United States: The CFIUS Process Is Becoming More Challenging For Foreign Investors

On September 13, 2017, President Trump took the unusual step of issuing an Executive Order blocking the China-backed investment firm Canyon Bridge Capital Partners Inc. from acquiring U.S.-based Lattice Semiconductor Corporation due to national security concerns. While this was only the fourth time in the last 30 years that a President has issued such an order, two of these orders have come in the past year.

Based on this, other recent events, and the anticipated expansion of the scope of the Committee on Foreign Investment in the United States (CFIUS), we are providing a summary of recent CFIUS activities and key takeaways that any China-owned or controlled foreign investor should consider before moving forward with a U.S. investment or acquisition.

The CFIUS Review Process

CFIUS is an interagency committee chaired by the Commerce Department that has the authority to block foreign investment in the U.S., or impose mitigation measures, when the transaction "threatens to impair the national security of the United States." 50 U.S.C. §4656.

CFIUS has the authority to review "any transaction ... by or with any foreign person, which could result in control of a U.S. business by a foreign person." 31 C.F.R. § 800.207. "Foreign national" includes foreign governments and foreign entities, as well as entities controlled by foreign governments and foreign entities, while "U.S. business" includes "any entity, irrespective of the nationality of the persons that control it, engaged in interstate commerce in the United States." 7 31 C.F.R. § 800.216, 226.

Parties to a covered transaction are not required to seek CFIUS pre-clearance before proceeding with the transaction. However, where parties elect not to seek pre-clearance, CFIUS may, at any time, initiate its own review of the planned transaction, which could result in the divestiture of the acquired assets if there is a determination to block the transaction.

The CFIUS review process typically begins when the parties to a covered transaction make a voluntary filing to CFIUS. The parties' voluntary joint notification includes a detailed submission to CFIUS, including information about the acquiring entity's relationships with any foreign government, and information about the nature of the target entity's products and the potential change in strategy post-acquisition.

The parties' submission of a joint notification begins an initial 30-day review period, upon completion of which CFIUS may clear the proposed transaction or proceed to a 45-day investigation period. At the conclusion of the 45-day follow-up investigation period, CFIUS may clear the proposed transaction or provide a recommendation to the President, who has 15 days to determine whether to clear or block the proposed transaction.

Parties contemplating a transaction or investment that will include a CFIUS notification filing should be aware that the review process has become increasingly lengthy. Often the entirety of a review, from the submission of a draft notification to CFIUS staff for comments until clearance (or blockage), can take well over 6 months. Certain acquisitions, such as those involving foreign government owned entities, essentially always require the 45-day investigatory period. Further, after a review period has nearly expired, CFIUS has increasingly requested that parties refile their requests for pre-clearance, which effectively restarts the entire process.

Recent China Investments Have Drawn Scrutiny

Publicly reported data confirms that during the past few years, CFIUS has reviewed an increasing number of transactions, reflecting an expanding view of its national security scope.

CFIUS appears to be exercising particular scrutiny over covered transactions involving prospective Chinese acquirers. For example, the following transactions / investments have been recently blocked by CFIUS or abandoned due to CFIUS' refusal to clear them:

  • Canyon Bridge Capital / Lattice (2017) - Despite extensive lobbying by a China-Owned Investment Fund, President Trump supported CFIUS' recommendation to block the proposed $1.3 billion acquisition of a U.S. programmable chip company supporting virtual reality, intelligent automation and advanced computing.
  • TCL Industries / Inseego (2017) – U.S. electronics maker Inseego abandoned a proposed $50 million sale of its MiFi business to a Chinese smartphone manufacturer due to CFIUS' objections.
  • Global Eagle Entertainment (2017) – CFIUS refused to permit a Chinese company from making a proposed $416 million investment in a U.S.-based in-flight services company because of alleged security issues.
  • Grand Chip / Aixtron (2016) - President Obama supported CFIUS' recommendation to block a China acquirer's acquisition of a German-based chip equipment supplier that had a U.S. subsidiary that developed cutting edge equipment.
  • GSR Ventures / Philips (2016) – CFIUS recommended rejecting Philips' plan to sell its Lumileds lighting business to China-owned GSR Ventures for $2.8 billion. There was an alleged concern over Lumileds' U.S.-based development and use of a next generation microchip technology which provides superior speed, temperature and power handling.
  • Unisplendor / Western Digital (2016) – In 2015, Unis agreed to a $3.8 billion equity investment (a 15% ownership stake) in Western Digital, a U.S. manufacturer of computer and information storage solutions. The investment was specifically tied to a determination by CFIUS that the transaction was not "covered," i.e., subject to CFIUS review. CFIUS, however, determined that a 15% stake was sufficient "control" to trigger a CFIUS filing, at which point Unisplendor abandoned the investment.

