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CFIUS approval of A123 Systems deal draws critics

by William McConnell In Washington  |  Published January 30, 2013 at 9:37 AM
A number of Washington lawmakers on Tuesday criticized national security regulators for allowing China's Wanxiang Group to acquire bankrupt car battery maker A123 Systems Inc.

Wanxiang said it was informed late Monday by the Committee on Foreign Investment in the United States that it may proceed with the transaction.

Lawmakers on both sides of the aisle have raised concerns about the sale, which they complained would transfer technology developed with subsidies from U.S. taxpayers to China. A123 filed for bankruptcy in October after having received roughly $130 million in stimulus money from the U.S. Department of Energy to fund its research. Wanxiang's $257 million bid bested one from Milwaukee-based Johnson Controls Inc. Wanxiang tried to blunt criticism of the deal by excluding A123's defense contracts, which were sold separately to Navitas Systems for $2.25 million.

There's no avenue for reversing the CFIUS approval, although the outcome might fuel support among lawmakers for legislation that would hamstring companies that have received federal subsidiaries from selling themselves to foreign buyers.

Still unknown is whether CFIUS imposed any conditions on the deal to mitigate possible national security threats. Two of the most prominent Capitol Hill critics of the transaction., Sens. John Thune, R-S.D., and Chuck Grassley, R-Iowa, demanded that CFIUS brief them on the decision. "We don't have any answers on whether U.S. national security concerns are protected. The only thing that's clear is a foreign-owned company will benefit from the millions of dollars given to A123 through the president's stimulus package. That's troubling," Grassley said in a statement.

Kaye Scholer LLP partner Farhad Jalinous, who represents clients before CFIUS, said the agency almost certainly imposed some conditions. Federal law requires that CFIUS report to Congress on its review but it will not make a public report on the transaction. Wanxiang is under no obligation to make the details public, unless the bankruptcy court requires it.

Rep. Marsha Blackburn, R-Tenn., who has written legislation that would require companies receiving research funding from the Department of Energy to report when they are being acquired by a "nonallied" foreign nation, criticized CFIUS's approval.

"Just eight days ago, President Obama stated in his inaugural address that 'we cannot cede to other nations the technology that will power new jobs and new industries.' I could not agree more, which is why it disturbs me that the administration would approve the sale of A123 to Wanxiang," Blackburn said. "What's changed in the last week? Actions speak louder than words and this is a clear-cut example of a time when President Obama needs to step in and protect our national security interests. We cannot afford to have technology that is used in our drones and Navy SEAL delivery systems end up in the hands of the Chinese government. Especially as this administration has a new Asia pivot defense policy which will put our special forces units in China's backyard."

Other opposing lawmakers have included Sens. Debbie Stabenow and Carl Levin, both Michigan Democrats, who said separating the company's business into military and nonmilitary components might not be feasible.

Under the CFIUS process, the Treasury Department-led panel judges whether or not a transaction should be blocked on national security grounds. If the panel finds a transaction should be stopped, it makes that recommendation to the president, who is the ultimate judge on blocking a transaction. The president would not review a deal CFIUS has decided to approve. Although ostensibly CFIUS -- also comprised of other government agencies with national security responsibilities including the Departments of Defense, Homeland Security and Justice -- does not consult with the president until it has reached its conclusion, recommendation on high-profile deals are almost always coordinated with the White House. "A decision like this would have had the president's support," Jalinous said. "With Capitol Hill breathing down their necks, CFIUS is not going to make a decision like this in a vacuum."

"We're pleased the government has completed its review and provided us with the go-ahead to finalize this transaction," Pin Ni, president of Wanxiang America said in a statement Tuesday. "The future is bright for A123. It is a company with exceptional talent and potential, and Wanxiang America is committed to its long-term success and the continuance of its U.S. operations. "

The dustup over the A123 deal is part of a larger debate over Chinese investments in the U.S. CFIUS has rejected several acquisitions here by Chinese companies and Obama's decision to bar Chinese investors from buying wind farm operator Ralls Corp. is now being challenged in federal district court. In May, Treasury Secretary Timothy Geithner and Chinese officials issued a wide-ranging statement on measures they will take to foster economic cooperation, including vows not to use their merger review processes to harm M&A investors from each other's country.

In 2011 Chinese Vice Premier Wang Qishan and Minister of Commerce Chen Deming complained specifically about the CFIUS process and cited three attempts by Chinese companies to invest in the U.S. that ran into trouble as examples of unfair treatment: the 2005 plan by Cnooc Ltd. to pay $18.5 billion in cash for Unocal Corp., which was withdrawn after lawmakers objected; plans by China's Anshan Iron and Steel Group Corp. in 2011 to invest in Mississippi-based Steel Development Co., a deal restructured after some lawmakers pressured CFIUS to block it; and the unraveling in 2011 of Huawei Technologies Co. Ltd.'s plan to purchase assets from 3Leaf Systems Inc. of Santa Clara, Calif.

CFIUS is reviewing Cnooc's plan to acquire Canada's Nexen Inc., which owns energy assets in the U.S. portion of the Gulf of Mexico.

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Tags: 3Leaf Systems Inc. | A123 Systems Inc. | Anshan Iron and Steel Group Corp. | Carl Levin | CFIUS | Chen Deming | Chuck Grassley | Cnooc | Cnooc Ltd. | Committee on Foreign Investment in the United States | Debbie Stabenow | Department of Defense | Department of Energy | Department of Justice | DoE | Farhad Jalinous | Homeland Security | Huawei Technologies Co. Ltd. | John Thune | Johnson Controls Inc. | Kaye Scholer LLP | Marsha Blackburn | national security | Navy SEAL | Nexen Inc. | Pin Ni | President Obama | Ralls Corp. | Steel Development Co. | Timothy Geithner | Unocal Corp. | Wang Qishan | Wanxiang Group

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