CNOOC's new lessons

After the China National Offshore Oil Corporation (CNOOC), made what would be China's largest overseas investment, the nation's third largest oil company is in a good position to teach other Chinese companies a lesson in making an overseas foray.

With the memory of CNOOC's flop eight years ago still very much alive in people's minds, the largest hurdle in its purchase of Canadian energy company Nexen was considered to come from the Committee on Foreign Investment in the United States (CFIUS), a Treasury agency reviewing foreign investments.

In 2005, CFIUS struck down the CNOOC offer to buy Unocal for US$18.5 billion out of national security concerns. Nonetheless, eight years ago, on Jan. 12, CFIUS did give the green light to the CNOOC-Nexen deal.

That same month, CFIUS approved the sale of the bankrupt car battery maker A123 Systems to China's Wanxiang Group, in spite of concerns over national security and the benefits that the Chinese company might gain through federal funding.

To mitigate criticism, Wanxiang strategically scrapped A123's defense contract, which was sold to a U.S. energy company for US$2.3 million.

Covington & Burling LLP partner Mark Plotkin, who represented CNOOC and Wanxiang before CFIUS, said the most valuable lesson learned from CNOOC's Nexen deal is that with careful planning and experienced counsel, major strategic investments by Chinese companies in the United States can be approved by CFIUS.

In some cases, a counsel would advise its customers to avoid the planned investment, if it is associated with U.S. infrastructure or is geographically close to sensitive areas of facilities. In other cases, a counsel would advise on restructuring the transaction or excluding certain sensitive assets as to facilitate the trade and make the U.S. government more comfortable with the transaction.

"The potential difficulties in most cases were foreseeable and could have been addressed through adequate consultation with sophisticated CFIUS counsel," said Mark Plotkin, citing the CNOOC case as a poster child for deal-making in this field.

CFIUS' approval of the CNOOC-Nexen trade is evidence that CFIUS is concerned only with national security matters, even when protectionism, economic nationalism and xenophobia get in the way.

"In our experience, CFIUS evaluates each transaction on its own merits," he said. "How the parties approach the CFIUS process makes a very significant difference."

Opposition from either the media or Congress can make the transaction parties uncomfortable and can impact their determination to pursue the deal, but CFIUS is an independent body organized to approve foreign investments in the country.

Mark Plotkin said Chinese investment is generally welcomed in the U.S., except in those sectors that are strategically important from a national security perspective.

One telling example is CFIUS' rejection of Sany Affiliate Ralls Corp's acquisition of a wind farm in Oregon because of the project's proximity to a U.S. Navy facility. Another example is China's Dalian Wanda Group's acquisition of AMC Entertainment Holdings for $2.6 billion last year. The movie industry isn't as sensitive as the energy sector, so the deal was not as hard to negotiate as one in the energy sector.

"There is a cautious attitude towards investment in certain types of U.S. infrastructure, such as energy generation, distribution and transmission, for example, and — understandably — in defense industries," said Mark Plotkin.

"But the vast majority of U.S. companies and industries are considered benign and any investment in those is genuinely welcomed," he added.