DealLawyers.com Blog

“This too shall pass” doesn’t apply to CFIUS risk. Despite five years having passed since the acquisition of Jupiter Systems by Hong Kong-based acquirer, Suirui International, a July 8 Executive Order mandates that Suirui divest the interest it acquired in Jupiter Systems following a review by CFIUS, which found that the ownership posed a threat to U.S. national security. Here’s background from this Freshfields blog:

Jupiter deals in video wall display technology and visualization systems—in other words, large-scale, multi-monitor displays one might see in NASA’s Mission Control or in a military command center. Jupiter has operated for over 40 years and offers its solutions to corporate customers as well as U.S. government entities. Jupiter reports its U.S. government customers include the CIA, the NSA, and NASA. These agencies likely rely on Jupiter’s systems to display and process sensitive or classified data.

Suirui and its Chinese parent company are cloud communication service carriers similarly specializing in video conferencing solutions . . . After buying Jupiter for an undisclosed sum, Suirui installed its co-Chairman as Chairman of Jupiter and its co-CPO as CEO. Beyond announcing these overlapping executive appointments, Jupiter’s website currently contains no disclosure of the acquisition itself[.]

The blog summarizes what the order requires, as follows:

Immediate Access Prohibitions: Suirui and its affiliates are immediately barred from accessing Jupiter’s non-public source code, technical information, IT systems, and U.S. facilities.

Complete Divestment: Within 120 days, Suirui must divest all interests in Jupiter, including transferring or destroying assets such as intellectual property, source code, and customer contracts.

Jupiter’s Divestment of the Jupiter Asia Companies: A unique requirement for this presidential order is that Jupiter is required to divest all interests or rights in any assets or operations of the Jupiter Asia Companies—three entities organized in Hong Kong and China—created after the completion of the Transaction.

Buyer Pre-Approval: The divestment is subject to CFIUS non-objection; CFIUS has 30 days to object to potential buyers once proposed. The order specifically mentions factors on which an objection might be based, such as whether the buyer is a U.S. citizen and whether they have ties to the Chinese sellers.

Compliance Monitoring: Until divestment is complete, the parties must provide weekly compliance certifications to CFIUS and are subject to audit requirements.

It also provides a list of key factors in CFIUS’s review, and these key takeaways:

Non-passive Chinese investments in U.S. businesses that pose any colorable national security risk are almost certain to be prohibited.

Even without public reporting, CFIUS has means to identify non-filed transactions.

CFIUS’s reach extends well beyond the pre-closing transaction review process. Companies that fail to engage with CFIUS appropriately may find themselves subject to retroactive scrutiny that could ultimately result in forced divestment.

A forced divestment can result in destruction of value of the company. In structuring its divestment requirement, CFIUS is less likely to be sympathetic to value destruction concerns if the national security considerations should have been obvious and it appears that the parties sought to avoid detection of the transaction by customers or CFIUS.

I *think* (please reach out if I am wrong) that this marks only the 10th time this power has been used to formally block or unwind a transaction since the first in 1990.

– Meredith Ervine