As proxy battles go, Qualcomm’s recently delayed shareholder vote on a bid to replace board members has gone into unchartered territory, with a government agency stepping in to delay any action for at least 30 days.
Qualcomm, a leading manufacturer of the chip sets found in nearly all smartphones, is fending off a takeover bid by Broadcom, a semi-conductor company domiciled in Singapore. The $117 billion, $82 per share, deal is one of the largest ever in the technology space.
A lot of ancillary activity has taken place as the bid proceeds, turning the transaction into something of a corporate soap opera.
In one recent twist, on March 9, Qualcomm announced that Dr. Paul Jacobs will no longer serve as executive chairman of its board of directors. He will continue to serve on the board, but will no longer serve in an executive management capacity, a role now eliminated.
The move was touted as part of an effort to “move Qualcomm forward by closing the acquisition of NXP, strengthening our licensing business, and capitalizing on the enormous 5G opportunity before us." Qualcomm has been trying to finalize its acquisition of NXP Semiconductors, a Dutch company.
The commitment to that acquisition, more than a year in the works, is another effort to keep Broadcom at bay. The latter company’s strategy to overcome the objections of its unwilling target is now focused on a takeover of the board of directors.
In January, Broadcom filed proxy materials in connection with its solicitation of proxies to elect 11 independent nominees to the Qualcomm board of directors at Qualcomm's 2018 Annual Meeting of Stockholders, scheduled for March 6. The effort was later reduced to six members
Shareholders, however, won’t get to vote on those board members for at least another 30 days. The latest twist in the Qualcomm deal comes courtesy of the U.S. Government, specifically the Committee on Foreign Investment in the United States (CFIUS). In an unusual move it is demanding more time to review potential implications of the takeover bid that would be made possible with new directors.
The role of CFIUS is to review certain types of foreign transactions to determine if there is: a threat to impair U.S. national security; a foreign investor present which is controlled by a foreign government, such as a state-owned enterprise; and something that can affect homeland security or result in control of any critical infrastructure that might impair national security.
Increasingly, in a multinational business climate, concerns are arising regarding national security and the intellectual property held by domestic companies that do business abroad.
“The fact that a review emerged and an interim order emerged from a scheduled proxy vote is very unique. It is a very unique procedural status.”
Jason Waite, Partner, Alston & Bird
Recently, citing those concerns, CFIUS pressure led MoneyGram and Ant Financial Services Group, an affiliate of China-based Alibaba, to terminate their planned merger.
For the Qualcomm deal, the involvement of CFIUS has more to do with extrapolation and projection than direct Chinese involvement or security concerns.
“Having a well-known and trusted company hold the dominant role that Qualcomm does in the U.S. telecommunications infrastructure provides significant confidence in the integrity of such infrastructure as it relates to national security,” CFIUS wrote in an unusually detailed letter demanding the delay of a board vote It explained why its sights were set on a company based in Singapore.
“Reduction in Qualcomm’s long-term technological competitiveness and influence in standard setting would significantly impact U.S. national security,” the letter added. “This is in large part because a weakening of Qualcomm’s position would leave an opening for China to expand its influence on the 5G standard-setting process. Chinese companies, including Huawei, have increased their engagement in 5G standardization working groups as part of their efforts to build out a 5G technology.
“For example, Huawei has increased its R&D expenditures and owns about 10 percent of 5G essential patents. While the United States remains dominant in the standards-setting space currently, China would likely compete robustly to fill any void left by Qualcomm as a result of this hostile takeover. Given well-known U.S. national security concerns about Huawei and other Chinese telecommunications companies, a shift to Chinese dominance in 5G would have substantial negative national security consequences for the United States.”
Broadcom, perhaps prognosticating trouble with CFIUS, had already initiated plans and promises, including a formal relocation from Singapore to the U.S. Broadcom is expected to ask shareholders to approve the plan on March 23.
WHITE HOUSE KILLS DEAL
As Compliance Week published for the week, on Monday March 12, President Trump threw us another curve ball regarding Broadcom’s attempted takeover of Qualcomm.
