On September 13, 2017, President Donald Trump issued an executive order blocking the $1.3 billion acquisition of Lattice Semiconductor Corporation (Lattice), a publicly-traded microchip producer based in the United States, by Canyon Bridge Capital Partners (Canyon Bridge), a Chinese state-owned private equity firm, citing national security concerns. This move signals that the U.S. continues to more closely scrutinize international transactions involving industries with U.S. national security sensitivities, in particular technologies relied on by the U.S. military.
The Committee on Foreign Investment in the United States (CFIUS) is a multi-agency group chaired by the U.S. Department of Treasury responsible for a national security review of all acquisitions of U.S. businesses by non-U.S. acquirers. Following such review, if CFIUS finds that national security concerns are present in the transaction, CFIUS can recommend that the President disallow the transaction to close. Despite over eight months of urging from Lattice and Canyon Bridge to allow the transaction to be completed, CFIUS ultimately recommended to the President that he block the transaction from closing, citing several potential national security risks, including the transfer of certain intellectual property to a foreign acquirer, the Chinese government’s ownership of the acquirer, the importance of semiconductor supply chain integrity, and the U.S. government’s reliance on Lattice products. President Trump agreed with CFIUS that the national security risks could not be resolved through mitigation measures and issued an executive order requiring the parties to take all steps necessary to abandon the transaction within 30 days.
Although this instance marks only the fourth time that the President has disallowed a transaction following a CFIUS review and recommendation, it is the third time since 2012 that a President has issued such an order. President Obama issued two such orders, issuing an order that Ralls Corporation, a U.S. company owned by Chinese nationals, divest certain windfarm projects located close to a U.S. defense facility in 2012, and issuing an order blocking the proposed acquisition of Aixtron, Inc. by Grand Chip Investment GMBH, a German company that was ultimately controlled by a Chinese limited partnership. The other instance also involved a Chinese owned acquirer and occurred in 1990 when President Bush ordered the divestment of the China National Aero-Technology Import and Export Corporation’s ownership of MAMCO Manufacturing Inc., a company located in Seattle, Washington.
Chinese investment in the U.S. tripled between 2015 and 2016 as Chinese companies look to diversify overseas. However, Chinese investors often face hostility when trying to acquire U.S. companies, at least in part due to the concern that China will not reciprocate U.S. market openness. Despite resistance, China hopes to expand its presence in cutting-edge sectors, committing to investing $150 billion in its semiconductor industry, and expressed that security investigations are a country’s right but should not be used to advance protectionism. Other notable Chinese deals currently under CFIUS review include a $1.2 billion proposed purchase of MoneyGram International, a U.S.-based money transfer company, by Ant Financial, an affiliate of Chinese e-commerce company Alibaba Group, as well as a $2.7 billion proposed purchase of U.S. insurer Genworth Financial by China Oceanwide Holdings Group, a Chinese investment company. Chinese investors are increasingly considering transaction structures that minimize CFIUS risk, particularly because these transactions come at a sensitive time in U.S.-China relations.
Under the current CFIUS statute, the President is required to publicly announce a decision to suspend or prohibit a transaction, in effect branding the buyer and target as national security risks. A bill to update the CFIUS process, sponsored by Senate Majority Whip John Cornyn (R. Texas), may be introduced this year. One potential change is the addition of special requirements for transactions involving sensitive sectors and investors from certain countries of concern. Another potential change is allowing CFIUS to directly prohibit transactions, thus avoiding the political fallout of Presidential action. Expansions in the scope of CFIUS’s review authority must also be balanced against the potential chilling effect on foreign investment.
Given the recent increased scrutiny by CFIUS and legislative changes potentially on the horizon, owners of U.S. businesses operating in industries of strategic importance to the U.S. government may need to exercise increased caution before entering into potential transactions with international buyers, in particular Chinese buyers. Keep in mind that these transactions are disallowed after incurring costs related to the negotiation of the transaction and sellers have no way of recouping these costs after a transaction is disallowed.
Ryan Udell is Co-Chair of the Corporate and Securities Group at White and Williams LLP. Ryan concentrates his practice on equity and debt financings, mergers and acquisitions, and general corporate issues, with emphasis on technology focused industries, such as software, healthcare IT, pharmaceuticals, biotechnology, medical technology. He can be reached at email@example.com.
Ian Doherty is an associate at White and Williams LLP. He concentrates his practice on general corporate, transactional and securities law matters. Ian also has a broad range of experience in private entity formation, corporate, limited liability, and partnership governance and SEC disclosure requirements and filings. He can be reached at firstname.lastname@example.org.
Tina Zheng is an associate at White and Williams LLP. She counsels investors and public and private companies in matters including general corporate governance, mergers, acquisitions, divestitures, private equity, debt financing and venture capital. She can be reached at email@example.com.