(Repeats to additional customers with no changes to text)
By Greg Roumeliotis
Oct 11 Insurance mergers and acquisitions rarely
raise red flags with U.S. national security watchdogs.
China's Fosun International Ltd took that history
to heart last year when it paid $1.84 billion for the remaining
80 percent stake of U.S. property and casualty insurer Ironshore
Inc that it did not already own.
But in December 2015, one month after Fosun completed the
acquisition, it was approached by officials at the Committee on
Foreign Investment in the United States (CFIUS), a government
panel that scrutinizes deals over national security concerns,
according to people familiar with the matter who asked not to be
identified because these details are not public.
CFIUS was concerned about how Fosun would operate
Ironshore's Wright & Co, a provider of professional liability
coverage to U.S. government employees such as law enforcement
personnel and national security officials, including the Central
Intelligence Agency, according to these sources.
Fosun, Ironshore and CFIUS all declined to comment on the
CFIUS operates a voluntary filing system for companies
engaged in a deal. Such an instance of the panel approaching
companies after they complete a deal is rare.
But the recent U.S. scrutiny of Fosun -- which did not seek
CFIUS approval for the Ironshore deal -- is just one example of
a new impetus by CFIUS to target what it refers to as
"non-notified transactions" -- or deals that did not seek CFIUS
approval in advance.
In the last twelve months CFIUS has stepped up its pursuit
of these non-filers over concerns that some deals were falling
through the cracks, according to sources with direct knowledge
of the panel's inner workings. This previously unreported push
by CFIUS has the potential to delay some deals and raises the
risk of them being thwarted altogether.
While Wright accounted for a tiny fraction of Ironshore's
business, the inquiry has forced Fosun to delay its initial
public offering of Ironshore, which has been registered with
the U.S. Securities and Exchange Commission since June, until
CFIUS clears the original acquisition. Fosun will now likely
miss a window for IPOs due to the expected market volatility
around the Nov. 8 U.S. presidential election, according to the
Chinese companies have been treated with suspicion by CFIUS
because of the ties many of them have to the country's communist
regime, reflecting the complicated diplomatic and commercial
ties between China and the United States.
This has not stopped Premier Li Keqiang's "going out"
policy, which encourages Chinese companies to buy foreign trophy
assets. The push -- aided by CFIUS's history of rarely shooting
down deals altogether -- contributed to Chinese M&A activity in
the United States reaching a record high of $32 billion so far
To be sure, CFIUS has approached companies in the past as
well, and does not limit its review to only Chinese deals. In
2010, CFIUS contacted Russian internet company CMail.ru and AOL
Inc over the latter's $188 million divestment of messaging
service ICQ to Cmail.ru, which had already been completed. The
CFIUS review in that instance did not require the deal to be
On rare occasions, the panel has also vetoed deals, such as
the $3.3 billion sale of Koninklijke Philips NV's
lighting business to a consortium of Chinese investors, which it
blocked last January.
But Ironshore and similar cases this year show that the U.S.
watchdog is flexing its muscles in a more subtle, albeit
"Companies may assume that there is no chance that CFIUS
would have an interest in their transaction, but that runs the
risk of possible miscalculation," said Eric Dinallo, a partner
at law firm Debevoise & Plimpton LLP.
CFIUS, an agency made up of eight U.S. government
departments and chaired by the Treasury Secretary, does not
publicize the reasons for its decisions. The majority of
transactions involve private companies with no SEC filings.
Recent regulatory filings and statements by publicly listed
companies, however, offer glimpses of CFIUS catching some
companies off guard. U.S. electronics distributor Ingram Micro
Inc said in July it would seek CFIUS approval for its
acquisition by Chinese shipping company Tianjin Tianhai
Investment, despite saying in February it did not need to,
following "consultation" with CFIUS.
As a result, in August Ingram Micro pushed back the deadline
for the deal with Tianjin to close by three months to Nov. 13.
CFIUS is interested in learning more about the company's supply
of technology to the U.S. government, according to the sources.
Ingram Micro and Tianjin Tianhai declined to comment.
CFIUS has added staff and resources in the last two years to
identify non-notified transactions, the sources said, though the
number of additional people recruited or the extra funding it
was given could not be learned.
Among the CFIUS staffers playing a role in identifying
non-filers, alongside CFIUS Staff Chairman Stephen Hanson and
Treasury Deputy Assistant Secretary for Investment Security
Aimen Mir, is Brian Reissaus, a former member of the Defense
Security Service, an agency of the U.S. Department of Defense,
according to the sources. Reissaus will often be the CFIUS
staffer reaching out to companies, the sources said.
A Treasury spokesman declined to comment on behalf of CFIUS
and the staffers. Chinese government officials declined to
comment on CFIUS's new focus.
CFIUS's crackdown on these non-notified transactions shows
how the agency's focus has expanded beyond traditional sectors
of national security concern, such as aerospace and
semiconductors, to less obvious areas ranging from commercial IT
and agriculture to biomedical science and electronics.
Companies whose deals are reviewed by CFIUS without having
made voluntary filings risk delays in completing them and
uncertainty over their investment plans, lawyers say.
In the case of Fosun, to ensure CFIUS approval Ironshore
agreed to sell Wright last month to former American
International Group Inc CEO Hank Greenberg's Starr
Companies, according to the sources.
In light of this divestment and other conversations it had
with CFIUS, the company has reset the CFIUS review process by
making another filing with the panel, and an outcome is expected
in the coming weeks, one of the sources added.
In the interim, Fosun has been exploring selling Ironshore
outright as an alternative to an IPO, according to the sources.
HELL OR HIGH WATER
Some companies resist filing for a CFIUS review voluntarily
because they fear that addressing this issue during their tough
merger negotiations will add an extra layer of complexity to the
talks, and some times risk complicating them to the point that a
deal is not reached.
This is because, once the possibility of a CFIUS review is
foreseen in a merger contract, companies have to haggle over who
assumes the financial risk under various scenarios.
Sellers try to push for "hell-or-high-water" provisions in
contracts requiring the buyers to do whatever it takes in terms
of divestitures and other measures to obtain CFIUS approval.
Buyers resist this and seek to negotiate in advance what CFIUS
remedies would be acceptable to them.
A case in point is Zhongwang USA LLC, which is backed by
Chinese aluminum magnate Liu Zhongtian, and its $2.33 billion
deal last month to acquire U.S. aluminum company Aleris Corp
. Zhongwang USA agreed to "undertake best efforts to
obtain CFIUS clearance as soon as practicable," while also
limiting any CFIUS-related divestitures it would be willing to
accept to 5 percent of Aleris' 2015 U.S. net sales, a regulatory
The heightened scrutiny is also jacking up CFIUS-related
breakup fees that buyers have to agree to in order to get a deal
done, with sellers often asking these to be deposited in escrow
accounts for more security. In the case of Zhongwang, it placed
its $100 million breakup fee in an escrow account when it signed
its deal with Aleris.
Taken together, CFIUS lawyers and other consultants are
advising their clients to proactively file with the agency to
get out in front of the scrutiny.
"Go to CFIUS before you close a transaction," said Dinallo.
"Our experience has been that, if there is no issue, CFIUS has
been quick to respond."
(Additional reporting by Diane Bartz in Washington D.C., Mike
Stone in New York and Sue-Lin Wong in Beijing; Editing by Carmel
Crimmins and Edward Tobin)