Japanese companies’ ambitions to pursue more deals within the US might fall foul of intensified scrutiny of their enterprise actions in China, trade legal professionals have warned.
The issues, which legal professionals mentioned had been being debated on the high of some of Japan’s largest companies, centre on the Committee on Foreign Investment within the US (Cfius) — the inter-agency physique that screens deals by non-US companies and that has stepped up its evaluations of consumers’ links with China.
The warnings come as Japanese companies discover more acquisitions within the US, following the ending of Covid-19 restrictions that made abroad deals troublesome, and with Chinese consumers dealing with even better hurdles to safe US deals.
Although Cfius scrutiny impacts potential consumers from anyplace outdoors the US, legal professionals mentioned Japanese companies had been notably susceptible as a result of of their many years’ value of funding, provide chains, joint ventures and different enterprise connections in China.
Aimen Mir, a former chair of the Cfius evaluate committee who’s now a contest accomplice at Freshfields Bruckhaus Deringer, mentioned that “as the geopolitical situation evolves” companies ought to be ready for better scrutiny.
“Companies will find it increasingly difficult to navigate between the US and China and neither government seems likely to make this conundrum any easier for investors in the near-term,” mentioned Mir.
He added that whereas Cfius was not seeking to dissuade companies from doing enterprise in China usually, the depth of a gaggle’s ties to China might create complexities in a evaluate.
Cfius would possibly cross-examine a Japanese firm on how it will react if confronted with a business determination over which the US and Chinese governments had been straight in battle, he urged.
“Companies will have to think about what will happen down the road,” added Mir.
Ken Lebrun, a Tokyo-based mergers and acquisitions lawyer at Davis Polk, mentioned: “Increasingly, Japanese companies facing a Cfius review . . . do need to think very carefully about their interconnectivity with China. They have to be able to answer Cfius’s questions about whether Chinese employees or business partners have access to their technology or IT, whether their cyber security is a weak link, and so on.”
US president Joe Biden signed an govt order in September final 12 months that harassed the necessity for Cfius evaluations to stay conscious of an evolving nationwide safety panorama. While the order could not have represented a major change in elementary place, authorized specialists mentioned it despatched a message that the Cfius evaluate course of was going to turn into more invasive.
Ivan Schlager, a accomplice at Kirkland & Ellis with a apply targeted on Cfius circumstances, mentioned that whereas Japanese deals within the US didn’t face a better chance of being blocked, “the review will be more rigorous, intense and thorough”.
He mentioned one potential Cfius concern could be round companies with a heavy dependence on China as a buyer.
“Do the Chinese have leverage over you? Can they use that leverage for nefarious purposes?” mentioned Schlager.
George Grammas, a accomplice at Squire Patton Boggs who advises purchasers on export controls and Cfius clearance, mentioned Cfius thought of ties to China broadly by way of “subsidiaries, joint ventures and co-operative arrangements”, specializing in potential weaknesses at safeguarding know-how.
That raises concern for a lot of Japanese companies which have joint ventures in China the place they’re partnered with native teams and share a sure stage of know-how.
Cfius declined to remark.