A transaction in which a foreign company gains control of US assets can be hammered to sleep by the President acting upon the recommendation of the Committee on Foreign Investment in the United States (“CFIUS”). The delay of CFIUS review and its potential draconian consequence affect the viability of foreign purchaser participation in asset sales by companies in chapter 11. We look at one case in which the debtor and foreign stalking horse bidder are seeking CFIUS review nonetheless.
Grand Chip Investment GmbH, a German LLP that has a parent company that is a Chinese limited partnership that in turn has Chinese partners, sought to purchase Axitron SE, a German company that controlled an American subsidiary company. On December 2, 2016, President Obama issued this presidential order, in which he stated that he found there to be “credible evidence that leads me to believe that . . . [the Purchasers ] through exercising control of the US business of Axitron SE . . .might take action that threatens to impair the national security of the United States.” In part on the basis of those findings, the President stated that, “The proposed acquisition of Axitron US by the Purchasers is hereby prohibited, and any substantially similar equivalent transaction, whether effected directly or indirectly through the Purchasers’ shareholders, partners, subsidiaries, or affiliates is prohibited.”
Thus, a deal was squelched. The President acted upon the recommendation of the Committee on Foreign Investment in the United States (“CFIUS”), as explained here.
In September 2014, “Foreign Buyers of US Assets in Sections 363 Sales: National Security Regulatory Review” was publishedon this site, in which the author explained briefly the CFIUS national security review process and discussed its possible effect on a foreign company’s purchase of assets from a U.S. debtor in a Section 363 sale of assets. The article suggested that given the delay to be caused by CFIUS review (under the common debtor circumstance of having low or even vanishing liquidity), a foreign potential purchaser of assets might provide a DIP loan in order to buy time to overleap the CFIUS regulatory barriers.
In an article entitled “The Intersection of National Security and Bankruptcy,” attorney Richard Chesley raises further issues, which we recast as questions: (a) should bankruptcy courts require a CFIUS review on every bankruptcy sale involving a foreign purchaser or investor?; (b) would bankruptcy courts that so require add a cost to foreign purchasers, and thus the bankruptcy estate (in such cost’s effect on the bid amount) that harms creditors?; (c) are debtors and foreign purchasers too biased to be relied upon to seek CFIUS review when needed?; and (d) would a creditors committee seek to force purchasers and debtors to submit to CFIUS review, thus likely reducing the ultimate sales price?  Good questions. No doubt a losing US bidder would welcome such review.
In the recently filed chapter 11 case of In re AtopTech, Inc., Case No. 17-10111 (Bankr. D. Del.), the US debtor (“ATopTech”) — a Santa Clara, California company that develops software used by engineers to design integrated circuits — commenced the case having negotiated an agreement to sell substantially all of its assets to a purchaser to be formed by Draper Athena, a foreign-owned venture capital firm, which would act as stalking horse according to bidding procedures proposed by the debtor.
The asset purchase agreement filed by the debtor along with the motion to approve bidding procedures provides that buyer and seller shall cause to be submitted “a joint draft notice and other appropriate documents to the CFIUS . . . to obtain CFIUS Clearance.” The somewhat uncommon circumstances of the case encourage the proposed head-on embrace of CFIUS review, avoiding the issues to which attorney Chesley points.
In the ATopTech chapter 11 case, there is no need for anyone to provide DIP financing and there is no critical shortage of liquidity, as explained in the first-day declaration filed by the CEO of ATopTech. Thus, a delay in order to secure favorable CFIUS review can be weathered by the debtor.
The debtor had been growing and seizing market share of the electronic design automation industry, its revenue and EBIDTA had been increasing, its operations had been cash-flowing, and the debtor had minimal secured debt. ATopTech filed for chapter 11 relief because of a $30 million judgment against it, and sought to sell its assets and resolve all claims, including those of the judgment creditor (some ongoing and not resolved judicially), with the proceeds of such sale.
While it is difficult to predict CFIUS or presidential action, including with regard to the potential Draper Athena acquisition of ATopTech, data does exist to help parties and practitioners assess cases like the one their contemplated transaction might pose. Here are three sources (there are many others):
In early 2016, the law firm Dentons published a detailed consideration of three transactions in which the acquirer was a Chinese entity, including GO Scale’s proposed acquisition of the Philips Lumileds business; the proposed acquisition of Western Digital Corp., a well-known US manufacturer of computer and information storage solutions, by Unisplendor Corp. (Unis), a business unit of Tsinghua Holdings, which itself is a business affiliate of Tsinghua University, one of China’s top universities; and the proposed acquisition of Fairchild Semiconductor International Inc. by China Resources Microelectronics Ltd. and Hua Capital Management Co., Ltd. (CRM).
The law firm White and Case has just published as a Client Alert a lengthy review of recent developments and trends in CFIUS review noting, among other things, that CFIUS reviewed more than 170 transactions in 2016, CFIUS continues to interpret its jurisdiction broadly, and that other nations are engaging in similar national security review. This all bodes well for lawyers with CFIUS specialties.
Finally, “The Trade Practitioner,” prepared by the law firm Squire Patton Boggs, provides details and links to seemingly every transaction that goes before the CFIUS, and maintains an archive of past transactions. John Schaus, “President Obama’s Second Order on CFIUS,” Center for Strategic & International Studies (Dec. 5, 2016), at https://www.csis.org/analysis/president-obamas-second-order-cfius..  Richard Chesley, “The Intersection of National Security and Bankruptcy,” Law360 (April 8, 2013),  Id. (Chesley answers (c) and (d) in the negative).  Id.  See Docket no. 32, p. 39 of In re ATopTech, Inc, Case no. 17-10111 (Bankr.D. Del.), available online at the website of Epiq Bankruptcy Solutions, at http://dm.epiq11.com/#/case/ATO/dockets.  See Declaration of Jue-Hsien Chern in Support of Debtor’s Chapter 11 Petition and First Day Relief, Docket No. 3, pp. 2-5 (Jan. 13, 2017) of In re ATopTech, Inc, Case no. 17-10111 (Bankr.D. Del.).  Id. at pp. 5-8.  See Dentons, “Recent Activity in Chinese Transactions Subject to CFIUS Review: Does the Equation Change for Chinese Investors?” (March 3, 2016) at http://governmentcontracts.dentons.com/en/insights/alerts/2016/march/1/recent-activity-in-chinese-transactions-subject-to-cfius-review.  Farhad Jalinous, Karalyn Mildorf, Keith Schmig, Norman Pachoian, Cristina Brayton-Lewis & Emily Wang, “Client Alert: CFIUS: Recent Developments and Trends” at http://www.jdsupra.com/legalnews/cfius-recent-developments-and-trends-51313/  See http://www.tradepractitioner.com/category/cfius/.
Mr. Cahill is counsel with Lowis & Gellen LLP, in Chicago, Illinois. He guides secured lenders, creditors, debtors, creditors’ committees, potential purchasers and others through bankruptcy cases, out-of-court workouts, assignments for the benefit of creditors, and receiverships. Mr. Cahill has substantial mega-case experience at national law firms representing very large debtors, and has counseled and…
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