Subscriber Content Preview | Request a free trialSearch  

The Deal Magazine

   Request magazine  |  Subscribe to newsletter
Print  |  Share  |  Discuss  |  Reprint

Politics aside, A123 bankruptcy loan warrants security review

by Bill McConnell in Washington  |  Published November 2, 2012 at 1:56 PM
By asking a government national security panel to investigate a Chinese company's plan to provide $50 million in debtor-in-possession financing to bankrupt battery maker A123 Systems Corp., Republican Senators Chuck Grassley of Iowa, and John Thune of South Dakota have highlighted what is likely to become a more frequent obligation of the Treasury Department-led committee charged with review purchases of U.S. assets by foreign buyers.
The lawmakers on Nov. 1 sent a letter to Treasury Secretary Timothy Geithner asking him to direct the Committee on Foreign Investment in the U.S. to examine reports that China-based Wanxiang Group Corp. intends to provide DIP financing to lithium-ion battery company A123, which has received approximately $130 million of a $249 million federal stimulus grant from the Department of Energy as well as Department of Defense contracts.
"A123 has received millions of taxpayer dollars to develop technology and intellectual property that should not simply be shipped to China," Thune said in a statement announcing the letter. "Considering A123's grid energy storage activities and active military contracts, the Obama administration must thoroughly scrutinize any transaction that would lead to A123 being owned by a foreign company."
One CFIUS expert noted that even amid a spate of unfavorable CFIUS rulings regarding would-be Chinese buyers of U.S. assets, bankrupt companies offer an enticing target for slaking China's appetite for investments here and will draw increasing attention of U.S. regulators. "More and more bankruptcy courts will have to deal with CFIUS issues," said the attorney, who asked not to be named. "Investment in bankrupt companies fits with the classic Chinese investment strategy -- there are companies with good technology and the Chinese zone in on them."
For months, Grassley and Thune have been have been demanding the Obama Administration to reveal more about its investment in struggling A123 and have expressed concerns about Wanxiang's plans to invest in the battery company. On Aug. 14 they sent a letter to DOE after A123 announced a $450 million investment deal with Wanxiang. Then on Oct. 9, a week before A123 filed for Chapter 11, Thune and Grassley sent a letter to A123 expressing concerns about company's potential agreement to grant Wanxiang majority control of the company.
Although Wanxiang appeared to withdraw from the deal after the Chapter 11 filing, a new plan to provide the $50 million DIP loan and Wanxiang's apparent plan to bid on A123's assets as part of the bankruptcy proceedings rekindled the lawmakers' efforts to press the White House to take a stand on the deal.

Wanxiang's loan would replace a loan from Johnson Controls Inc., which is expected to bid on A123's automotive business. Judge Kevin J. Carey of the U.S. Bankruptcy Court for the District of Delaware in Wilmington is scheduled to consider the replacement financing on Monday, Nov. 5.
In his statement, Thune also charged that the Obama Administration has refused to answer questions about the government's investment in A123 even as it was clear the company was in poor financial shape. "After several attempts, Senator Grassley and I have yet to receive straightforward answers from the administration on taxpayer-backed A123. Given the urgency of the bankruptcy process, we expect the administration to respond to our questions without delay."
Although the experts in CFIUS reviews see both politics and competitive rivalry playing a role in the lawmakers' efforts, they say the concerns raised by Grassley and Thune are legitimate areas for the national security panel to investigate. That Republicans have been pounding the White House for making investments in green companies that subsequently went bankrupt -- Solyndra LLC is another -- or that Johnson Controls would like to see Wanxiang's investment blocked do not diminish those concerns, they said.
Grassley and Thune's request to CFIUS "seems to me a reasonable, appropriate and careful inquiry," said Stephen Mahinka, a partner in the competition practice at Morgan, Lewis & Bockius LLP. "We don't know what government contracts, intellectual property -- classified work or other wise -- A123 is doing with DOE but to the extent the company has them they thought ought to be reviewed ahead of time."
Mahinka also noted that CFIUS regulations provide for reviews of lending transactions, which would include DIP financing, but that at this point Wanxiang's DIP would not trigger one because the lender is not obtaining control of A123. CFIUS approval would be needed if Wanxiang ultimately bids on A123 assets, however.
CFIUS's authority to block purchases of assets out of bankruptcy is stronger than that of antitrust regulators, Mahinka said.  "There are disputes over whether bankruptcy judges' power to approve deals supersedes any Department of Justice or Federal Trade Commission antitrust concerns," he noted. "But CFIUS takes the position that other statutes do not control its actions, so even if the bankruptcy court says yes to Wanxiang in the bidding, the CFIUS review still will be an additional required clearance."
A review of an A123 purchase by Wanxiang could possibly mirror another purchase of a battery maker several years ago by a Chinese buyer. The CFIUS review went unnoticed at the time and the lawyer involved would not identify the companies. However, he said the buyer had to make sure it relinquished technologies covered by International Traffic in Arms Regulations (ITAR) and government contracts that raised concerns. "We had to convince the government we had stripped it clean, which was not easy," he said.
blog comments powered by Disqus

Meet the journalists

Movers & Shakers

Launch Movers and shakers slideshow

French mergers and acquisitions lawyer Laurent Faugerolas joined Dechert LLP. For other updates launch today's Movers & shakers slideshow.


Struggling TeleCommunication Systems is sold

After announcing in July that it was exploring strategic alternatives, TeleCommunication Systems Inc. has agreed to sell to Comtech Telecommunications Corp. in a transaction with an enterprise value of $430.8 million. More video