Earlier this year, Wise Road Capital, a Chinese private equity firm, entered into an agreement to purchase Magnachip Semiconductor Corporation (Magnachip), a South Korean chip manufacturer. On August 27, 2021, Magnachip submitted an SEC filing indicating that the Committee on Foreign Investment in the United States (CFIUS or the Committee) is preparing to block the deal. The SEC filing can be found here.

According to the SEC filing, the parties recently received a letter from the U.S. Department of the Treasury on behalf of CFIUS. Treasury's letter states that "CFIUS has identified risks to the national security of the United States arising as a result of the [transaction]," and that "CFIUS has not identified any mitigation measures, including those proposed jointly by [the parties], that CFIUS believes would adequately mitigate the identified risks." The SEC filing further notes that "absent new information arising during the investigation period that alters CFIUS's assessment of the national security risks, CFIUS anticipates that it will refer the matter to the President for a decision." Finally, although the SEC filing notes that the parties are assessing next steps, it cautions that "[t]here can be no assurance that [the parties] will develop or agree to any proposals that would result in CFIUS clearance."

Treasury's letter to the parties is known as a due process letter (DPL). If CFIUS identifies a risk to national security and cannot figure out a way to mitigate the risk by the end of the investigation period, the Committee refers the transaction to the President with a recommendation to block. Near the end of the investigation period and before referring the matter to the President, the Committee sends a DPL to the parties. The DPL provides in writing the unclassified reasons for why the Committee believes that a risk to U.S. national security arises from the transaction. The DPL gives the parties one last chance to respond to the Committee's concerns before it refers the matter to the President. Here, the end of the investigation period appears to be on or about September 9, 2021. The Committee sent the DPL to the parties on or about August 27, 2021, giving the parties about two weeks to review the Committee's explanation for blocking the deal and to decide how to proceed.

Three takeaways from the recent SEC filing:

  1. The Magnachip deal is likely going to be blocked. The deal is definitely on life support. CFIUS typically sends a DPL to the parties only after it has tried to negotiate a mitigation agreement with them, and based on those discussions, it does not appear that mitigation will work. If the matter goes to the President, there is a high likelihood that the President will block the deal. Thus, in most cases where the parties receive a DPL indicating that the Committee is preparing to refer a transaction to the President, the parties simply abandon the transaction. It is possible-but not likely-that the parties could propose acceptable mitigation at the last minute or that the Committee will permit the parties to withdraw and refile their transaction so that they can have more time to negotiate mitigation. However, those things are typically done before CFIUS sends a DPL, which is typically the sign that mitigation discussions have ended and that the Committee will block the transaction.
  2. Treasury's non-notified team will find semiconductor transactions. The parties did not file the transaction voluntarily with the Committee. Rather, Treasury's non-notified team reached out to the parties after the deal was signed and requested a filing. As we have advised in prior client alerts, CFIUS is building a large non-notified team whose only mission is to scour press releases, commercial databases, bankruptcy filings, financial publications, media outlets, and other sources, searching for transactions that were not filed with the Committee and may pose national security risks. Given the importance of semiconductors and the current geopolitical climate, there is almost no chance that a semiconductor transaction of any size will slip past the Committee. And if there is any basis whatsoever for the Committee to assert jurisdiction, the Committee will likely request a filing.
  3. The Committee is worried about technology transfer. The Committee likely concluded that Magnachip has some capability-technology, intellectual property, know-how-that is currently beyond the capability of Chinese semiconductor companies and that this capability has some military or national security application. As the SEC filing indicates, the Committee issued an interim order in this case. An interim order is an order from CFIUS that blocks the parties from completing the transaction until after CFIUS finishes its review. Here, the parties submitted their CFIUS filing on June 11, 2021, and the Committee issued its interim order four days later, on June 15. That the Committee moved so quickly suggests that the Committee was worried that semiconductor technology would be transferred to the Chinese acquirer, and, once transferred, the potential damage to U.S. national security would be irreversible.

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