Asiabizblog - Business and Law for China and Asia

« Audio: More Confusion For Chinese Share Sell-off | Main | ABA Sponsors China Business Webcast and CLE »

July 1, 2005

Dale Oesterle on CNOOC-Unocal

Note the Editor's updates to this post, found at its conclusion below.

[Editor's Note: I'd like to thank Dale Oesterle, professor of contract law at Ohio State University, who has graciously provided today's post, which also runs on his Business Law Prof Blog. Author of the casebook, The Law of Mergers and Acquisitions (West 2002), he addresses the question: will the US government approve the proposed union of CNOOC-Unocal?]

CNOOC's Bid for Unocal: CFIUS Approval

by Dale Oesterle, Professor of Law
J. Gilbert Reese Chair in Contract Law
Moritz College of Law, The Ohio State University

Hong Kong based CNOOC, Ltd, China's largest offshore oil producer made a bid last week for Unocal Corp. CNOOC is 71 percent owned by state controlled China National Offshore Oil Corporation. The acquisition falls under of the interagency Committee on Foreign Investment in the United States (CFIUS). CFIUS, a committee that has worked in relative obscurity (it is the last chapter, never covered, in my Mergers & Acquisition casebook), will now be in the bright lights. The Unocal acquisition appears to be the first of many attempts by China and Chinese companies to buy American companies.

CFIUS has its origins in the Exon-Florio Amendment to the Omnibus Trade and Competitiveness Act of 1988. A Japanese company, Fujitsu had attempted a takeover of Fairchild Semiconductor Corporation in 1987 and the Exon-Florio Amendment was Congress's response. The President now has the authority to block foreign acquisitions of American companies if the acquisitions "threaten to impair the national security." The President delegated authority under the Act to CFIUS to investigate and advise the President on whether foreign acquisitions threaten national security. CFIUS is chaired by the Secretary of the Treasury and has eleven members -- representatives of the Departments of Treasury, State, Defense, Commerce, and Justice, and the Office of the Trade Representation, the Office of Management and Budget, the Chair of the Council of Economic Advisors, an Assistant to the President for Economic Policy and the Director of the Office of Science and Technology Policy. National security is not defined but Congress included a list of "factors" that include a focus on national defense requirements. Oil would clearly meet one of the factors; oil production is necessary for the "capacity of domestic industries to meet national defense requirements."

The Unocal acquisition will be a test case for CFUIS and our response to China's efforts to buy major American companies. I suspect that CFUIS will recommend that the President block the acquisition and that the President will agree to do so. In so doing, of course, the President will make Chinese officials very unhappy. China, however, does not let Americans buy controlling stakes in Chinese companies and in international affairs, reciprocity is the name of the game.

[Editor's Update, July 3, 2005: In light of this post, see also FT's article Congress Votes to Stymie CNOOC Bid. Subscription required for the entire article. But the first paragraph: "Political pressure surrounding CNOOC’s $18.5bn unsolicited bid for Unocal, the California oil company, was stepped up on Thursday as Washington lawmakers overwhelmingly supported a measure aimed at blocking the bid by cutting off funds for the Bush administration to investigate the deal."]

[Editor's Update, July 8, 2005: From the Financial Times.

"The proposed deal does raise questions but most relate to its commercial logic. China’s belief that it needs to buy resources producers in order to secure supplies makes sense only if its companies can manage them more efficiently than their owners. Otherwise, locking up capital to acquire raw materials that are freely traded on world markets is at best wasteful and at worst very risky. Odder still is CNOOC’s belief that it needs to buy a US oil company to gain access to Asian reserves which it could have bought directly from elsewhere. Integrating management, operations and corporate cultures will be a formidable task, of which the Chinese company has no previous experience, and it may also be obliged to dispose of some of Unocal’s assets."

Subscription required to view the entire article.]

Trackback Pings

TrackBack URL for this entry:
http://www.asiabizblog.com/cgi-bin/mt/mt-t.cgi/49

Comments

Post a comment