Upon review of a recommendation from the Committee on Foreign Investment in the United States and consideration, as appropriate, of the Defense Production Act of 1950, he ruled that any deal would be illegal. “The Purchaser and Qualcomm shall immediately and permanently abandon the proposed takeover,” he wrote. The complete text of his order follows:
REGARDING THE PROPOSED TAKEOVER OF QUALCOMM INCORPORATED BY BROADCOM LIMITED
By the authority vested in me as President by the Constitution and the laws of the United States of America, including section 721 of the Defense Production Act of 1950, as amended (section 721), 50 U.S.C. 4565, it is hereby ordered as follows:
Section 1. Findings. (a) There is credible evidence that leads me to believe that Broadcom Limited, a limited company organized under the laws of Singapore (Broadcom), along with its partners, subsidiaries, or affiliates, including Broadcom Corporation, a California corporation, and Broadcom Cayman L.P., a Cayman Islands limited partnership, and their partners, subsidiaries, or affiliates (together, the Purchaser), through exercising control of Qualcomm Incorporated (Qualcomm), a Delaware corporation, might take action that threatens to impair the national security of the United States; and
(b) Provisions of law, other than section 721 and the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.), do not, in my judgment, provide adequate and appropriate authority for me to protect the national security in this matter.
Sec. 2. Actions Ordered and Authorized. On the basis of the findings set forth in section 1 of this order, considering the factors described in subsection 721(f) of the Defense Production Act of 1950, as appropriate, and pursuant to my authority under applicable law, including section 721, I hereby order that:
(a) The proposed takeover of Qualcomm by the Purchaser is prohibited, and any substantially equivalent merger, acquisition, or takeover, whether effected directly or indirectly, is also prohibited.
(b) All 15 individuals listed as potential candidates on the Form of Blue Proxy Card filed by Broadcom and Broadcom Corporation with the Securities and Exchange Commission on February 20, 2018 (together, the Candidates), are hereby disqualified from standing for election as directors of Qualcomm. Qualcomm is prohibited from accepting the nomination of or votes for any of the Candidates.
(c) The Purchaser shall uphold its proxy commitments to those Qualcomm stockholders who have returned their final proxies to the Purchaser, to the extent consistent with this order.
(d) Qualcomm shall hold its annual stockholder meeting no later than 10 days following the written notice of the meeting provided to stockholders under Delaware General Corporation Law, Title 8, Chapter 1, Subchapter VII, section 222(b), and that notice shall be provided as soon as possible.
(e) The Purchaser and Qualcomm shall immediately and permanently abandon the proposed takeover. Immediately upon completion of all steps necessary to terminate the proposed takeover of Qualcomm, the Purchaser and Qualcomm shall certify in writing to the Committee on Foreign Investment in the United States (CFIUS) that such termination has been effected in accordance with this order and that all steps necessary to fully and permanently abandon the proposed takeover of Qualcomm have been completed.
(f) From the date of this order until the Purchaser and Qualcomm provide a certification of termination of the proposed takeover to CFIUS pursuant to subsection (e) of this section, the Purchaser and Qualcomm shall certify to CFIUS on a weekly basis that they are in compliance with this order and include a description of efforts to fully and permanently abandon the proposed takeover of Qualcomm and a timeline for projected completion of remaining actions.
(g) Any transaction or other device entered into or employed for the purpose of, or with the effect of, avoiding or circumventing this order is prohibited.
(h) If any provision of this order, or the application of any provision to any person or circumstances, is held to be invalid, the remainder of this order and the application of its other provisions to any other persons or circumstances shall not be affected thereby. If any provision of this order, or the application of any provision to any person or circumstances, is held to be invalid because of the lack of certain procedural requirements, the relevant executive branch officials shall implement those procedural requirements.
(i) This order supersedes the Interim Order issued by CFIUS on March 4, 2018.
(j) The Attorney General is authorized to take any steps necessary to enforce this order.
Sec. 3. Reservation. I hereby reserve my authority to issue further orders with respect to the Purchaser and Qualcomm as shall in my judgment be necessary to protect the national security of the United States.
Sec. 4. Publication and Transmittal. (a) This order shall be published in the Federal Register.
(b) I hereby direct the Secretary of the Treasury to transmit a copy of this order to Qualcomm and Broadcom.
Source: White House
That effort may also explain CFIUS urgency, as once the move is complete it loses jurisdiction. The agency has demanded that Broadcom give the committee at least five business days notice before taking action.
CFIUS was also, no doubt, responding to Congressional concerns.
Among those concerned by the deal is Rep. Mike Gallagher (R-Wis.). On March 1, he sent a letter to Secretary of the Treasury Steven Mnuchin urging CFIUS to promptly review Broadcom’s hostile bid for Qualcomm.
