United States: New Presidential Order Blocking Chinese Acquisition Of Semiconductor Firm Flags A Trend Of Heightened CFIUS Review Of Chinese Investments

On September 13, 2017, President Donald Trump blocked Chinese private equity firm Canyon Bridge Capital Partners LLC from purchasing US-based Lattice Semiconductor Corp., which manufactures programmable logic chips used in communications, computing, and industrial and military applications, on grounds of national security.1 This development, along with others, signals a trend of heightened US government review of Chinese investments under the Trump Administration, particularly by the Committee on Foreign Investment in the United States (CFIUS), the multi-agency panel charged with reviewing foreign investments in US companies that may have national security implications. If CFIUS finds such a transaction poses a threat to US national security, it recommends that the President use his authority under Section 721 of the Defense Production Act of 1950 (Section 721) to block or order divestment of the acquisition. In making such a recommendation, CFIUS takes into consideration whether provisions of law other than section 721 and the International Emergency Economic Powers Act could provide adequate and appropriate authority for the President to protect the national security from any risk posed by the transaction.2

In this instance, Lattice and proposed buyer Canyon Bridge had presented the proposed transaction to CFIUS through three successive submissions.3 During CFIUS's review of those submissions, concerns grew about the deal after it was reported that the Chinese central government was partially funding the deal, and that Canyon Bridge was linked to China's space program.4 When CFIUS ultimately recommended that the President block the transaction, Lattice argued directly to the President that the transaction should proceed, stating that the acquisition would create as many as 350 new US jobs and would not implicate national security.5 However, President Trump was not persuaded, and followed CFIUS's recommendation, issuing an order that "there is credible evidence" that Canyon Bridge and its affiliates "might take action that threatens to impair the national security of the United States," were the transaction to proceed.6

This order, which was just the fourth order ever issued by a President under Section 721, underscores the US Government's serious concerns about Chinese investment in the United States, especially in technology manufacturers. In 1990, President George H.W. Bush ordered the divestiture by the China National Aero Technology Import and Export Corporation, a company owned by the Chinese Government's Ministry of Aerospace Industry, of its interest in MAMCO Inc., a Seattle, Washington manufacturer and fabricator of metal components used in civilian aircraft. In 2012, President Obama ordered the Ralls Corporation, owned by Chinese executives in the Sany Group, to divest its interests in four wind farm projects near restricted air space in northern Oregon due to national security concerns. And in 2016, President Obama blocked Chinese investors seeking to acquire Aixtron US, the California subsidiary of a German semiconductor producer.7 Out of many hundreds of foreign investment transactions that have undergone CFIUS reviews, these and the recent Canyon Bridge transaction represent the only deals to have faced a fatal blow through Presidential action under Section 721.

It also merits note that other planned Chinese investments have cratered during the CFIUS review process, before the President has had cause to act under Section 721. For example, in June 2017, Chinese firm TCL Industries Holdings withdrew its CFIUS notice of its proposed purchase of Novatel Wireless, Inc., the wireless "MiFi business" of Inseego Corp.8 In July 2017, the Chinese conglomerate HNA Group abandoned its $416 million investment in Global Eagle Entertainment, Inc., a satellite-based connectivity and media company, after facing serious opposition from CFIUS.9

During his presidential campaign and when he was President-elect, Donald Trump often blasted China's trade and investment policies, and many of his transition team members and Cabinet secretaries articulated strong criticism as well. The Trump Administration's actions to date presage a long, difficult road for potential Chinese investors in US companies, especially potential purchasers of technology manufacturers vital to the defense industry. China is the world's largest market for chip technology, and thus its investment in US semiconductor companies has surged in recent years in an effort to build its own domestic supply and rely less on imports.10

More broadly, trade with China has been a subject of great concern for the Trump Administration. In April, the US Department of Commerce announced it was investigating whether steel imports from China threaten national security. And in August, President Trump ordered the US Trade Representative to consider investigating China for intellectual property theft, due in part to concerns over China's new cybersecurity law that requires certain technology firms to store user data within Chinese borders and that may also potentially lead to requiring disclosure of source code and encryption software to the Chinese government, and in other part to China's lax enforcement of intellectual property violations.11

The Trump Administration's heightened scrutiny has had support from other high-ranking officials and legislators. In June, Senator John Cornyn (R-TX), the second-ranking member of the Senate, announced plans to introduce legislation designed to address the "potential [of China's investments] to degrade our nation's military superiority and to undermine our US defense industrial base, including significant damage to our long-term national security."12

