A123 deal hangs on secretive federal panel
The nearly $257 million purchase of Waltham battery maker A123 Systems Inc. by a Chinese conglomerate hangs on approval by an obscure, secretive federal panel that scrutinizes foreign acquisitions of American businesses to protect national security.
The panel, known as the Committee on Foreign Investment in the United States, or CFIUS, has approved nearly all the deals it has considered over the past several years, according to committee annual reports. But more recently it has intensified its scrutiny of foreign entities — particularly those from China — seeking to obtain advanced US technologies, presenting a hurdle for Wanxiang America Corp. as it tries to acquire nearly all the assets of bankrupt A123.
The committee has more than quintupled the number of cases that it puts through an extended review, to 40 in 2011 from just seven in 2006. Last month, it reported to Congress for the first time that US intelligence officials believe “there is likely a coordinated strategy” by foreign governments or companies to acquire US businesses to gain access to sensitive technologies.
And in September, President Obama, acting on the recommendation of the panel, became the first president in 22 years to block a foreign investment for national security reasons. He ordered a Chinese company, Ralls Corp., to abandon its interest in four wind farm projects near a Navy base that hosts training missions for drone aircraft.
“There is perhaps more scrutiny given to Chinese companies lately, and that goes to the competitive nature between the US and China,” said Darren Braham, a lawyer at Prince Lobel Tye LLP in Boston, who has worked on CFIUS cases in the past.
Wanxiang’s efforts to buy A123 have attracted particular attention because the battery maker’s technology was developed with the support of tens of millions of US taxpayer dollars. The deal is going through an extended 45-day review, following an initial 30-day period.
Some Republican lawmakers and former US military leaders have urged CFIUS to reject the sale, even though A123’s defense business was sold to an Illinois energy storage company. “Granting a Chinese company access to even the commercial segment of A123’s business will ultimately give it access to Department of Defense financed military technology,” the Strategic Materials Advisory Council, a coalition of former military leaders, said in a recent statement.
Wanxiang, which last year received approval from the committee for a $420 million investment in a Cambridge alternative energy firm, said it expects to win approval again. A decision is expected at the end of the month.
“We have other deals that we got approved very quickly, no issue at all,” said Pin Ni, president at Wanxiang America. “It’s just a process you have to go through.”
CFIUS was created in 1975 under an executive order by President Gerald Ford. Today, the panel has nine standing members, including the secretary of the Treasury, its chair, and the secretaries of Commerce and Defense.
In addition, a number of other federal agencies may participate in the committee’s decisions on whether a business deal threatens national security, which is broadly defined.
The panel analyzed 673 deals from 2006 to 2011, according to public versions of its classified annual reports to Congress. The committee sent only two cases to the president in that time period.
The committee primarily operates in secret, often frustrating foreign companies, which themselves must disclose confidential business information.
If CFIUS rejects the deal, it won’t necessarily disclose why. If it requires the deal to be modified to win approval, it may not say how.
“It’s not uncommon for them to say, ‘We’ve identified national security concerns that we’d like you to mitigate, but we can’t tell you what they are,’ ” said Carl Valenstein, a partner with Bingham McCutchen LLP who advises clients on CFIUS reviews. “You’re left guessing.”
By law, CFIUS must make its decisions based solely on national security threats, not politics or economic policies. But recent concerns from investors that deals involving Chinese companies were receiving more scrutiny prompted Assistant Secretary of the Treasury Marisa Lago to reassure executives in China during a trip to Beijing in November.
“President Obama and the US Treasury Department place great importance on the US-China economic relationship, and recognize that investment is an increasingly important part of that relationship,” Lago said in prepared remarks.
Working in Wanxiang’s favor is the company’s large presence in the United States, where it has more than 3,000 employees, and its past success in gaining CFIUS approval, said Chip Roh, who handles international trade and investment cases at Weil, Gotshal & Manges LLP in Washington.
He noted the approval last year of Wanxiang’s investment in GreatPoint Energy, the Cambridge company developing technology to convert coal to natural gas. “The fact that they’ve already passed once means that CFIUS doesn’t consider Wanxiang some arm of the Chinese intelligence service,” Roh said.