Fighting over Legal Process in the SoftBank-Sprint Deal

Last week, the inter-agency Committee on Foreign Investment in the United States (CFIUS) approved Japanese telecommunications firm SoftBank's purchase of a 70% interest in Sprint-Nextel.  (Paul briefly discussed the transaction earlier.)  Both the approval and the events preceding it highlight an issue of great importance: the way actors excluded from the formal CFIUS process, like lawmakers and industry competitors, attempt to influence the decisions of CFIUS members and the transacting parties. As for the legal background, CFIUS has authority to review---and to block---corporate transactions where a foreign person aims to control a U.S. business.  Though not required to do so, SoftBank and Sprint affirmatively sought CFIUS review.  The law separately required buyer and seller to seek approval from another agency, the Federal Communications Commission. (The companies' public interest statement, most relevant for Lawfare readers, begins on page 21 of the linked filing.) The hubbub surrounding the Sprint deal stems from this central fact:  SoftBank, along with many other Asian telecommunications firms, uses equipment built by Huawei and ZTE, two Chinese companies.  Both are believed to be state-controlled and thus might enable the Chinese government to conduct espionage or cyber attacks against U.S. targets.  That possibility brought on scrutiny from many quarters---both inside and outside of the CFIUS and FCC frameworks---as I explain below the fold. Congressional Concerns about Huawei and ZTE. In a report released in the fall of 2012, the House Permanent Select Committee on Intelligence expressed wariness of Huawei and ZTE technology.  The report was based on open-source and classified intelligence, and interviews with officials at both businesses and their industry competitors.  In short, the Committee found that the two companies were not cooperative, not forthcoming, and had not provided detail requested by the Committee.  At the same time, experts from the industry and current and former employers suggested that Huawei and ZTE might be violating U.S. laws. Meanwhile, Clearwire---a U.S. telecommunications company in which Sprint held a 50% stake---selected Huawei as a vendor, one month after the House Committee report came out. To complicate the situation further,  Sprint announced in December that it aimed to acquire the other, outstanding half of Clearwire's stock.  Approval of both transactions (SoftBank-Sprint, Sprint-Clearwire) together could mean a greater role for Huawei and ZTE technology in the United States---and thus heighten national security concerns. Enter industry competitors. The risk was not lost on another U.S. company, Dish Network, which in a written filing (part I, part II, part III) asked the FCC to extend the deadline to oppose the pending SoftBank-Sprint transaction. Its request included two questions directly focused on the implications of SoftBank-Sprint and Sprint-Clearwire deals:

• Is it in the public interest for a foreign company to control more spectrum below 3 GHz than any one other company in the United States?
• Does the presumption in favor of foreign investment apply in light of the services Clearwire provides, and if not, does Japan offer effective competitive opportunities to U.S. providers of other similar services?

Dish Network wasn't the only private business with anxieties.  AT&T, through one of its vice presidents, Brad Burns, released a statement in October expressing the company's concerns about the quantity of spectrum that would be controlled by a foreign company, should the transaction go through. The FCC later requested further information about SoftBank's shareholders, including the proportion of shares held by Japanese individuals, residents of Japan, Japanese businesses, and Japanese trust banks.  But in January, the Department of Justice requested that the FCC defer its review until CFIUS had concluded its work. Over the next few months, information leaked to the press about proposals to address Huawei/ZTE-related problems the deal presented. These reflected a quandary facing CFIUS: it needed to resolve national security issues posed by the new company, including its supplier selection, but without also prohibiting it from choosing Chinese suppliers---which would violate trade rules.  Apart from an outright prohibition on Chinese vendors, how else could CFIUS meet its statutory obligation and still calm an anxious public? More From Congress. One answer came from a prominent member of Congress--rather than from either of the transacting parties themselves.  (For its part, CFIUS also does not discuss details of its covered transactions publicly.) In March, House Intelligence Committee Chairman Mike Rogers went on the record to confirm that Huawei equipment would not be used in the Sprint network, upon approval of SoftBank's purchase, and that SoftBank would mitigate any uses of the equipment in Clearwire's network to boot.  And, as this Wall Street Journal story explained, SoftBank would be required to notify the government in advance of any other plans to acquire core network purchases, and to mitigate national security or public safety concerns that might be associated with them prior to selecting a vendor. Dish Network Raises the Stakes.  This did not appease the transaction's seemingly most vocal critic: Dish Network.  In April, it submitted a bid for the entirety of Sprint Nextel for $25.5B---that is, $5B more than SoftBank had put up---and launched an advocacy website.  In a statement, SoftBank responded that its plan better assured U.S. national security than Dish Network's plan:

SoftBank’s proposal improves U.S. national security because only SoftBank has committed to remove equipment already located inside a U.S. network that the government has national security concerns about. . . . Dish has made no such commitment to remove this network equipment and to do so would require Dish to further increase the amount of debt it will need to complete any transaction.