Gallagher has co-sponsored the Foreign Investment Risk Review Modernization Act, legislation aimed at modernizing the national security review of potential foreign investment in the United States in order to safeguard it from malicious global actors.
“Failure by CFIUS to exercise its authority in connection with an attempted foreign takeover of Qualcomm—a critical technology company—would undermine the express authority that Congress has afforded CFIUS by law and irreparably harm U.S. national security,” he wrote. “Singapore-based Broadcom is no stranger to CFIUS. As you know, federal agencies tasked with protecting our national security closely scrutinized the company during the unusually lengthy CFIUS review of Broadcom’s acquisition last year of Brocade Communications.”
“We cannot overstate the likely harm that would result to Qualcomm, the U.S. company leading the development of 5G and other next-generation technologies, as well as to United States security interests,” he added. “A disruption of Qualcomm’s R&D efforts would in effect hand the growing competition for 5G to China.”
Gallagher added that, “CFIUS can review proxy contests precisely because the proposed change of directors represents an attempt to take control of the company.”
Hock Tan, president and CEO of Broadcom, in a letter to Congress sought to assuage concerns.
“Broadcom is committed to making the United States the global leader in 5G. Any notion that a combined Broadcom-Qualcomm would slash funding or cede leadership in 5G is completely unfounded,” he wrote. “We are fully committed to making the United States the global leader in 5G by focusing resources and strengthening leadership in this area.”
Broadcom pledged to create a new $1.5 billion fund with a focus on innovation to train and educate the next generation of RF engineers in the United States. “In addition, Broadcom will not sell any critical national security assets to any foreign companies. Of course, any dispositions of assets to foreign buyers would be themselves subject to CFIUS review,” Tan wrote.
Tan stressed that Broadcom is “in every important respect, an American company.”
“It is led by an executive team of American citizens and a board of directors made up of nearly all American citizens,” he wrote. “Ninety percent of Broadcom's shareholders are in the U.S. More than half of Broadcom's total workforce is in the United States, across more than 25 states. When we complete our acquisition of Qualcomm, we expect to have more than 25,000 employees in the United States.”
Despite documented Congressional concerns, Broadcom alleged that Qualcomm secretly filed a voluntary request with CFIUS to initiate an investigation, resulting in a delay of Qualcomm's annual meeting 48 hours before it was to take place. “This was a blatant, desperate act by Qualcomm to entrench its incumbent board of directors and prevent its own stockholders from voting for Broadcom’s independent director nominees,” it said in a statement. “It is critical that Qualcomm stockholders know that Qualcomm did not once mention submitting a voluntary notice to CFIUS in any of its interactions with Broadcom to date … This can only be seen as an intentional lack of disclosure, both to Broadcom and to its own stockholders. This brings Qualcomm's ‘engagement theater’ to a new low. It should be clear to everyone that this is part of an unprecedented effort by Qualcomm to disenfranchise its own stockholders.
“The fact that a review emerged and an interim order emerged from a scheduled proxy vote is very unique,” says Jason Waite, international trade practice leader and partner at law firm Alston & Bird. “It is a very unique procedural status.”
“I think almost everybody recognizes that Chinese investment undergoes a particularly stringent review by CFIUS,” he added. “The Qualcomm letter was very interesting because even in a case where you didn’t think China had anything to do with it, they still found a concern related to China.”
Waite says the scrutiny on the Qualcomm deal is an illustration of the continuous evolution of the national security threat environment. “I wouldn’t say that it is just China, or just a change in political philosophy,” he explained. “It is more complicated that that. We have a sophisticated and complex national security infrastructure that is constantly adapting and developing new ideas about emerging threats. That is what influences these types of reviews and cases.”
“Moneygram is a great example of how the range of national security concerns expanded and it is not the only case where CFIUS was concerned about personal data being owned and controlled by a foreign party,” Waite added. “If you had asked people two or three years ago whether personal data was a national security concern, most would have said ‘no.’ That has evolved.”
Waite stresses that “because of the unusual procedural status of this, the CFIUS letter hasn’t concluded that there is a national security threat.”
“All it is saying is that there could be and they need more time,” he says. “It’s a unique case for them to step in at this phase where there is not even a transaction, just a proxy vote. That’s highly unusual. I’m not sure what will happen in 30 days.”