In December, Ness Technologies filed a civil action in New York State court against Pactera Technology International and Chinese parent HNA Group for alleged damages resulting from the failed sale of subsidiary Jersey Holdings to Pactera.
The lawsuit filed on 6 December alleges that Pactera/HNA's failure to comply with the Committee on Foreign Investment in the United States' (CFIUS) requests for information about the group's ownership structure cost the seller the deal.
CFIUS is an inter-agency US committee authorised to review transactions that could result in control of a US business by a foreign person, in order to determine the effect of such transactions on the national security of the USA.
Ness Technologies alleges that Pactera submitted "demonstrably and knowingly false, inconsistent, and misleading information" to CFIUS about the deal, which was contingent on a review by the body.
For its part, Pactera describes the allegations as without basis, adding that it has "diligently complied" with the provisions of the contract. It says it will vigorously defend the lawsuit which it calls "unmeritorious".
HNA has not responded to FlightGlobal's request for comment on the impact that the Ness-Pactera deal's failure and the stance adopted by the CFIUS might have on the group's acquisition strategy.
In aviation, HNA has over the past several years engaged in an international buying spree of businesses – including airline, catering, MRO and aircraft-leasing companies. The Chinese-owned conglomerate states that one of its key areas of investment is "tourism", under which airline investments fall.
Adding to its domestic shareholdings, the group has taken stakes in a number of international airlines since 2014, including Aigle Azur, Azul, Comair, TAP Portugal and Virgin Australia. Additionally, the company has invested in ground and cargo handler Swissport, airline caterer Gategroup and maintenance provider SR Technics.
During this time, Bohai Leasing – which is majority-owned by HNA – also purchased leasing companies Avolon and CIT Aerospace, making the merged company the third-largest aircraft lessor in the world in 2017.
HNA shows no signs of reining in its aviation ambitions.
But the CFIUS issues could pose hurdles to the company making US acquisitions. While HNA was able to clear CFIUS review with its acquisition of CIT Aerospace, the committee granted its approval prior to 30 November 2016 – during the Obama administration – as was required by the purchase contract. Two regulatory lawyers in Washington DC tell FlightGlobal that that they believe the Trump administration has been using CFIUS review as a political tool to block or complicate foreign investment in US businesses, particularly from China and Russia.
Historically, CFIUS has focused on foreign investment in deals that involve critical technology or crucial infrastructure. While an aircraft leasing deal may involve neither, CFIUS has taken an interest in aircraft and aviation since the 9/11 terrorist attacks in the USA, reviewing potential threats to national security but also anything that "could result in the control of a US business by a foreign government or a person controlled by or acting on behalf of a foreign government".
CFIUS's questions about the HNA ownership structure as part of the Ness-Pactera case could, in theory, impair future acquisitions of other US aviation businesses by the Chinese group.
"What CFIUS is discovering is not less than many non-Chinese banks have concluded in the past few years when trying to go through the chain of 'obligors' within HNA Group," argues one banker wishing to remain anonymous. "The web of cross-controls within HNA Group makes... the corporate structure unintelligible – the net equity position is unknown and same for the consolidated net debt."
That HNA did not pass CFIUS review in the Ness-Pactera deal makes it likely that the company will remain on US regulatory radar for future transactions. CFIUS review is not required for foreign investment in a US company, but if a foreign buyer is purchasing more than a 10% stake in a US company then the committee has the authority to review the transaction at any point in time, even after the deal has been concluded.
Because CFIUS has taken more oversight of transactions under the Trump administration, particularly with regards to Chinese investment – according to two Washington DC-based lawyers interviewed for this article – more US companies have made it a stipulation of the closing agreement to voluntarily submit and pass CFIUS review to ensure the deal won't be unwound later.
In the Ness-Pactera case, Ness is suing for damages because it alleges that HNA could not prove its ownership structure to CFIUS, which was a condition of the deal.
If HNA failed CFIUS review for a technology company, then – given that aviation is one of the industries on the committee's radar – future aviation-related transactions involving a US business or assets may face scrutiny by the committee.
The CIT-Avolon deal was voluntarily submitted to a CFIUS review, and with future aviation-related transactions involving a US company the same would likely happen.
In fact, given the global nature of aircraft leasing (US employees, US locations, US-registered aircraft), purchase of an aircraft leasing platform could often fall under the USA's jurisdiction and regulatory review, according to the two Washington DC lawyers focused on regulatory issues.
"Aviation has always been viewed as sensitive in the USA," one of the lawyers tells FlightGlobal.
Given the unpredictability of the Trump administration, all companies or technologies that could be interpreted as sensitive to national security are at risk of a CFIUS investigation. Therefore, other aviation-related businesses – such as MRO, baggage-handling or catering companies, as HNA has purchased in other countries – would probably voluntarily opt for CFIUS review to avoid an investigation at a further date.
Why does HNA matter?
Its victories in auctions indicate that HNA has been the highest bidder in a number of sale processes.
"Although often slowed by Chinese regulatory issues related to capital leaving China, HNA has been viewed as a strong and reliable bidder, particularly with respect to leasing and aviation assets such as GE Seaco, CIT Aviation, Avolon and Swissport, all of which went at very rich multiples. The absence of HNA in an auction could be viewed as significant," says a US investment banker.
But if regulators are dissatisfied with the lack of information on HNA's structure, as Ness Technologies alleges, a deal with the group may carry execution risk for future acquisitions that also submit to CFIUS review. The failure of that deal to gain clearance could make sellers wary of selecting HNA as the preferred bidder.
"There are two things at play here," says Dara Panahy, a partner at Milbank. "One, HNA Group is interested in aviation – an area that warrants higher scrutiny by the US government generally. Also, any meaningful Chinese inbound investment is experiencing higher scrutiny under this administration."
After the regulatory scrutiny brought by the Ness-Pactera episode, HNA is facing more under the terms of deal with Glencore. In December, the Swiss commodities giant said it had completed the first part of a deal to sell a 51% stake in logistics company HG Storage International (HGSI) to a HNA subsidiary. However, US assets will only be transferred into HGSI once CFIUS clearance has been received, at which point the remaining $196 million of a $775 million purchase price will become payable.
Against this backdrop of increased regulatory scrutiny, questions arise over HNA's buying potential for future aviation investments, given the global nature of the industry and the fact that many aviation businesses are likely to fall under US jurisdiction in one way or another.
Competitors bidding for aviation assets would be delighted if such a formidable rival dropped out of the running, even temporarily.
Source: Cirium Dashboard