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.

Footnotes

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions