CFIUS and Chinese Investment: Lessons Learned from the First Half of 2013

Wilson Sonsini Goodrich & Rosati

Since the 2008 global financial crisis, Chinese companies have significantly increased their overseas investments in the United States. Like other foreign investments, Chinese investments may be subject to a national security review by the Committee on Foreign Investment in the United States (CFIUS or Committee). In the first half of 2013, there were three notable reviews of Chinese investments by CFIUS. These transactions offer important lessons for parties contemplating deals involving Chinese acquisitions of controlling interests in companies operating in the United States, including:

  • Planning ahead and engaging the Committee early on increases the chances of reaching the best outcome for the investor.
  • Failing to notify the Committee of a transaction with potential national security concerns may tie the hands of the investor, who may be required to divest the U.S. portion of the target, likely at a material loss.
  • The proximity of the target’s assets to sensitive U.S. government and military facilities as well as critical infrastructure, particularly by Chinese government-controlled entities, raises national security concerns that may require significant mitigation.
  • Acquisitions of non-U.S. entities with operations in the United States are still within the jurisdiction of the Committee.

CFIUS Background

CFIUS is an interagency committee that has the authority, pursuant to Section 721 of the Defense Protection Act of 1950, as amended by the Foreign Investment and National Security Act of 2007, to conduct a national security review of transactions that could result in control of a U.S. business by a foreign government, entity, or person (a “covered transaction”).1 Parties may voluntarily notify CFIUS of a covered transaction, or CFIUS may initiate its own review before or after a transaction has been consummated. 

After the submission of a complete voluntary notice, an initial 30-day review period commences. During the review period, CFIUS examines the transaction to determine its effects on the national security of the United States. CFIUS will initiate an additional 45-day investigation period if (a) a member of the Committee believes the transaction threatens to impair the national security of the U.S. and such threat has not been mitigated, (b) the lead agency recommends that an investigation be undertaken, (c) the transaction will result in foreign-government control, or (d) the transaction involves critical infrastructure of or within the United States.2 If CFIUS decides not to conduct an investigation, the parties receive a safe harbor against further action over the transaction. During the 45-day investigation period, CFIUS further examines the national security implications of the transaction and must determine whether to clear the transaction—and therefore grant a safe harbor to the parties—or to recommend to, or request a determination by, the President to block or unwind the transaction. Presidential determinations are rare, however, as most parties will abandon or restructure a transaction to avoid a presidential action. CFIUS also has the authority to enter into an agreement with or impose conditions on parties to mitigate any national security risks presented by a covered transaction.

Notable CFIUS Determinations in 2013

Wanxiang Group’s Acquisition of A123 Systems

In December 2012, a U.S. subsidiary of Wanxiang Group, a Chinese automotive parts manufacturer, received bankruptcy court approval to acquire insolvent U.S. lithium ion battery manufacturer A123 Systems, Inc. for approximately $257 million.3 A123 possessed U.S. government and military contracts and had developed technologies, including, reportedly, new chemistries for battery packs used by U.S. soldiers that provide twice the power of traditional batteries at the same weight, are fireproof, and can operate under extreme heat or cold.4 A123 also had been awarded a grant from the Department of Energy of roughly $250 million, which it used to build two manufacturing facilities in Michigan.5

Several members of U.S. Congress voiced opposition to the acquisition because it allegedly resulted in the transfer of taxpayer-funded sensitive technologies to a Chinese company.6 Despite significant political opposition, CFIUS ultimately cleared the transaction in January 2013.7 The Committee’s clearance is largely attributed to Wanxiang taking national security concerns into account in structuring the transaction by having A123 divest its government and military contracts business to a small Illinois battery company, Navitas Systems, and by ensuring that Wanxiang does not have access to the assets, technology, or employees of this spun-off business.8

CNOOC’s Acquisition of Nexen

In July 2012, CNOOC Limited, a Chinese offshore crude oil and natural gas producer, entered into an agreement to acquire a Canadian oil and gas company, Nexen, Inc. The transaction raised national security concerns because state-owned China National Offshore Oil Corporation is a controlling shareholder of CNOOC, and Nexen owned assets in the U.S. portion of the Gulf of Mexico, including, reportedly, drilling platforms located within 50 miles of a major U.S. military base that is southeast of New Orleans, Louisiana. Recognizing the potential national security implications and that the acquisition of a non-U.S. target with a U.S. business is a covered transaction subject to the jurisdiction of CFIUS, the parties submitted a joint voluntary notification and apparently agreed not to close until they received clearance from CFIUS.9

CFIUS ultimately cleared CNOOC’s acquisition of Nexen in February 2013, although reportedly with conditions relating to Nexen’s Gulf assets.10 According to media reports, CNOOC agreed to transition Nexen from operator to non-operator status, meaning that CNOOC will no longer be responsible for decision-making on these projects.11 CNOOC, however, will continue to “own the assets and be allowed some general oversight, as well as to collect revenue from the properties.”12

This clearance is particularly notable because CFIUS had blocked or unwound three other Chinese investments or proposed investments since 2009, where the acquired target maintained assets in close proximity to a U.S. military base.13 CNOOC, unlike these other Chinese investors, was able to maintain ownership and a revenue stream over these assets. This outcome is likely attributable to the parties engaging with CFIUS by submitting a voluntary notification and cooperating with CFIUS during the review process, including agreeing to withdraw and re-file its notification for the likely purpose of giving CFIUS more time to review the national security implications of the transaction and negotiate an acceptable mitigation agreement.

Procon Resources’ Acquisition of Lincoln Mining Corporation

In November 2012, Procon Resources, Inc. closed a private placement with Lincoln Mining Corporation that resulted in Procon holding approximately 29 percent of Lincoln’s issued and outstanding shares and entitled Procon to appoint four of Lincoln’s seven directors.14 Although headquartered and incorporated in Canada, Lincoln’s principal mining operations are in the United States. Because the China National Machinery Industry Corporation—a PRC-owned entity—indirectly owns 60 percent of Procon’s issued and outstanding shares, Procon’s acquisition of control over Lincoln’s U.S. business is a covered transaction subject to the jurisdiction of CFIUS.15

More than four months after closing, on April 1, 2013, the parties submitted a voluntary notification to CFIUS—possibly at the request of the Committee, which monitors non-notified transactions.16 In June 2013, the parties announced that they had withdrawn their notification and agreed that Procon will divest its investment in Lincoln to a third-party investor subject to review and approval by CFIUS.17 The parties also agreed that until the divestment had been completed, access to Lincoln’s Bell Mountain, Pine Grove, and Oro Cruz properties would be limited and subject to approval by the U.S. government.18

Like CNOOC/Nexen, the proximity of the target’s assets to a U.S. military base appears to be the primary national security concern. Lincoln’s Oro Cruz property is located near the Marine Air Corps Station in Yuma, Arizona, which is a premier aviation training facility for the Marines. Lincoln’s Bell Mountain and Pine Grove properties are located near the Fallon Naval Air Station (NAS Fallon) in Nevada, which is the U.S. Navy’s premier tactical air warfare training center. This is at least the third time CFIUS has prevented Chinese investment in mining operations near NAS Fallon, blocking Northwest Ferrous International Investment Company’s investment in Firstgold Corporation in 2009 and causing Far East Golden Resources Group Ltd to divest its interest in Nevada Gold Holdings, Inc. in 2012.

On the Horizon: Shuanghui’s Proposed Acquisition of Smithfield Foods

We expect Shuanghui International Holdings Limited’s proposed acquisition of Smithfield Foods, Inc. to offer additional insight as to how Chinese investors can successfully navigate the CFIUS review process.19 On May 28, 2013, Shuanghui—a private holding company that is the majority owner of China’s largest meat processor and pork producer—entered into an agreement to acquire Virginia-based Smithfield, which is the world’s largest hog producer and pork processor. 

The parties conditioned the acquisition upon clearance by CFIUS and have offered assurances with the intention of mitigating any perceived national security concerns with the transaction, including committing that Smithfield will (a) maintain high food safety standards and abide by U.S. regulations, (b) continue its contracts with family farmers, and (c) maintain its headquarters and management after the transaction.20 Nevertheless, several members of U.S. Congress have expressed strong opposition to the transaction, which, if consummated, would be the largest acquisition by a Chinese company in the U.S. and the second-largest acquisition of a U.S. food company by a foreign company. 

