While some say Chinese private equity investors may be discouraged from investing in US assets due to perceived anti-Chinese sentiment, lawyers argue their worries are overblown.
Although Chinese PE firms tend to focus on the potential financial return of an acquisition – whereas state-owned enterprises have strategic ambitions – some may have principals with family connections to politicians and are likely to face scrutiny as a result, says Carl Valenstein, Washington, DC-based partner at law firm Bingham.
Examples would include Jiang Zhicheng, grandson of former president Jiang Zemin, who was responsible for setting up Boyu Investment Advisory, while Wen Yunsong, son of ex-president Wen Jiabao, co-founded New Horizon Capital.
The Committee on Foreign Investment in the United States (Cfius) – a grouping of government agencies including the US Treasury Department and the Department of Homeland Security – is responsible for vetting foreign investments, to determine their potential effect on national security.
Cfius will not necessarily automatically reject deals due to ‘princeling’ connections, notes Harry Clark, Washington, DC-based partner at law firm Orrick. What is more important if the principal – well connected or not – has been involved in the theft or illegal transfer of technology.
“I know how the Chinese audience look at the results [such as in the Ralls deal] and view them as discriminatory,” says Valenstein. “But the government’s position is that it is looking at this objectively and thinks there are issues that need to be addressed.”
The case Valenstein referenced involved Chinese firm Ralls investing in a wind farm located near a US military installation. Cfius subsequently ordered the transaction to be unwound and Ralls took the unprecedented step of suing the US government and lost.
Another controversial case was that of Shenzhen-based telecoms provider Huawei’s 2011 purchase of US server technology firm 3Leaf. An investigation following the acquisition eventually led to the unwinding of Huawei’s interest due to the founder’s previous background as a People’s Liberation Army soldier.
Of course, there are deals that have gone through, such as the proposed purchase of US pork producer Smithfield by Chinese counterpart Shuanghai. Late last Friday the acquisition received Cfius clearance, although it remains subject to Smithfield shareholder approval, which goes to vote on September 24.
Admittedly, with the Chinese government recently accused by the US of cyber-hacking, Chinese buyers will likely face greater scrutiny, especially over sensitive industries such as technology or businesses close to military bases.
But recent controversies should not be overshadowed by negative press, argue the lawyers.
Clark says the vast bulk of transaction notices filed by Chinese strategic buyers and PE firms to Cfius have been cleared by the committee. “This has been the case since 2009 – and since Cfius began scrutinising foreign investment transactions in 1989,” he notes.
Chinese conglomerate Wanda acquired US-based cinema chain AMC Theatres last year, while in 2005 Chinese computer maker Lenovo was cleared to acquire IBM, despite information technology being seen as a sensitive industry.
While the outcomes of transactions between Chinese buyers and US businesses have so far been mixed, Clark and Valenstein dismiss claims that Cfius is inherently discriminatory against Chinese investment.
“The government does start with an open investment view and views each transaction separately, but it doesn’t ignore the information it gathers where it has to assess where the risk is,” says Valenstein.
“But the process is not discriminatory against Chinese investors, and many transactions not involving critical infrastructure have been approved.”
Says Clark: “The outcomes of most Cfius examinations of planned acquisitions, including acquisitions by Chinese interests, are driven by the facts of the transactions and not politics.”