Meanwhile, on the Hill.  In May, as the CFIUS deadline drew near, it was clear that not everyone on Capitol Hill was as comfortable with the mitigation agreement as Congressman Rogers was. Democratic Senator Charles Schumer wrote to Treasury Secretary Jack Lew (whose agency chairs CFIUS) and FCC Acting Chairwoman Mignon Clyburn to express his reservations, as did Arizona Republican Senator John McCain. More details soon came to light about the CFIUS review and mitigation agreements.  Like many national security agreements stemming from CFIUS evaluations, this one would require the appointment of a "Security Director" on the new company's board, subject to U.S. government approval. Go American. Still seeking to undercut its rival, Dish Network next put out a press release arguing that it was better-equipped to protect the national security interests at stake---primarily because of its made-in-the-U.S.A. status. It said, among other things:

There is a bright line between DISH and SoftBank: DISH is not foreign-controlled, nor is its proposal subject to CFIUS. . . . The question is about who should control and who will be accountable for assets – the Sprint national wireless and backbone fiber networks – that are vital to our national security. . . .The contrast is clear: DISH does not operate infrastructure dependent on Chinese equipment; DISH does not own nearly a third of the Chinese e-commerce giant, Alibaba; DISH was not affiliated with a company that admitted bribing Chinese officials for telecommunications contracts.

Crossing the finish line.   The public relations effort evidently fell flat.  A few days after the security director provision leaked, SoftBank and Sprint announced that CFIUS had cleared the transaction. Sprint's Form 8-K, filed with the SEC, contained a description of the steps the two would take, in order to resolve national security concerns:

• SoftBank and Sprint must appoint an independent member to the New Sprint board of directors to serve as the Security Director. The Security Director will be approved by the USG Parties, oversee Sprint’s compliance with the National Security Agreement and serve as a contact for the USG Parties on all security-related matters. In addition, the Security Director is required to have expertise and experience with national security matters, be a U.S. resident citizen, and hold appropriate security clearances.

• Once Sprint either obtains operational control of Clearwire or consummates its proposed acquisition of Clearwire, USG Parties will have a one-time right to require Sprint to remove and decommission by December 31, 2016 certain equipment deployed in the Clearwire network.

• The USG Parties will have the right to review and approve certain network equipment vendors and managed services providers of Sprint, as well as of Clearwire once Sprint completes its proposed acquisition of Clearwire.

A New York Times editorial spoke in favor of the deal, pointing out that T-Mobile and Verizon are both majority or plurality foreign-owned, and the U.S.-Japan alliance should "allay concerns." Sprint has already begun following through on its national security agreement: it announced on Friday that it had selected the new independent board member who will serve as the new company's Security Director: Retired Admiral Mike Mullen (the seventeenth Chairman of the Joint Chiefs of Staff).

While the SoftBank-Sprint deal will move forward when shareholders vote on June 12 (here's the proxy statement), the future of Clearwire is still to be determined. Sprint raised its offer for Clearwire from $2.97 a share to $3.40 a share; in response, Dish Network raised its bid for Clearwire by $1 per share.  Clearwire had set a vote on Sprint's offer for May 31, but rescheduled it for June 13, after deciding that it desired to review Dish's new offer. On Monday June 3rd, Sprint sent a letter to Clearwire's board saying that the Dish proposal is "not actionable" under Delaware law.

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Thus the legal battle over national security continues---though with the CFIUS decision, the main regulatory process has come to an end.  The case nevertheless illuminates an important trend---the use of existing domestic laws to contest commercial actions with a national security “twist.”  It is highly unlikely that the drafters of the CFIUS statute or the Federal Communications Act anticipated this result.  But lawyers are good at putting existing laws to new uses.