The parties submitted a voluntary notification to CFIUS on June 18, 2013.21 As expected, CFIUS initiated a 45-day investigation of the proposed transaction, which was announced by the parties on July 24, 2013.22 Although CFIUS practitioners generally expect the Committee to clear this deal, whether and to what extent CFIUS will impose conditions upon the transaction is highly anticipated, as it will offer important lessons for future Chinese investments, particularly if such conditions address concerns that are more political than national-security-based in nature.  


Chinese investors should consider the applicability and effect of CFIUS prior to acquiring interests in businesses with U.S. operations, whether or not the target business is a U.S. or non-U.S. company.  CFIUS concerns should be addressed when negotiating and structuring a transaction in order to achieve the best outcomes for the investor. Moreover, it is important to engage CFIUS in the early stages of the transaction in order to increase the likelihood of a timely and efficient review. Planning ahead and cooperating with the Committee are increasingly necessary where the target’s assets are located near sensitive U.S. government or military property, as demonstrated by the CNOOC/Nexen and Procon/Lincoln deals. Where parties ignore proximity and other CFIUS issues prior to closing (e.g., Procon/Lincoln), there may be serious consequences, including restricted or prohibited access to the investment and even divestiture where national security concerns cannot otherwise be mitigated.

1 Under the CFIUS regulations, majority ownership is not required for control. Control, for CFIUS purposes, is broadly defined to include any form of power over a company that provides the holder with the ability to determine important matters affecting the entity. See 31 C.F.R. § 800.204.

2 See 31 C.F.R. § 800.503. CFIUS must initiate an investigation for foreign government-controlled transactions and transactions involving critical infrastructure unless the chairperson of the Committee and the head of any lead agency “determine on the basis of the review that the covered transaction will not impair the national security of the United States.” 31 C.F.R. § 800.503(c).

3 See Michael Bathon, “Wanxiang Wins U.S. Approval to Buy Battery Maker A123,” Bloomberg (Jan. 30, 2013), available at

4 See Julie Wernau, “Navitas Key to Sale of A123 to Chinese Firm,” Chicago Tribune (Jan. 30, 2013), available at

5 See Michael Bathon, “Wanxiang Wins U.S. Approval to Buy Battery Maker A123,” Bloomberg (Jan. 30, 2013), available at A123 only used about $132 million of the award to build these plants. See id.

6 See id. A spokesman for the Department of Energy asserted that no funds were used for research and development of battery technology.

7 See Julie Wernau, “Navitas Key to Sale of A123 to Chinese Firm,” Chicago Tribune (Jan. 30, 2013), available at

8 See id.

9 See “Nexen Announces All Required Regulatory Approvals Received,” Nexen Press Release (Feb. 12, 2013), available at

10 Rebecca Penty and Sara Forden, “Cnooc Said to Cede Control of Nexen’s U.S. Gulf Assets,” Bloomberg (Mar. 1, 2013), available at

11 See id.

12 Id.

13 In December 2009, Northwest Ferrous International Investment Company, a Chinese government-controlled company, abandoned its acquisition of a 51 percent interest in a Nevada gold mine after CFIUS recommend blocking the transaction because it involved assets located within 50 miles of the Naval Air Station Fallon (NAS Fallon) in Nevada. In May 2012, CFIUS forced Far East Golden Resources Group Ltd., a subsidiary of Chinese company Hybrid Kinetic, to divest its majority interest in a U.S. mining company, Nevada Gold Holdings, Inc., which was also near NAS Fallon, almost two years after consummation of the transaction. In September 2012, President Obama blocked a bid by Ralls Corp., which is owned by two executives of China’s SANY Group, to build wind farms in Oregon near and within restricted airspace used by the U.S. Navy.

14 See “Lincoln Mining Closes Procon Transactions with $3.4 Million Financing and Director Changes,” Lincoln Mining Corporation Press Release (Nov. 22, 2012), available at

15 See “Divestment of Procon Investment in Lincoln Mining Required as a Result of US Regulatory Review,” Lincoln Mining Corporation Press Release (June 18, 2013), available at

16 See id.

17 See id.

18 See id.

19 See “Agreement and Plan of Merger between Shuanghui and Smithfield,” dated May 28, 2013, available at

20 See “Smithfield Provides CFIUS Review Update, ” Analyst Blog, available at

21 See “Smithfield Foods Announces Update on CFIUS Process,” Smithfield Foods Press Release (July 24, 2013), available at

22 See “Smithfield Foods, Inc. Preliminary Proxy Statement” (June 18, 2013), available at

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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