Further, CFIUS' recent scrutiny of transactions involving Chinese purchasers has not been limited to cases that would result in Chinese companies acquiring control of advanced technology. For example, CFIUS recently required China-based Oceanwide Financial to refile its CFIUS notification regarding its proposed acquisition of U.S. insurer Genworth. Similarly, CFIUS has raised objections on a number of real estate transactions where the China-based acquirer would control real estate in close proximity to U.S. military bases.

However, CFIUS has cleared a number of large acquisitions by China investors over the past few years including ChinaChem/Syngenta (cleared $43 billion acquisition despite potential concerns over seed and pesticide technology); Global Foundries / IBM (cleared the acquisition of IBM's microelectronics business unit, which makes chips for the U.S. military and government agencies, subject to an agreement by the China parent not to receive certain information);Beijing Jianguang Asset Management / NXP (cleared $1.8 billion acquisition of NXP's radio frequency power amplifier business); and Shuanghui / Smithfield Foods (cleared Shuanghui's $4.7 billion acquisition of pork processor Smithfield despite significant political opposition by farming interests citing food security concerns).

Key Takeaways

Based on these events, potential China investors / acquirers of U.S. assets should be sensitive to the following:

1. CFIUS Is Sensitive To China Acquisitions, Particularly Large Transactions By State Owned Entities

Based on recent CFIUS activity, as well as congressional statements, the U.S. government appears committed to carefully scrutinizing prospective transactions that would result in a Chinese investor acquiring control of a business with US technology or assets. Particularly large acquisitions by China State Owned Entities -- SOEs -- or private companies affiliated with SOEs, will face significant scrutiny.

While smaller transactions will generally not face the same scrutiny, CFIUS has shown increasing dexterity in honing in on cutting edge technologies, even if they are at the nascent stage. Moreover, the Aixtron and Philips transactions further demonstrated that CFIUS will not hesitate to scuttle acquisitions of foreign entities that have meaningful U.S. operations.

2. CFIUS Is Expanding Its Mandate

CFIUS was historically conservative in its exercise of authority, focusing on core national security threats that usually directly related to military use. Over the past few years, however, this has changed. Now, CFIUS appears to be construing "national security" more broadly to include issues such as cyber-threats, access to data about U.S. citizens, food and agriculture supply chain threats and financial system risk.

In addition, as confirmed by the Lattice transaction, CFIUS is increasingly conducting its own review of potential technology transfer and supply chain issues.

3. Possible Congressional Action to Expand CFIUS

Legislative efforts are underway to potentially expand CFIUS' authority to review transactions involving foreign investors. Currently, Senate hearings are being held and proposed legislation is being considered that could broaden CFIUS' jurisdiction to include overseas joint ventures and technology transfers. At this time, it is difficult to predict the outcome of such legislative efforts, but bipartisan CFIUS reform is a distinct possibility.

4. A Fulsome Pre-Investment CFIUS Analysis Is Critical

The above confirms that CFIUS has recently expanded its views of the scope of national security interests. A substantive assessment of any transaction or investment that could implicate CFIUS should be considered before any agreement by a China investor is executed. The costs (both in fees and time) of CFIUS compliance can be significant and a failure to file could result in a CFIUS-led investigation and divestiture order.

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.

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