Although there has not yet been a change of ownership, the recent change in management of HNA Group Co., the heavily indebted Chinese airline conglomerate and aggressive global M&A acquirer of recent years, should be enough to initiate a national security review of the group’s U.S. holdings.
By the terms of the law, changes of ownership or control can trigger jurisdiction of the Committee on Foreign Investment in the U.S. (CFIUS) with respect to U.S. entities. HNA was put into critical condition by the new coronavirus last month, as concerns about Covid-19 illness crippled air travel. As of Feb. 29, the provincial government of Hainan had “appointed new leaders atop HNA and is assuming management of its liquidity risks.” The HNA global corporate structure of subsidiaries and affiliates, of which Hainan Traffic Administration Holding Co. Ltd. is the ultimate parent, includes over 440 entities, including U.S. entities.
While HNA has made statements emphasizing that the ownership of the company remains unaffected by the change in management, Bloomberg has reported that, according to people familiar with the matter, this move is “tantamount to China declaring it’s taking over decision making at the group.” The Hainan government, as part of the arrangement, appointed a new executive chairman and created a working group comprised of “officials from the municipality, the civil aviation authority and China Development Bank to oversee the effort.”
Among HNA’s subsidiaries is Ingram Micro Inc., a California company that was acquired by HNA in 2016. The acquisition was reviewed by CFIUS, and Ingram Micro is currently subject to an agreement with the Committee under which it “is required to operate as a standalone company, and is subject to annual audits of its compliance with certain operating and security agreements, according to Moody’s Investors Service.” HNA is also the ultimate parent of Delaware company Swissport, USA Inc.
Foreign-Person-to-Foreign-Person Conveyance of Control
The existing agreement in place between Ingram Micro Inc. and CFIUS is not available to the public. Even so, any takeover by the Chinese government or a Chinese provincial government (such as Hainan) of control of these or any other U.S. entities ultimately owned or controlled by HNA would likely be considered a “foreign government-controlled transaction” under CFIUS regulations—meaning that it would be subject to CFIUS review.
The key provision is the regulation’s definition of control, which includes the power to “determine, direct, or decide” certain important matters impacting the entity regardless of whether that power stems from actual ownership. Such important matters include:
“(1) The sale, lease, mortgage, pledge, or other transfer of any of the tangible or intangible principal assets of the entity, whether or not in the ordinary course of business;
(2) The reorganization, merger, or dissolution of the entity;
(3) The closing, relocation, or substantial alteration of the production, operational, or research and development facilities of the entity;
(4) Major expenditures or investments, issuances of equity or debt, or dividend payments by the entity, or approval of the operating budget of the entity;
(5) The selection of new business lines or ventures that the entity will pursue;
(6) The entry into, termination, or non-fulfillment by the entity of significant contracts;
(7) The policies or procedures of the entity governing the treatment of nonpublic technical, financial, or other proprietary information of the entity;
(8) The appointment or dismissal of officers or senior managers or, in the case of a partnership, the general partner;
(9) The appointment or dismissal of employees with access to critical technology or other sensitive technology or classified U.S. Government information; or
(10) The amendment of the Articles of Incorporation, constituent agreement, or other organizational documents of the entity with respect to the matters described in paragraphs (a)(1) through (9) of this section.” 31 CFR § 800.208.
Considering the definition of “control,” the current involvement of the Hainan provincial government in management of the group would appear to trigger CFIUS review.
Aside from having a separate defined term for “foreign government-controlled transactions,” the regulations also state that covered control transactions include a “transaction in which a foreign person conveys its control of a U.S. business to another foreign person.” In the regulations, the definition of “foreign person” includes foreign governments, and the definition of “foreign governments” in turn covers “national and subnational governments, including their respective departments, agencies, and instrumentalities”—such as the provincial government of Hainan.
This analysis would apply to other similarly situated U.S. subsidiaries or affiliates of Chinese companies—possibly ailing due to the coronavirus outbreak—the control of which is taken over by Chinese national or provincial governments.
The fact that, in the instance of Ingram Micro, the U.S. entity is already a party to an agreement only increases the likelihood of CFIUS review of the recent change in management with respect to that particular U.S. entity.
This article was revised on March 9, 2020, to clarify that HNA Group’s management and not its ownership was affected by the new arrangement announced on Feb. 29, 2020, and to add detail, including an excerpt from the relevant regulations.
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