U.S., Chinese Investors Feud Over Startup Icon Aircraft During National Security Review of Deal

Sparring over plane maker is risky tactic during secretive screening process by government panel Cfius

Feuding investors in a California plane startup are firing off allegations against each other while the company is in the midst of?a U.S. national security review, a risky tactic during the secretive process.

Icon Aircraft Inc. makes a small, amphibious plane with foldable wings that is marketed for recreational use. A group of American shareholders fell out with Chinese investors who hold a dominant stake in Icon, alleging they are improperly transferring the company’s technology to China. The Chinese investors have said in legal filings that they are pursuing a normal technology licensing agreement. They and Icon deny any improper dealing.

The Americans last year filed a lawsuit seeking to stop the alleged technology transfer. They then appealed to the Committee on Foreign Investment in the U.S., or Cfius, which reviews deals on national-security grounds, and told the panel that Icon’s technology has possible military applications.

In recent weeks, after The Wall Street Journal reported that Cfius was reviewing the deal, the sparring parties launched a series of attacks against each other.

Kirk Hawkins, a co-founder of Icon who is among the American investors fighting the Chinese investors, issued a statement to several media outlets citing a previously confidential Pentagon program looking at turning Icon’s planes into unmanned aerial vehicles. That is why, he said, the U.S. government should stop the technology transfer by the Chinese shareholders. Icon’s Chinese backer is Shanghai Pudong Science and Technology Investment Co., a government-backed firm known as PDSTI.

“It is about protecting a U.S. company from nefarious investment practices” by China, said Mr. Hawkins, who remains on Icon’s board after it ousted him as chief executive.

Icon, whose board is controlled by PDSTI, shot back in a statement to the Journal, saying its planes are unsuitable for military use and alleging Mr. Hawkins is motivated by self-interest, not national security concerns. Icon also released documents to the Journal, including one it says is a strategy document emailed by Mr. Hawkins in March 2020 outlining a plan to threaten to take the case to Cfius if PDSTI didn’t buy him out of Icon.

Asked about that and another document supplied by Icon, Mr. Hawkins said that he and other American shareholders came to see that PDSTI was intent on expropriating Icon’s technology. He said PDSTI offered him and other minority shareholders a buyout if they helped support a Cfius approval. They declined, he said, and decided to “contact Cfius to ask for help.” Neither Mr. Hawkins nor the lawyer representing him and the other American shareholders would elaborate.

PDSTI, in a filing in the lawsuit, makes reference to an unsuccessful attempt to resolve the dispute with the American investors. It has also said its investment saved Icon from collapse.

The public fight is unusual in the middle of a review by Cfius, said lawyers who specialize in such cases. The panel conducts its investment-screening behind closed doors and can recommend that the president block or unwind deals.

“You’re definitely playing with fire reporting a transaction to Cfius as an investor in the company,” said John Kabealo, founder of Washington, D.C., firm Kabealo Law, which isn’t involved in the Icon case.

The Cfius process has been used as a tactic by investors before, lawyers who deal with the panel said. President?Donald Trump?in 2018?blocked Broadcom Ltd.’s $117 billion hostile bid?for?Qualcomm?Inc.?after the wireless technology company raised national security concerns with the panel about a deal.

While companies facing scrutiny aren’t legally prohibited from discussing the process, most don’t, to avoid publicizing internal information or aggravating the panel, said the lawyers who deal with Cfius cases. Disgruntled employees, industry rivals and would-be investors cut out of a deal sometimes approach the panel to try to quash a transaction, but active investors usually don’t, the lawyers said.

“Cfius has a variety of measures to solve national security issues, and the result may be burdensome operating conditions that hurt the company’s business and your own investment value,” Mr. Kabealo said. “Plus, future investors view Cfius problems as kryptonite.”

The Treasury Department, which leads the interagency panel, declined to comment on the Icon deal. The FBI is also conducting a separate investigation into possible criminal violations related to the deal and the alleged technology transfer, as the Journal reported last month, citing documents and people familiar with the matter.

from the WSJ.com