Defending the citadel: When foreign investment rules are weaponised to defend against unwanted takeovers

Shareholders and government bodies have been 'road-testing' the FI rules – and they are finding some non-conventional uses.

A case from the USA: Qualcomm’s successful defence against Broadcom

When Broadcom, one of the largest chipmakers in the world, mounted its hostile takeover bid for US-based wireless technology company Qualcomm in November 2017, the would-be acquirer was domiciled in Singapore. This gave Qualcomm the opportunity to file for CFIUS review of Broadcom’s unwanted bid – which it promptly and unilaterally did in January 2018. Following political interventions in support of Qualcomm by two members of the US Congress, the then US President Donald Trump issued a Presidential Order in March 2018 requiring Broadcom to immediately and permanently abandon the proposed USD 117 billion takeover.

The Presidential Order, one of only seven in the history of the CFIUS regime to date, was motivated by national security concerns, including in relation to the perceived risk that a Broadcom-driven reduction in R&D spending on 5G might open the door to Chinese dominance of this technology.

Without Qualcomm’s unilateral decision to file for CFIUS review, the Presidential Order might not have taken place since, at the time of the bid, Broadcom had already announced its decision to redomicile from Singapore to the USA, a transition it completed in April 2018, just one month after the Presidential Order was issued.

Another case from the USA: Founder fails to regain control of Icon aircraft through CFIUS

In a second CFIUS case, in 2015, Chinese-backed Shanghai Pudong Science and Technology Investment Company (PDSTI) acquired a small initial stake in US based start-up Icon, a maker of amphibious planes marketed for recreational use. This shareholding was increased in 2017 and currently stands at around 47%. Both investments were invited by the then CEO and co-founder of the company. However, shortly after becoming the largest shareholder in Icon, PDSTI began installing board members and executives and laying plans to transfer Icon’s technology to China.

A group of American shareholders, including its co-founder, urged CFIUS to review PDSTI’s investment on national security grounds, noting that Icon’s technology has possible military applications (citing a previously confidential Pentagon programme which considered turning Icon's planes into unmanned aerial vehicles). While disgruntled employees, industry rivals and potential investors who are cut out of a deal sometimes approach CFIUS in an attempt to quash a transaction, active investors typically do not do so, for fear of undermining their own investment value.

CFIUS decided to scrutinise the transaction in November 2021. However, following a full review, it concluded that there were no unresolved national security concerns and cleared PDSTI’s stake in Icon in March of this year without mitigation. It is reported, however, that the FBI is also conducting a separate investigation into possible criminal violations related to the deal and the alleged technology transfer.

A case from France: Grocery stores as national security infrastructure – or a political ‘hot potato’?

Canadian retail group Alimentation Couche-Tard made a friendly takeover approach for French super and hypermarket operator Carrefour in early 2021. The move came during Carrefour’s attempt at a turnaround and, unlike the two US cases, was said to have been broadly welcomed by Carrefour’s biggest shareholders.

However, within a day, the French Finance Minister blocked the deal, ostensibly on the grounds of national ‘food sovereignty’. This was made possible by the recent addition of ‘food security’ to France’s list of strategically important sectors.

The timing of the prohibition attracted speculation suggesting that the decision was a political manoeuvre rather than a prohibition motivated by food security concerns. The intervention took place during a presidential election year and involved one of France’s largest private sector employers. The government’s rejection of the deal was welcomed by key political stakeholders, such as the General Confederation of Labour union, which had concerns about potential job cuts resulting from a possible takeover.

A case from Italy: Seed production as a strategic asset?

In 2021, China-backed Swiss group Syngenta offered c. EUR 200 million to acquire seed producer Verisem from US fund Paine Schwartz Partners. Verisem originated in Italy in the 1970s, and by 2021 had a global footprint including facilities in Europe, North America and Asia. In October 2021, the Italian government vetoed the Syngenta deal under its Golden Power rules designed to protect industries of strategic importance. The deal had already drawn the attention of - and raised criticism from - the agricultural lobby Coldiretti (which advocates for the all-Italian agricultural supply chain). This represented the first and, so far, only time the Italian government has relied on FI rules to block a transaction in the agri-food sector.

Implications and takeaways

While still relatively few overall, examples across the globe signal an emerging trend: stepped-up FI rules can and are being deployed by a range of actors – from company management through disgruntled minority shareholders to politicians – in situations where national security may only be a secondary concern.

For companies, and their existing stakeholders, the broadening of the sectors considered ‘strategic’ widens their scope to invoke ‘national security’ concerns as a way to block unwanted deals. FI control could become increasingly attractive as a ‘shield of last resource’, particularly given the possibility of relying on retroactive provisions to look back at completed transactions. However, by its very nature an 'FI defence' against an unsolicited offer or otherwise against an unwelcome shareholder certainly belongs in the 'poison pill' category of measures that, once started, cannot be taken back.

For would-be foreign investors, the lesson is a more cautionary one. FI rules must be considered early, even in non-hostile situations and in sectors that historically might not have attracted FI scrutiny. Where potential concerns are identified, they need to be carefully managed, adding to the complexity of cross-border M&A. Also, regulators will pay great attention to investment motives and strategies potentially pursued by an investor post-closing. Where such strategies may not be fully aligned with national interests (or not perceived to be aligned), investors should ensure they have a good understanding of the potential implications for them, as well as of the mitigations that may be invoked (such as certain behavioural concessions, which are still the most commonly used cure for certain types of national security or public interest concerns).

For governments, the implications are finely balanced: the expansion of FI regimes has given them increased powers to defend their national, and potentially political, interests. However, a perceived ‘instrumentalisation’ of FI rules could lead to political tensions, trade retaliation, and, ultimately, a chilling effect on investment. As a result, governments should apply due caution when deploying this new toolkit and resist the temptation of short-term political gains over long-term economic implications.