction to high-tech joint ventures and minority-position investments providing access to any non-public information, which could include non-U.S. technology transfers. The legislation also would give CFIUS greater ability to prevent companies from restructuring their investments to evade review. If the bill becomes law, we can expect to see a substantial rise in CFIUS's workload and possibly an increased number of transactions hindered by CFIUS mitigation measures or blocked by the President. Moreover, the perception of heightened CFIUS scrutiny may have a general chilling effect on cross-border transactions.

Takeaway

The Broadcom-Qualcomm matter provides valuable insights for potential M&A transactions involving foreign buyers:

  • President Trump's order blocking the Broadcom-Qualcomm deal indicates that parties to transactions involving emerging technologies (especially in the semiconductor industry) should be prepared to face increasing levels of scrutiny – regardless of the nationality of the foreign investor.
  • That said, any potential nexus to China, even an indirect nexus, such as the possibility that a transaction might have the effect of expanding Chinese global market share, could trigger heightened national security concerns in CFIUS proceedings.
  • Finally, this is an unusual case, in how quickly CFIUS acted, and in the detailed information provided by the U.S. government regarding its national security concerns. That may be due to the fact that Qualcomm unilaterally notified CFIUS in what appears to be a defensive measure against a hostile takeover, whereas typically both parties cooperate to seek CFIUS approval and to keep the proceedings confidential. The possibility of a contentious CFIUS review is an important consideration for foreign buyers considering a hostile takeover.

Footnotes

1 Executive Office of the President, "Presidential Order Regarding the Proposed Takeover of Qualcomm Incorporated by Broadcom Limited" (Mar. 12, 2018), 83 Fed. Reg. 11631 (Mar. 15, 2018), available at https://www.whitehouse.gov/presidential-actions/presidential-order-regarding-proposed-takeover-qualcomm-incorporated-broadcom-limited.

2 Id.

3 Id.

4 Section 721 of the Defense Production Act of 1950, as amended by the Foreign Investment and National Security Act of 2007, codified at 50 U.S.C. App. 2170.

5 U.S. Department of the Treasury, "Statement on CFIUS Action" (Mar. 4, 2018), available at https://home.treasury.gov/news/press-releases/sm0303.

6Available at https://www.sec.gov/Archives/edgar/data/804328/000110465918015036/a18-7296_7ex99d1.htm.

7 Id.

8 Broadcom, "Broadcom Pledges to Make the U.S. the Global Leader in 5G" (Mar. 7, 2018), available at http://investors.broadcom.com/phoenix.zhtml?c=203541&p=irol-newsArticle&ID=2336707.

9 See Broadcom, "In Letter to Congress, Broadcom Pledges to Make the U.S. the Global Leader in 5G" (Mar. 9, 2018), available at http://investors.broadcom.com/phoenix.zhtml?c=203541&p=irol-newsArticle&ID=2337280.

10 Id.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions