Now more than ever Chinese investment in the United States is facing barriers stemming from the strict reviews conducted by the Committee on Foreign Investment in the United States ("CFIUS" or the "Committee"). After several high-profile cases, which our law firm has covered in previous articles and are summarized below, the general consensus is that Chinese investment will be greatly scrutinized - and in many cases completely blocked - to satisfy the U.S. government's national security concerns.
But even in these uncertain times, we have also seen some Chinese transactions approved by CFIUS, confirming that not all Chinese investment is off limits. Below we summarize some of the cases that were reviewed and cleared by CFIUS, as well as some of the high-profile cases that involved blocking or divestment orders to identify steps that potential investors and acquirers can take to increase the changes of successful review.
In just over one year, at least four acquisitions of U.S. companies by Chinese entities have been approved by CFIUS. In early July 2019, CFIUS approved the acquisition by AssetMark Financial Holdings, Inc. ("AssetMark"), a wealth management and financial services company with Chinese ownership, of Global Financial Private Capital, another financial services firm, in a cash purchase for $35.9 million, which added another $3.8 billion in platform assets. AssetMark had been acquired by the Chinese securities group Huatai Securities Co., Ltd. ("Huatai") in 2016 and is now 70.3% owned by Huatai.
In late February 2020, AssetMark received approval from CFIUS for the acquisition of another wealth management firm, WBI OBS Financial, LLC, parent of OBS Financial Services, Inc. This time, the purchase by AssetMark led to the acquisition of approximately $2.1 billion in platform assets. CFIUS approvals are not made public, so it is impossible to know the exact criteria that went into the Committee's decision to approve. But it is clear from these two acquisitions that there is some opportunity for Chinese companies to acquire U.S. firms in the financial services sector.
In early November 2019, CFIUS approved the strategic alliance between Shanghai RAAS Blood Products Co., Ltd. ("Shanghai RAAS"), a Chinese company, and Spanish blood-products company Grifols GRLS.MC ("Grifols"), which resulted in Shanghai RAAS acquiring a non-majority share (45% economic rights and 40% voting rights) in Grifols Diagnostic Solutions Inc. ("GDS"), a U.S. subsidiary of Grifols. As part of the arrangement, Grifols received 26.2% economic and voting rights in Shanghai RAAS. The transaction marked the first share swap in China between a foreign company (GDS) and a non-state-controlled Chinese company listed on a stock exchange. The fact that Shanghai RAAS was ostensibly not state-controlled may have contributed to CFIUS's approval of the deal: Chinese acquisitions of U.S. companies involved in the medical field have been rejected in the recent past. For example, CFIUS rejected the acquisition of Ekso Bionics Holdings, Inc., a leader in medical and industrial exoskeleton technology, by a Chinese joint venture in May 2020.
In early March 2020, Citiking International US LLC ("Citiking"), a Chinese-controlled investment company, received CFIUS approval for its acquisition of ONE Aviation, a New Mexico-based manufacturer of very light private jets that filed for bankruptcy in October 2018. Citiking had financially backed ONE Aviation's service operations on Eclipse 500 and 550 very light jets since the bankruptcy declaration. ONE Aviation reportedly owes $198.8 million in total debt, including approximately $53.2 million owed to state and local governments. The ONE Aviation acquisition provides a template for other possible acquisitions by Chinese companies of failing commercial aviation companies in the United States.
Though somewhat different from the above examples of corporate acquisitions, in June 2020 CFIUS also approved a real estate acquisition of a greenfield wind farm project by GH America Energy, a subsidiary of the Chinese company Guanghui Energy Co., Ltd. The greenfield project is in Val Verde County, Texas, which is also the location of Laughlin Air Force Base the largest pilot training base in the country. The real estate transaction has caused some concern, including from U.S. Representative Will Hurd of Texas's 23rd District and U.S. Senator Ted Cruz. Nonetheless, by clearing the transaction, CFIUS must not have found sufficient national security concerns to reject the acquisition. Importantly, Laughlin is not listed on the list of sensitive facilities contained in the CFIUS regulations on real estate transactions.
The Bad and the Ugly
We have previously covered high-profile cases involving the blocking of transactions or ordering companies to divest their acquisition of U.S. companies. For example, in 2017 President Trump blocked Canyon Bridge Capital Partners Inc. ("Canyon Bridge"), an investment firm backed by Chinese investors, from acquiring Lattice Semiconductor Corporation ("Lattice"). In blocking the transaction, the U.S. government cited national security risks including: the potential for the transfer of intellectual property to a foreign party, the Chinese government's role in the transaction, the importance of the semiconductors to the U.S. government, and the use of Lattice products by the U.S. government.
Again in 2018, Ant Financial, a Chinese company owned by Alibaba Group Holding Ltd. ("Alibaba"), announced that its proposed acquisition of MoneyGram International, Inc. ("MoneyGram") was being blocked by CFIUS. MoneyGram provides financial services around the world. This decision was surprising because Alibaba and Ant Financial had received CFIUS clearance in previous transactions and MoneyGram arguably did not deal with particularly sensitive information from a national security perspective. Unlike the Canyon Bridge case, MoneyGram does not operate in the defense sector nor does it deal with critical infrastructure such as semiconductors. Additionally, both MoneyGram and Ant Financial offered several amended proposals to help mitigate the concerns of CFIUS. Ultimately, the proposed transaction was denied because the Chinese government held a 15% stake in Ant Financial, and it was feared that the data held by MoneyGram could be used by the Chinese government to target activists, journalists, and others.
Following the same trend, in 2019 CFIUS required gaming company Beijing Kunlun Tech Co. Ltd. to divest its 100% ownership of Grindr, LLC, a dating app whose database contains personal information of over 27 million users, including user locations, HIV status, and other personal details. That same year CFIUS required iCarbonX, a Chinese genome company, to divest its majority ownership of U.S. company PatientsLikeMe Inc., which provides a platform for patients with the same diseases to connect with one another and exchange information.
Similarly, in 2020, President Trump issued an executive order requiring publicly traded Chinese company Beijing Shiji Information Technology Co., Ltd ("Shiji") and its wholly owned subsidiary, Shiji (Hong Kong) Ltd., to divest the 2018 acquisition of U.S.-based hotel-management software company StayNTouch, Inc. ("StayNTouch"), citing national security concerns. Though the executive order did not cite specific reasons, it appears, based on the restrictions from accessing any hotel guest data through StayNTouch placed on the Chinese entities, that at least one of CFIUS's concerns was Shiji's potential access to a large database of personal and financial information of U.S. citizens.
Most recently in 2020, CFIUS ordered TikTok's owner, ByteDance Ltd., to divest its ownership of American assets because of concerns that the app captures a large amount of information from users, "including internet and other network activity, such as location data and browsing and search histories." The order came as a step to protect users from exploitation of their personal data.
Ultimately, Chinese government ownership or access to sensitive U.S. technologies, critical infrastructure, or the personal data of U.S. citizens will face the highest levels of scrutiny: as seen in recent cases, it may be very difficult - if not impossible - to get CFIUS approval for these types of transactions.
Even in these uncertain times, however, there have been Chinese-backed investments or acquisitions which have been cleared, providing valuable lessons to potential acquirers or investors.
To increase the likelihood of any given deal being approved, conduct a thorough pre-filing risk assessment to identify issues of concern so that you can proactively introduce mitigation measures to ease the U.S. government's national security concerns. For example, if the target possesses sensitive technologies, implementing strong cybersecurity policies and technology control plans, which outline separate IT systems and firewall sensitive technologies, would be a good start.
Your initial mitigation plan would need to be tailored to address issues identified during your pre-filing risks assessment, and you should attempt to anticipate CFIUS's potential concerns (e.g., target's location, technologies, sensitive data of U.S. persons, or acquirer's country of origin and government ownership or contacts, to name a few). Try to ease those concerns in the mitigation measures you implement prior to the filing. This will also help build trust with CFIUS, which will be critical during CFIUS's review.
Being proactive in your pre-filing mitigation measures may also help you have a more direct impact on potential mitigation agreements after the filing has been made. Importantly, this risk assessment and mitigation measures should also be considered for transactions involving Chinese investments which may not have been covered in years prior to the Foreign Investment Risk Review Modernization Act of 2018. This is especially important as the U.S. government is able to review transactions already consummated, regardless of whether a CFIUS filing was submitted.
John C. Demers (Assistant Attorney General for National Security) at the U.S. Department of Justice recently provided more details regarding the use of
The Trump Administration has made extensive use of Section 301 of the Trade Act of 1974 ("Section 301") to further its trade goals with respect to China, leading to the imposition of some form of tariff on approximately $370 billion in Chinese-origin goods. The rhetoric from the Administration remains strongly against Chinese trade, despite some tariff relaxation in late 2019. (Please see our previous article discussing those developments: U.S.-China Trade Dispute Easing: "Phase One" Deal and Other Tariff Updates.)
Some in the business community hope that a defeat of President Trump in the November election will lead to a relaxation or removal of the Section 301 tariffs against Chinese goods. Former Vice President Joe Biden leads President Trump in many polls; however, it is important to recognize that, even if there is a new occupant of the Oval Office in January, there will not necessarily be a reversal with respect to China tariffs or China trade policy generally. Biden seemed to state in August that he would remove the tariffs on Chinese goods if he gained office, but that statement was quickly walked back by the Biden campaign. Instead, a Biden campaign aide stated that Biden would "re-evaluate" the tariffs. As the election looms closer, the general sentiment from press reports is that a potential Biden Administration's China policy will maintain many of the restrictions and tariffs currently in place in order to curb China's growing and more aggressive position on the world's stage.1
Whether President Trump or Biden wins in November, the United States is unlikely to return to its previous status quo with regards to trade with China. Though nothing is certain at this point, it may not be a viable strategy to "wait out" the tariffs. To the extent possible, from tariff engineering and supply chain movement, companies should have contingency plans for China operations regardless of what happens in November.
