From fretting takeovers to vetting CFIUS: finding a balance in U.S. policy regarding foreign acquisitions of domestic assets.

• Author: Sud, Gaurav
• Position: Committee on Foreign Investments in the United States

ABSTRACT

Merger law in the United States has historically relied on a system of private ordering with as little intervention from the federal government as possible. This scheme lies in stark contrast to the merger law of many other developed nations and, as such, has become a trademark of U.S. corporate law. Recent events, however, have brought into question the system's desirability in cross-border transactions where foreign entities are investing in U.S. assets. Proponents of reform argue that the federal government should become more involved in the approval process for these transactions given increased concerns of national security, while opponents argue that welcoming foreign investment is a hallmark of U.S. foreign policy not to be changed. This Note suggests a reform addressing both of these concerns in the hope that, when the next such transaction is called into question by U.S. politicians, the concerned parties will have a well-established legal doctrine to guide them.

TABLE OF CONTENTS I. INTRODUCTION II. COMPARATIVE LOOK AT THE STATUTORY FRAMEWORK FOR MERGERS AND ACQUISITIONS TRANSACTIONS IN THE UNITED STATES AND ABROAD A. Statutory Framework of Delaware General Corporate Law Concerning Mergers B. Statutory Framework of Foreign Law Concerning Mergers III. CFIUS EXPANSION AND IMPLICATIONS FOR DIRECTORS AND SHAREHOLDERS OF U.S. CORPORATIONS A. What is CFIUS? A Brief History and Examination of the Mechanics Behind the CFIUS Review Process B. The Recent Movement for Expansion of the Scope of CFIUS Power C. The Implications of the Seemingly Imminent Expansion of CFIUS for Directors and Shareholders IV. A PROPOSED REFORM TO U.S. MERGER LAW IN THE CONTEXT OF CROSS-BORDER TRANSACTIONS A. Various Economic, Political, and Social Goals Should Not Be Compromised B. Revising CFIUS C. Revamping the CFIUS Process D. Proposed Change to Delaware Merger Statute V. CONCLUSION I. INTRODUCTION

On April 4, 2005, California-based oil and natural gas powerhouse Chevron Corporation (Chevron) announced its intention to acquire another California-based industry leader, Unocal Corporation (Unocal). (1) The deal obtained antitrust approval from the U.S. Federal Trade Commission, and negotiations were proceeding according to schedule until June 23, 2005, when China National Offshore Oil Corp. (CNOOC) announced an unsolicited $18.5 billion bid for Unocal, topping Chevron's bid by $2 billion. (2) At the time of the bid, China was experiencing an increased need for a secure energy supply as a result of its growing economy. (3) Moreover, as a result of China's trade surplus with the United States, foreign investment seemed to make good economic sense as a way for the Chinese to satiate this heightened need for energy supplies. (4)

Within hours of the announcement of the bid, however, concerned rumblings could be heard in Congress regarding national security issues arising from the possibility of a foreign company taking control of a U.S. company in the already tight energy market. (5) This apprehension was exacerbated by the fact that the CNOOC Ltd. entity was a subsidiary of a large, state-owned Chinese petroleum company, thereby adding fuel to the political fire. (6) The opposition in Congress took the form of several bills and resolutions that were introduced over the course of the summer. (7) The first such Congressional missive came in the form of a House Resolution, drafted by Representative Richard Pombo of California, voicing the concerns that had been discussed in Congress and calling for President Bush to conduct a thorough review of the proposed acquisition--if indeed Unocal and CNOOC were to enter into an agreement. (8) On the same day, June 30, 2005, the House also passed an amendment to an appropriations bill, which prohibited the use of Treasury funds for the purpose of gaining approval for the proposed transaction. (9)

In an effort to make assurances to stockholders and to quell the minor political uproar that followed CNOOC's bid, the directors of the Chinese company subsequently volunteered to undergo review by the Committee on Foreign Investments in the United States (CFIUS). CFIUS is a multi-agency panel comprised of twelve members, including representatives from the Department of Homeland Security and the Commerce Department, which assesses a deal's viability in terms of national security before making a recommendation to the President. (10) CNOOC's June 27, 2005 letter to the U.S. Congress aimed to "stress the key commitments that are an integral part" of the "friendly and open offer for Unocal." (11) After establishing CNOOC's willingness to participate in a CFIUS review, the letter went on to assure Congress that "substantially all of the oil and gas produced by Unocal in the U.S. will continue to be sold in the U.S. should a merger occur" and reiterated CNOOC's commitment to "retain[ing] the jobs of substantially all of Unocal's employees, including those in the U.S." (12) Because the foundation of political opposition to mergers is generally the risk of job loss, this move was aimed directly at alleviating the fears pervading the U.S. political scene. (13)

