Trump Blocks His First CFIUS Deal

Trump Blocks Chinese Investment on National Security Grounds

On September 13, 2017, The Trump administration accepted the recommendation from the Committee on foreign investment in the United State[1] (CFIUS) and blocked the purchase of a U.S. semiconductor company (“Lattice”) by a Chinese investment firm (“Canyon Bridge”), citing national security concerns for reasons including:

• The potential transfer of intellectual property to the foreign acquirer;
• The Chinese government’s role in supporting the transaction (source of funds);
• The importance of semiconductor supply chain integrity to the U.S. government; and
• The use of Lattice products by the U.S. government.

One of the main issues arising in the Lattice/Canyon Bridge Deal is the holding company (“CRFM”/China Reform Fund Management Co.)’s strong connection with the Chinese government.[2] In particular, CRFM owns businesses with military applications and also invested in other sensitive industries in line with Chinese government’s military and economic agenda. Realizing this tie could be potentially problematic, CRFM designed a complex transaction structure by establishing a U.S. based private equity fund, Canyon Bridge, and engaging two U.S. nationals as its general partner to oversee the fund. Despite this effort, CFIUS is still unconvinced and ultimately determined that because the funding of Canyon Bridge is solely raised from a limited partner with strong Chinese government backing, the Chinese government’s support of this transaction cannot be overlooked hence it presented unresolvable national security concerns.[3]

The principle of substance over form is confirmed by the Lattice. CFIUS looks carefully into each equity holder’s contribution to the acquisition, their rights and obligations in controlling the target company, the identity of the ultimate controller and its affiliates and source of funds. In addition, attention should be paid to certain sensitive industries, including but not limited to: information security, national defense, telecommunications, aerospace, transportation, military appliance, and energy. Newly developed areas, such as artificial intelligence, semiconductors, and big data analytics are also drawing heightened review by CFIUS.

Furthermore, the length of the CFIUS review process should be noted. In the Lattice case, CFIUS can and increasingly does request that parties refile requests for CFIUS to review. The number of transactions that are reported to CFIUS has increased significantly in recent years, and that trend is expected to continue. Much of the growth is attributable to the volume of Chinese investments in the United States and CFIUS’ interest in those transactions, particularly when they involve semiconductors or other sensitive technologies. Because of the number of notices filed and the complexity of many of the transactions, CFIUS is increasingly extending its review into the investigation period as a way of managing its workload.[4]

A CFIUS determination that a transaction could threaten national security does not necessarily mean that the transaction will not be allowed to move forward. In many cases, CFIUS can clear a transaction subject to conditions designed to mitigate the perceived risks to US national security that the transaction otherwise would pose. Although Lattice had actively proposed a mitigation proposal and promised to double the number of its employees, an agreement was unable to be reached with CFIUS. The deal’s problems underscore the U.S.’s intent to prevent the transfer of sensitive technology to China. Chinese investors have faced intense regulatory scrutiny in their pursuit of U.S. chip makers, leading to some deals being quashed in recent years. [5]

The Lattice case is a wake-up call for prospective foreign investors to think comprehensively and thoroughly regarding the potential national security implications of their investments and acquisitions. Additionally, it sends a signal that the U.S. is more likely to oppose those deals backed by the Chinese government, particularly those deals involving in the high-tech sector. Therefore, it is becoming more important for Chinese investors, especially those who have a strong connection with the Chinese government, to understand and carefully analyze the CFIUS review process before making investment decisions.[6]

 

[1] https://www.lw.com/thoughtLeadership/overview-CFIUS-process

[2] https://www.reuters.com/article/us-lattice-m-a-canyonbridge/trump-to-decide-on-china-backed-buyout-of-u-s-chipmaker-idUSKCN1BC4QL

[3] Trump Blocks His First CFIUS Deal – What Can We Learn from it? –  Jinsong Zhang, Wei Kao, Zhengyi Pan

[4] https://www.lw.com/thoughtLeadership/overview-CFIUS-process

[5] https://www.lw.com/thoughtLeadership/overview-CFIUS-process

[6] Trump Blocks His First CFIUS Deal – What Can We Learn from it? –  Jinsong Zhang, Wei Kao, Zhengyi Pan

Xiaoxi Ma
xma@rroyselaw.com
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