Section 301 China Tariff Updates
Throughout 2020, the United States Trade Representative ("USTR") has continued to grant exclusions from the Section 301 China tariffs for products on the four lists of Chinese products subject to the tariffs ("Lists 1, 2, 3, and 4A"). Many products from Lists 1 through 3 received initial one-year exclusions in 2019 and have subsequently been granted further extensions of the exclusions.
Interestingly, more recent grants of extension, since May 14, 2020, have not been one-year extensions, as was previous USTR practice, but instead only extend the exclusion to December 31, 2020. It is not clear at this point if the USTR intends to provide a further opportunity to extend such exclusions. Parties affected by the Section 301 China tariffs, or those relying on granted exclusions, should continue to monitor USTR publications for opportunities to request extensions of available exclusions.
In September 2020, the USTR received two challenges to the legality of at least some of the Section 301 Chinese tariffs. First, on September 10, three importers collectively filed a lawsuit in the Court of International Trade ("CIT") challenging the authority of the USTR to implement additional duties on the products in List 3 of the Section 301 China tariffs.2 While acknowledging the potential authority for implementing additional duties under Lists 1 and 2, the lawsuit argues that the USTR exceeded its authority under Section 301 and failed to comply with the Administrative Procedures Act when it imposed additional duties under subsequent rounds of tariffs, beginning with tariffs on List 3 products. The lawsuit requests that the USTR vacate its rule establishing the List 3 tariffs and refund duties paid by the three importers under List 3. This case is still pending before the CIT.
Similarly, on September 15, the World Trade Organization ("WTO") issued a report in a dispute brought by China against the United States' imposition of additional duties on Chinese-origin goods.3 The dispute covers the imposition of tariffs under Lists 1 and 3. The initiation of the challenge process dates back to April 2018 when China requested consultations with the United States as required by the WTO's Understanding on Rules and Procedures Governing the Settlement of Disputes.
The consultations failed to resolve the dispute, leading to the creation of a panel to make findings and recommendations in the dispute. The WTO panel found that the trade measures implemented by the United States against China were inconsistent with the General Agreement on Tariffs and Trade 1994, the relevant agreement governing the dispute under international trade law.
U.S. Trade Representative Robert Lighthizer responded to the panel report by saying, "The WTO is completely inadequate to stop China's harmful technology practices."4 The United States' next step is likely an appeal of the panel report. However, the WTO's Appellate Body is not currently able to meet because the United States has blocked the appointment of WTO appellate judges, preventing the minimum number of judges required to hear appeals. As a result, an appeal could effectively end the legal nature of the dispute by preventing a final ruling authorizing retaliation by China.
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Because of the outsized effect of the Chinese tariffs, "Section 301 tariffs" have sometimes become synonymous with only the tariffs on Chinese-origin goods discussed above. It is important to recognize that there have also been Section 301 tariffs placed on goods from other countries for various reasons. We provide an update of such tariffs and possible forthcoming tariffs below.
Section 301 Tariffs in Response to Civil Aircraft Dispute
On October 18, 2019, the USTR imposed tariffs of 10% on large civil aircraft and 25% on certain non-aircraft products from the European Union in response to an ongoing WTO dispute related to civil aircraft subsidies.5 For more information, see our previous article on the subject: Tariffs on Wine, Whisky, and Cheese Provide Extra Fright This Halloween.
On February 21, 2020, the USTR published another notice of modification increasing the additional duties on large civil aircraft to 15% and modifying the list of non-aircraft products subject to the 25% tariffs.6 The tariff increase on large civil aircraft became effective on March 18, and the modifications to the list of non-aircraft EU products became effective on March 5. The tariffs on non-aircraft products continue to primarily affect various food items, but some non-food items from certain EU member states are also subject to the 25% tariff.
On June 18, 2020, the USTR announced that, pursuant to a review of the tariff action and previously requested public comments, it has decided to again modify the list of products subject to the additional duties.7 The USTR found that the EU continues to fail to adhere to the WTO's recommendations. The list of products subject to 25% tariffs was modified to also include multiple types of jams. Additional duties on large commercial aircrafts remain at 15%. The modification was minor, but the major effect is the determination to continue the tariffs.
Section 301 Tariffs in Response to France Digital Services Tax
On July 16, 2020, the USTR published a notice of action pursuant to a Section 301 investigation determining that France's digital services tax is unreasonable or discriminatory and burdens U.S. commerce.8 The notice of action provides for the imposition of a 25% tariff on certain goods from France, namely make-up, skincare products, and handbags. USTR has suspended the implementation of the additional duties for 180 days, or until January 6, 2021, but may determine that the suspension should be for less than 180 days. If USTR makes such a determination, it will publish another notice of action in the Federal Register.
Section 301 Investigation of Digital Services Taxes
On June 5, 2020, the USTR published a notice of the commencement of a Section 301 investigation of digital services taxes adopted or under consideration by Austria, Brazil, the Czech Republic, the European Union, India, Indonesia, Italy, Spain, Turkey, and the United Kingdom.9 If the USTR determines that the digital services taxes in these countries are unreasonable or discriminatory to U.S. commerce, it may implement tariffs on one or more of these countries, similar to the tariffs on French products.
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.