The parties
A123, headquartered in Waltham, Massachusetts, with manufacturing facilities in Massachusetts and Michigan and a joint venture in China, develops and manufactures advanced lithium ion phosphate batteries and energy storage systems for transportation, electric grid and commercial applications. A123 was experiencing financial difficulties by the spring of 2012 and turned to Wanxiang for financial assistance.
Wanxiang Group is one of the world’s largest, privately owned automobile parts companies, with headquarters in China and, since 1994, a subsidiary based in Chicago. Wanxiang America is reported to be a US$2 billion operation.
The deal
Back in August 2012, A123 announced that Wanxiang would extend the company a US$450 million lifeline that would have resulted in Wanxiang acquiring approximately 80 percent ownership and control over the business. The investment was conditioned upon approval of the transaction by the Committee on Foreign Investment in the United States (CFIUS), which reviews the acquisition of foreign control over US businesses to determine if they raise national security concerns.
The CFIUS process was delayed and there was substantial political opposition. On October 16th, 2012, A123 filed a Chapter 11 petition in the Delaware bankruptcy court. At the time of the filing, A123 entered into a stalking horse agreement with Johnson Controls Inc also a Recovery Act grant recipient, to purchase A123’s automotive assets for US$125 million.
Wanxiang set out to top the Johnson Controls’ bid. At the bankruptcy auction on December 9th, 2012, Wanxiang made a preemptive topping bid of US$257 million for all assets, excluding the US government contracts/military business, which were auctioned separately and ultimately sold to Navitas. Notwithstanding the political opposition, CFIUS cleared the transaction on 29th January and the transaction closed immediately thereafter.
Overcoming the opposition
The opposition to the Wanxiang-A123 transaction came from a number of sources. There was political opposition from Senators Grassley, Thune, Stabenow and Levin concerning the transfer of critical US technology funded by the US government to a Chinese company, as well as concerns over the company’s projects for the US military. The Strategic Materials Advisory Council, a coalition of former military leaders and industry experts, echoed these concerns.
So how was Wanxiang able to overcome the opposition and ultimately obtain the required US government approvals to close the transaction?
First, Wanxiang engaged in a public relations campaign to emphasise a couple of key points: (1) it is a private company with no association with the Chinese government — government owned and controlled entities are subject to greater scrutiny under the CFIUS regulations; and (2) it is a significant long-term investor in the US market with no plans to export US technology, assets or manufacturing jobs to China.
Second, Wanxiang combined forces with A123 to use their strong political connections with various state and local governments, and A123’s strong federal connections, to lobby in support of the transaction.
Obtaining US government approvals
Evidently, the US government concluded there were no anti-competitive issues resulting from the transaction. Clearance with the Directorate of Defense Trade Controls (DDTC) was undoubtedly addressed through a suitable technology control plan and appropriate ITAR licensing. The treatment of the DOE and NIST grants was more complex. Essentially, Wanxiang has to complete “post-closing” the novation process to the satisfaction of the US government or it will need to pay fair market consideration for the assets to the US government. The rights of the US government in any funded technology need to be respected and use of such technology is restricted to the United States.
While it is not possible to know with any certainty what issues CFIUS raised with respect to the transaction, it is possible to speculate on what may have been required to obtain CFIUS clearance. First, while it appears that Wanxiang did not have to use a US trust to acquire the assets, it did exclude the government/military contracts from the purchase. Second, the implementation of a technology control plan to regulate the export of any controlled technology would have been essential. Third, Wanxiang may have had to make some commitment to keep the assets, including technology, in the United States and not to export them to China.
Looking ahead
What lessons could be learned from the Wanxiang-A123 deal by other Chinese companies interested in making acquisitions of US technology companies, particularly those receiving US government support?
1. Be perceived as committed to the US market as a long-term investor and not simply a company looking for a bargain at the expense of the federal, state and local governments and US investors who funded the target company. It is important to have a US subsidiary (preferably with an established presence) drive the acquisition.
2. Recognise that Chinese investment in the United States is politically charged. Be prepared to participate in an appropriate way in the US political process by forging political alliances with US companies with strong connections to federal, state and local governments and to use lobbyists and political and media consultants to counter the arguments of your opponents.
3. Work closely with the target company and any third parties to ensure you will have the commercial flexibility to modify the substance and timing of your transaction to react to any concerns raised by the US government.
4. Comply scrupulously with any required US governmental notifications and approvals and show creativity and flexibility in modifying the commercial terms of the transaction to obtain approval. Be prepared to enter into a mitigation agreement to address any national security issues.
carl.valenstein@bingham.com
www.bingham.com
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