In the meantime, Chevron sweetened its offer to $17 billion on July 20, 2005. (14) Political pressure and regulatory risk continued to mount regarding CNOOC's offer, despite the company's assurances in the June 27 letter to Congress that indicated CNOOC's readiness to undergo CFIUS review. (15) At this juncture, CNOOC chief executive Fu Chengyu began to publicly consider a pledge to sell the entirety of Unocal's U.S. assets to assuage the political concern. (16) This proposed restructuring of the transaction would appear to please both sides--CNOOC was primarily interested in Unocal's "extensive Asian assets," and Congressional concern centered on the control of Unocal's U.S. assets. (17)

Days later, however, the CNOOC board determined that the regulatory risk surrounding the proposed transaction had reached insurmountable levels, and citing "unprecedented political oppression," the CNOOC board withdrew its offer for Unocal. (18) CNOOC's August 2, 2005 press release went on to assert that the events of the summer were "regrettable and unjustified" and had "created a level of uncertainty that presents an unacceptable risk" to CNOOC's ability to secure the transaction. (19) Further, the CNOOC board acknowledged its efforts (volunteering to undergo CFIUS review, pondering the immediate sale of all of Unocal's U.S. assets, etc.) to make the deal work in the face of adversity: "CNOOC has given active consideration to further improving the terms of its offer, and would have done so but for the political environment in the U.S." (20) Perhaps most significantly, CNOOC felt that it was no longer in the "fundamental best interests" of its shareholders to continue to pursue the bid. (21)

On August 10, 2005, the Unocal shareholders voted to accept Chevron's bid, and the transaction has since proceeded relatively uneventfully. (22) In the aftermath, the "losers" appear to be Unocal shareholders, who perhaps lost the opportunity for a more lucrative transaction, and CNOOC, which lost the opportunity to obtain valuable assets that it was financially capable of procuring. The "winner" appears to have been Chevron, which, although it had to sweeten its original offer slightly in response to CNOOC's offer, nonetheless came away from the acquisition without having to match or exceed the CNOOC offer. Since these events unfolded in the summer of 2005, CNOOC itself has shown signs that it has recovered from any ill effects the failed transaction may have caused. In fact, on January 10, 2006, CNOOC announced a $2.27 billion purchase of a 45% stake in a Nigerian offshore oil and gas field, the company's largest acquisition to date. (23) Further, this is the company's first acquisition outside of Asia, indicating its unyielding desire to expand, regardless of whether or not U.S. merger law allows it to do so on U.S. soil. (24) This relentless movement to expand abroad has been termed by the Chinese as their "go out strategy," and as CNOOC's determination to grow abroad demonstrates, this policy is unquestionably established and quickly becoming a reality of Chinese diplomacy. (25)

Though this scenario--a foreign company seeking to gain assets in a U.S. entity--is hardly a new one, the failed Unocal/CNOOC transaction is eyebrow-raising for a variety of reasons. First, the stakes of the transaction were certainly high, with Unocal finally being sold to Chevron for over $17 billion. (26) Moreover, the fact that the transaction was in an increasingly crucial sector of the market is undoubtedly noteworthy. The impact of this failed transaction on U.S-Sino relations is yet to be seen, but as China's economic prowess continues to grow, it is clear that diplomacy in this regard has benefits. (27) In fact, there appear to be many players potentially interested in U.S. energy properties, as both state-owned and privately owned companies in Russia, France, Venezuela, and Saudi Arabia have all been purchasers of U.S. energy interests in recent years. (28) Also, China-based Lenovo Group Ltd. acquired IBM's PC division in early 2005, and China's largest home-appliance maker, Haier Group Co., was in the midst of a bidding war for U.S.-based Maytag Corp. until it dropped out during the summer of 2005. (29) Even more recently, Congressman Ralph Hall, a Republican from New York, expressed concern in Congress over the proposed sale of U.S.-based Westinghouse Electric Company, whose potential buyers included a Japanese company. (30) Though the level of Congressional opposition thus far has paled in comparison to that incited by the Unocal/CNOOC proposed transaction, the nuclear energy sector raises many of the same national security concerns that would result in calls for a revamping of the merger process in the United States. (31)

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