M&A and regulatory lawyers are still talking about the “brilliant” and unprecedented use of a review by the Committee on Foreign Investment in the United States to knock out Broadcom Ltd.’s attempted hostile takeover of U.S.-based semiconductor maker Qualcomm Inc. in March. 

They’re saying it could be a trendsetter in its novel use of the CFIUS review as a takeover defense. But the president’s action also speaks to the Trump administration’s new priorities in the growing economic competition with China over technological innovation and infrastructure.

The White House blocked Broadcom’s $117 billion takeover bid by executive order on March 12, citing the interagency committee’s determination that there was “credible evidence” that the deal would “impair the national security of the United States.” 

The administration’s rejection wasn’t entirely unexpected, given the committee’s history of recommending against Chinese acquisitions of U.S. semiconductor manufacturers and military suppliers. In the last several years, at least four other deals have been blocked by a U.S. president on CFIUS’s recommendation, most involving Chinese acquirers.

Qualcomm’s unilateral move for a review, however, “is the first time I’ve heard of that happening in this kind of a context,” said Gregory Kinzelman, a mergers and acquisitions special counsel at Schulte Roth & Zabel in Washington, D.C.

The maneuver was pioneering in several respects: The takeover was shot down by executive order even before a shareholder vote to possibly seat Broadcom directors. The president intervened before the CFIUS panel, chaired by Treasury Secretary Steven Mnuchin, had formally completed its review. And, the panel and the president made explicit their reasons for opposing the deal, which runs counter to the usual “black box” CFIUS panel decision-making process. Broadcom formally withdrew its bid for Qualcomm in mid-March and announced its intention to redomicile in the United States.

Attorneys at Paul, Weiss, Rifkind, Wharton & Garrison, led by partner Scott Barshay, represented Qualcomm. A Wachtell, Lipton, Rosen & Katz team including firm co-founder Martin Lipton represented Broadcom. A Covington & Burling team led by Mark E. Plotkin and David Fagan advised Qualcomm on CFIUS matters. And an O’Melveny & Myers team led by Theodore Kassinger represented Broadcom in CFIUS matters.

Paul Weiss and Covington declined to comment for this story. Wachtell and O’Melveny did not respond to a request for comment.

In a March 5 letter to Plotkin and Kassinger, the Treasury Department, in a radical departure from past practice, announced that the deal required a full investigation of national security risks. Specifically, the letter detailed CFIUS’s concerns with Qualcomm’s leadership in developing 5G wireless broadband technology and its role in setting industry standards. It said that a heavily leveraged deal could cause Broadcom to reduce its investment in Qualcomm’s research and development, which could cede 5G leadership to China: “A shift to Chinese dominance in 5G would have substantial negative national security consequences for the United States,” it said. The letter also noted concerns about Qualcomm’s continued ability to fulfill its contracts as a trusted supplier to the U.S. Department of Defense.

“Assuming it was a strategy, it was brilliant, because it was the first of its kind,” said Reid Whitten, an international trade regulation expert who is managing partner of the London office of Sheppard, Mullin, Richter & Hampton. ”And it was bold because it came in so early. A unilateral notice, [before] a meeting because they may have voted for directors who may have voted for the acquisition. What they really did was head them off at the pass.”

Qualcomm’s Move for Review

In what apparently was the first time the committee publicly acknowledged that a CFIUS case was under its consideration, the panel ordered the national security review of the transaction on March 4 and asked Qualcomm to postpone its board meeting for 30 days.

Broadcom released a corporate statement the next day, saying: “Broadcom was informed on Sunday night that on Jan. 29, 2018, Qualcomm secretly filed a voluntary request with CFIUS to initiate an investigation, resulting in a delay of Qualcomm’s annual meeting 48 hours before it was to take place. This was a blatant, desperate act by Qualcomm to entrench its incumbent board of directors and prevent its own stockholders from voting for Broadcom’s independent director nominees.” 

Usually CFIUS applications are filed jointly and led by the buyer, not by the acquisition target, lawyers who regularly represent clients before CFIUS said.

