The US government has forced New Mexico telecommunications and solar power technology firm Emcore Corporation to abandon plans to sell a controlling share in its fiber optics business to China’s Tangshan Caofeidian Investment Corporation (TCIC). This is the second time in six months that a Chinese investment in the United States has been stymied on national security grounds.
On June 28, 2010, Emcore and TCIC announced that they would no longer seek approval for the deal from the Committee on Foreign Investment in the United States (CFIUS). The parties withdrew their application on June 24, 2010, in the face of national security-based objections. The withdrawal precludes formal rejection by the President.
Neither the government nor the parties have identified the concerns CFIUS expressed in its consideration of the Emcore transaction, nor have they disclosed whether the parties discussed with CFIUS any modifications that could have mitigated those concerns. In the past, CFIUS has been very sensitive to Chinese acquisition of US telecommunications technology, so that sensitivity might have played a role in the review of the Emcore transaction.
This action comes on the heels of a December 2009 transaction by a Chinese firm that similarly failed to overcome objections by CFIUS. In that earlier instance, the US government blocked a move by China-based Northwest Non Ferrous International Investment to take a controlling interest in Firstgold Corp., a Nevada mining firm that reportedly had access to tungsten and that was located near US military facilities.
Under the proposed Emcore transaction, signed in February 2010, Emcore would have sold a 60 percent interest in its fiber optics business to TCIC for $27.75 million in cash, plus an additional approximately $27 million post-closing, creating a new joint venture. In conjunction with the deal, the firms agreed that Emcore would establish a photovoltaics manufacturing and operations base in China. TCIC was to provide various financial incentives for Emcore to develop its solar power business in China.
Emcore is a leading developer and manufacturer of fiber-optic systems and components for commercial and military use, including microwave fiber-optic signal transmission and processing, satellite earth-stations, fiber-optic gyroscopes, and other applications. TCIC provides financial and other support to enterprises within the Caofeidian Industry Zone in China, promotes local economic development, and has funded numerous companies and projects in port, highway, and high technology areas.
Under the Foreign Investment and National Security Act (FINSA), the President, acting through CFIUS, can investigate proposed transactions that may result in control of a US business by a foreign person, and can suspend or block such transactions if they threaten to impair the national security. CFIUS can negotiate and enforce transaction modifications that satisfy government concerns.
In practice, if CFIUS informally advises the parties that a proposed transaction will not be approved, and satisfactory mitigation measures cannot be negotiated, the parties customarily withdraw their application, thus ending the investigation and avoiding a formal rejection of the deal. An investigation has resulted in a formal rejection only once: in February 1990, President George H.W. Bush voided the acquisition of Boeing supplier MAMCO Manufacturing Inc. by the China National Aero-Technology Import and Export Corporation.
The collapse of the Firstgold and Emcore transactions underscores the fact that CFIUS reviews may continue to pose difficult obstacles for foreign investors in certain sensitive sectors of the US economy. Understanding the CFIUS process and analyzing potential US government national security concerns are thus essential aspects of any cross-border transaction, especially those involving high technology.