Japanese companies seeking US deals fear more scrutiny of China links

Japanese companies’ ambitions to pursue more deals in the US could fall foul of intensified scrutiny of their business activities in China, trade lawyers have warned.

The concerns, which lawyers said were being debated at the top of some of Japan’s biggest companies, centre on the Committee on Foreign Investment in the US (Cfius) — the inter-agency body that screens deals by non-US companies and that has stepped up its reviews of buyers’ links with China.

The warnings come as Japanese companies explore more acquisitions in the US, following the ending of Covid-19 restrictions that made overseas deals difficult, and with Chinese buyers facing even greater hurdles to secure US deals.

Although Cfius scrutiny affects prospective buyers from anywhere outside the US, lawyers said Japanese companies were particularly vulnerable because of their decades’ worth of investment, supply chains, joint ventures and other business connections in China.

Aimen Mir, a former chair of the Cfius review committee who is now a competition partner at Freshfields Bruckhaus Deringer, said that “as the geopolitical situation evolves” companies should be prepared for greater 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,” said Mir.

He added that while Cfius was not looking to dissuade companies from doing business in China generally, the depth of a group’s ties to China could create complexities in a review.

Cfius might cross-examine a Japanese company on how it would react if faced with a commercial decision over which the US and Chinese governments were directly in conflict, he suggested.

“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, said: “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 executive order in September last year that stressed the need for Cfius reviews to remain responsive to an evolving national security landscape. While the order may not have represented a significant change in fundamental position, legal experts said it sent a message that the Cfius review process was going to become more invasive.

Ivan Schlager, a partner at Kirkland & Ellis with a practice focused on Cfius cases, said that while Japanese deals in the US did not face a greater likelihood of being blocked, “the review will be more rigorous, intense and thorough”.

He said one potential Cfius concern would be around companies with a heavy dependence on China as a customer.

“Do the Chinese have leverage over you? Can they use that leverage for nefarious purposes?” said Schlager.

George Grammas, a partner at Squire Patton Boggs who advises clients on export controls and Cfius clearance, said Cfius considered ties to China broadly via “subsidiaries, joint ventures and co-operative arrangements”, focusing on potential weaknesses at safeguarding technology.

That raises concern for many Japanese companies that have joint ventures in China where they are partnered with local groups and share a certain level of technology.

Cfius declined to comment.