According to public statements and press reports, Chinese telecommunications company Huawei Technologies Ltd. (Huawei) apparently has agreed to unwind its May 2010 acquisition of certain assets of bankrupt US computer technology firm 3Leaf Systems (3Leaf), in the face of opposition by the US Committee on Foreign Investment in the United States (CFIUS). Late on February 18, 2011, Huawei issued a statement that it will not contest CFIUS’s recommendation that Huawei withdraw its application to CFIUS for national security clearance of the transaction. Huawei has reportedly reached an agreement with CFIUS on the terms of its divestiture of 3Leaf assets, but the terms have not been announced publicly.

Last November, CFIUS asked Huawei to seek CFIUS approval for the then six-month-old transaction. CFIUS normally reviews deals that are announced or pending, rather than already completed. CFIUS, however, has the authority to review a completed transaction and to recommend its rescission. According to press reports, Huawei and 3Leaf did not seek CFIUS approval before the transaction was completed.

At the same time, members of Congress raised concerns about the transaction. On February 10, 2010, Democratic Senator Jim Webb of Virginia, Republican Senator Jon Kyl of Arizona and three other lawmakers wrote Commerce Secretary Gary Locke and Treasury Secretary Timothy Geithner to oppose the deal.

According to press reports, Huawei initially rejected the CFIUS recommendation to withdraw, which would have forced a direct review by President Obama under a 15-day timeline (under US law, only the President can actually block or rescind a transaction). This would have created a rare situation—transaction parties typically avoid a clash with the US government by withdrawing from a review if CFIUS signals resistance to a deal.

Under the Foreign Investment and National Security Act (FINSA), the President, acting through CFIUS, can investigate a transaction that may result in control of a US business by a foreign person, and can suspend or block the transaction if it threatens to impair the national security. CFIUS considers, among other factors, potential national security-related effects of the foreign acquisition on US-critical technologies or infrastructure, including telecommunications.

Parties to prospective transactions that might have national security implications typically submit joint voluntary notifications to CFIUS. If the parties do not notify CFIUS before the transaction is completed, CFIUS has the authority to initiate a review of the transaction and to mitigate any potential national security threat. If CFIUS concludes that there are no unresolved national security questions regarding the transaction, CFIUS ends its review and the parties are so informed. However, CFIUS will send a report to the President requesting the President’s decision if (i) CFIUS recommends that the President suspend or prohibit the transaction, (ii) CFIUS is unable to reach a unanimous recommendation, or (iii) CFIUS requests that the President make a determination. The President has 15 days from the end of the investigation period to suspend or prohibit the transaction if the President concludes that the transaction impairs the national security.

California-based start-up 3Leaf created virtual server technology for business enterprise data centers. Reportedly, Huawei acquired technology and key personnel, but no equity or physical assets from 3Leaf. According to the press reports, the firms did not notify the government because they concluded that the deal did not raise national security concerns and because Huawei did not acquire all of 3Leaf’s assets (presumably raising the question whether the transaction had resulted in foreign “control” of a US “business,” as defined by the CFIUS statute and regulations). Huawei also said that it filed export control classification requests with the Department of Commerce related to 3Leaf technology.

These events illustrate that understanding the CFIUS process, analyzing potential US government national security concerns, and potentially engaging CFIUS on those concerns are essential aspects of any cross-border transaction involving a sensitive sector of the US economy. They also illustrate the serious risk that companies may take in deciding not to notify CFIUS of a foreign acquisition in the United States that might broadly implicate US national security, even where only pieces of a US company are acquired.

Further background on the transaction, FINSA, and CFIUS were provided in a November 23, 2010 Mayer Brown Legal Update on the CFIUS request to Huawei to submit the deal for review.

For more information on the CFIUS process and US foreign investment regulation more generally, please contact Dave M. Wharwood, Timothy J. Keeler or Simeon M. Kriesberg.

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