SYDNEY: 28 May 2013 - In recent days, Dish Network Corporation has played the Xenophobia card in its contested takeover battle for Sprint Nextel Corporation against Softbank Corp of Japan.  Sprint is the third largest mobile services provider in the United States.  In October, 2012 Softbank and Sprint announced a $20 billion merger whereby Softbank would acquire an approximate 70% interest in Sprint and assist in recapitalising Sprint, in part so that Sprint could acquire the 50% of the mobile carrier Clearwire Corporation that it does not already own. Dish has been aggressively seeking to interfere in the merger including by proposing its own $25 billion merger transaction with Sprint in April 2013 and an earlier proposal in January 2013 to acquire Clearwire.

The most recent tactic of Dish has been to suggest that the Committee on Foreign Investment in the United States and the President use their powers to block the transaction under the CFIUS legislation (Section 721 of the Defense Production Act 1950). The concerns raised by Dish have been repeated by two US senators.

The concerns raised by Dish are based on the argument that all of the major telecommunication networks in the United States are domestically controlled and that Sprint has multiple contracts with the United States Department of Defence, operates secure networks for the United States government and has obligations owed to the United States government in relation to wire taps. It has also created its own website to advance the argument. Dish points to the significant expenditure that Softbank has made with Chinese equipment manufacturers in developing its wireless network in Japan as evidence of a concern that those Chinese suppliers could compromise US national security through Softbank’s Japanese infrastructure.  Softbank, as a Japanese listed company listed on the Tokyo Stock Exchange, is clearly not itself under Chinese control. 

The concerns seem to seize on the extraordinary claims made in the 2012 House of Representatives House Intelligence Committee report into Huawei and other Chinese telecommunications maufacturers as to security risks associated with using Chinese manufactured infrastructure. That co-incided with the Australian government decision in early 2012 not to allow Huawei to bid to supply infrastructure for the NBN.  This debate smacks more of protectionism than valid national security concerns.  Since then Huawei has turned its back on trying to develop its business in the US but continues to grow as one of the largest telecom manufacturers in other parts of the world.  To point to equipment supply arrangements in Softbank’s Japanese business as a national security issue in the United States seems extreme.

Softbank had previously made some key concessions directed at obtaining CFIUS and other relevant US regulatory approvals (see proxy statement at page 181). Softbank and Sprint have undertaken to enter a network security agreement under which Sprint with not acquire any network equipment from Huawei or other companies labelled a security risk by the House Intelligence Committee.  Softbank and Sprint have agreed that one of the ten directors on Sprint’s board will be subject to approval by the US government and designated as the security director to administer the network security agreement.

The CFIUS review process applicable to the Sprint merger is clear.  In reviewing the national security implications of foreign investment the CFIUS mandate extends to consideration of critical infrastructure and critical technologies that are essential to national security (s. 721(a) provides definitions). The President has power to block a transaction if he finds there is credible evidence that leads him to believe that a foreign interest exercising control might take action that threatens to impair national security (s. 721(d)). The effect of the acquisition on critical infrastructure and critical technology is a specific factor that the President may take into account (s. 721(f)).

The Xenophobia card seem to be playing well in the United States at the moment.  I recently wrote on the extraordinary decision made by Barak Obama in September 2012 prohibiting the acquisition by Sany executives of windfarms in Oregon and requiring Chinese equipment at the sites to be dismantled, as well as the unsuccessful subsequent litigation against the President. Earlier this year Wanxiang Group experienced heavy weather in its acquisition of A123 Systems, an electrical battery maker.  Some members of Congress strongly argued that the transaction should be blocked on the grounds it could jeopardise energy security because of the use of the battery technology by the US military and because of the high level of government grants that A123 had received in developing its technology. Despite these concerns that transaction received CFIUS approval.

China can be expected to be a dominant force in global foreign direct investment in coming years.  In 2012 the United States overtook Australia as China’s largest recipient of foreign direct investment, as China seeks to diversify its exposure among the countries in which it invests. It is critical that the United States and China develop a mature dialogue on the issues raised by Chinese foreign direct investment.  The Huawei house report and the Sany decision are to be regretted in that regard.  A CFIUS decision on the Softbank/Sprint merger is expected soon.  Hopefully common sense will prevail.