In July, news of a confidential US Department of Defense report commissioned by former Defense Secretary Ash Carter raised concerns about the United States' ability to effectively monitor China's investment in US technology firms, which has amounted to approximately $35 billion during the past 10 years.13 Focusing on US technology companies that "will be foundational to future innovation: artificial intelligence, autonomous vehicles, augmented/virtual reality, robotics and blockchain technology," of interest to the US military, the report recommends that the United States increase its review of Chinese investments in the United States, particularly investments in US technology companies.14Reportedly, the report recommends that CFIUS should review all foreign investments beyond $1 million, and that Congress should significantly increase CFIUS's budget so that it can initiate as many as 1,500 investigations per year (it currently handles about 150 per year).15

And in August, Senator Chuck Schumer (D-NY) wrote a letter encouraging President Trump to halt approval of all proposed transactions involving Chinese buyers as a way to force China to crack down on North Korean nuclear testing.16 Even before recent tension between the United States and North Korea, Senator Schumer was outspoken about the need for greater review of Chinese investment.17

These developments highlight a trend, which may mature into legislative action in the future, of heightened scrutiny of Chinese investments in the US technology sector. American companies seeking foreign investment should consider additional due diligence review of the sources of Chinese capital, including potential ties to the Chinese government. Potential Chinese and other foreign investors should be prepared to negotiate conditions with CFIUS that will mitigate the risk of implications for US national security. Parties to a transaction that becomes the subject of CFIUS review may also consider the possibility of legal action, such as the suit filed by the Ralls Corporation in an effort to obtain more information about and more leverage against CFIUS's actions adverse to Ralls' investments in the United States.18 Moreover, all companies seeking or offering foreign investment should continue to monitor executive and legislative developments regarding potential changes to CFIUS's jurisdiction and mandate, as well as trends in CFIUS's review process in practice.

*Amanda Claire Hoover contributed to this article. She is a Harvard Law School graduate employed at Arnold & Porter Kaye Scholer LLP and is not admitted to the District of Columbia bar.


1. See Order Regarding the Proposed Acquisition of Lattice Semiconductor Corporation by China Venture Capital Fund Corporation Limited, The White House (Sept. 13, 2017).

2. 50 U.S.C. App. §2170;
50 U.S.C. 1701 et seq.

3. President Decides Fate on CFIUS Filing: Canyon Bridge Capital Partners, Inc. and Lattice Semiconductor Corp., Trade Practitioner (Sept. 13, 2017).

4. Liana B. Baker, Koh Gui Qing & Julie Zhu, Exclusive: Chinese Government Money Backs Buyout Firm's Deal for US Chip Maker, Reuters (Nov. 28, 2016).

5. Jackie Wattles,Tech Company Wants Trump to Overrule National Security Decision on China Deal, CNN Money (Sept. 2, 2017).

6. Order, supra n. 1.

7. See Presidential Prohibition of Chinese Company Purchase of Semiconductor Firm Highlights Increased US Government Scrutiny of Chinese Investments, Arnold & Porter Advisory (Dec. 21, 2016).

8. CFIUS Filing Abandoned, T.C.L. Industries Limited/TCL Corporation and Inseego Corp./Novatel Wireless, Trade Practitioner (June 12, 2017).

9. Sumeet Chatterjee & Diane Bartz, US Regulatory Scrutiny Scuppers Deal for Unit of China's HNA, Reuters (July 25, 2017).

10. Trump Blocks China-Backed Lattice Bid, Bloomberg Politics (Sept. 13, 2017).

11. Ana Swanson, Trump Administration Goes After China Over Intellectual Property, Advanced Technology, Wash. Post: Wonkblog (Aug. 14, 2017);see also China's New Cybersecurity Law Imposes Heightened Restrictions on Company Computer Networks, Arnold & Porter Kaye Scholer Advisory (July 20, 2017).

12. Chelsea Naso, Sen. Cornyn Readies Bill Broadening CFIUS' Reach, Law360 (June 23, 2017).

13. Adam Behsudi, Defense Agency Report Urges More Scrutiny of Chinese Investment, Politico (July 10, 2017).

14. Id.

15. Id.

16. Top Senate Democrat Urges Trump to Block China Deals Over North Korea, Reuters (Aug. 1, 2017).

17. See, e.g., Ryan Faughnder, Schumer Calls for Scrutiny of Wanda Group and Other Chinese Investors, Noting China's Restrictions on US Films, L.A. Times (Dec. 1, 2016).

18. See Arnold & Porter Advisory, Due Process for Foreign Investors? D.C. Circuit Decision May Mean More Transparency in Proceedings Before CFIUS (Aug. 7, 2014).

*Amanda Claire Hoover contributed to this article. She is a Harvard Law School graduate employed at Arnold & Porter Kaye Scholer LLP and is not admitted to the District of Columbia bar.

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