A week later, President Donald Trump issued the superseding executive order disqualifying for election as Qualcomm directors all 15 individuals Broadcom listed as potential candidates—an unheard-of move.

International trade and national security regulation experts pointed out that, despite reports attributing the presidential order to the Trump administration’s growing trade conflicts with China, technology transfer in particular has been a key CFIUS concern. Semiconductor transactions have been under scrutiny by the panel going back at least to the late 1980s and the Exon-Florio Amendment to the Defense Production Act of 1950.

Sources familiar with the matter noted that Broadcom should therefore have expected scrutiny and could have taken the first step to file an application for CFIUS review. Moreover, Broadcom’s application for the acquisition of a switch maker, Brocade Communications Systems Inc., had just been through the review process and nearly failed. The joint application for review by Broadcom and Brocade was withdrawn and refiled in October 2017. But shortly thereafter, Broadcom’s CEO, Hock Tan, visited Trump in the White House in early November and vowed to redomicile the company in the United States, and the Brocade deal closed days before Broadcom made its unsolicited bid for Qualcomm. 

It is at the discretion of both parties whether to seek the voluntary review before or after announcing a transaction. Perhaps emboldened by the Brocade success, Broadcom did not apply for a CFIUS review before announcing its bid for Qualcomm. The CFIUS panel may have taken a dim view of that given its near-rejection of the prior Brocade deal, sources speculated. CFIUS also may have publicly disclosed its usually confidential concerns, sources also speculated, to prevent Trump from backtracking on his decision to kill the deal.

Given recent trends, more parties should consider floating a merger before the panel early, some transactional lawyers said. “It is a voluntary application, so you don’t have to make it, but more practitioners are saying that they’d rather send in a letter to the CFIUS officer at the Treasury and see what they think,” said James Rosener, a partner in the commercial department of Pepper Hamilton and head of its international practice group.

“Getting an approval is pretty insulating, because if you don’t do it, you are subject to mandatory divestment where you haven’t gotten that approval. It is a fairly draconian measure but permissible under Exon-Florio,” Rosener said.

For example, on CFIUS’s recommendation President Barack Obama required mandatory divestment in a 2012 deal by Ralls Corp., a holding company with ties to a Chinese construction firm, to buy wind farm properties located near a military installation when the company waited until after the transaction had closed before submitting it for CFIUS review. Neither Obama nor CFIUS made mention of the evidence they relied on in rejecting that deal, nor did they detail what their national security concerns were. More information came out later, when Ralls filed suit against the federal government saying it was denied due process, the first and only lawsuit against CFIUS to date. The matter was settled on appeal in 2015 before reaching the U.S. Supreme Court.

‘Poison Pill’ of the Future?

Kinzelman said that CFIUS’s explanation of its thinking in the Broadcom-Qualcomm matter is likely to be influential because “It could provide guidance in an area where there isn’t a lot of official public guidance.”

The successful play of the CFIUS card to defeat a hostile takeover also may inspire other companies to try it, joining the “poison pill” and the “white knight” as takeover defenses. It offers “another potential option for a takeover target when the potential acquirer is a foreign company.” Kinzelman said.

Rosener said the use of CFIUS to knock out a deal also signals its availability as yet another tool that can be used by U.S. officials to discourage foreign direct investment in industries or companies that the administration wants to protect. ”It is not even a thinly disguised effort,” he said. Given the broadening definition of national security to include data on individuals in the U.S., for instance, many more transactions will come under CFIUS scrutiny so clients should expect the review and plan proactively, he said. “Mitigation agreements continue to be the typical solution to allow the transaction to go forward,” he said.

Alternatively, more companies may court acquisition targets by touting their lack of need for a CFIUS review, if an expected legislative overhaul strengthens the process later this year. Whitten cited, for example, British industrial group GKN, which makes drive trains and is currently trying to defend against a hostile takeover by a turnaround firm. The company has sought a U.S.-based company to buy them instead, and “one of the things in this offer to shareholders highlights the advantage of CFIUS-risk elimination posed by a U.S. buyer,” he said.

“It is certainly a different angle to the game,” Whitten said. ”The table has been tilted and everyone has to play on this new slope,” he said.