Two recent CFIUS reviews show that the new administration is taking a hard stance on Chinese investment in technology. CFIUS, the Committee on Foreign Investment in the U.S., is an interagency committee that reviews the national security implications of transactions that could result in “control” of a U.S. business—even as little as 10 percent— by a foreign entity. If CFIUS finds that there are national security concerns associated with a transaction, it can work with the parties to mitigate such concerns or it can refer the case to the president for action, which can result in the president blocking or undoing the transaction. Until this past month, a U.S. president has only ever blocked a transaction on three occasions, though parties have also elected voluntarily to terminate transactions before they are referred to the president.
On September 13, President Trump blocked the fourth transaction in history for national security reasons, issuing an order that prohibited the $1.3 billion acquisition of Oregon-based Lattice Semiconductor Corporation by a Chinese government-backed fund. The newly formed fund, Canyon Bridge Capital Partners LLC, is headquartered in Palo Alto, Calif., with initial funding from limited partners in China. It announced its agreement to acquire Lattice last November, but CFIUS signaled it would recommend barring the deal earlier this year.
CFIUS also recently signaled that it had concerns about a deal by open location platform company, Here Technologies, to sell a ten percent stake to Chinese internet company, Tencent Holdings, Inc., China-based digital maps company, NavInfo Co. Ltd., and Singapore investment firm, GIC Private Ltd. Following the announcement of President Trump’s order to block the Lattice deal, the parties to the Here Technologies deal announced that they were voluntarily terminating the transaction after months of trying to work with CFUIS towards a mitigation plan. Although the parties did not detail what concerns CFIUS had with the transaction, it is clear that the involvement of Chinese investors was a consideration.
The Lattice and Here transactions signal a trend towards increasing scrutiny of Chinese investments in U.S. technology companies, and a realization of the expected increase in the number of investigations being undertaken by CFIUS. Both also shed light on the current opacity around the CFIUS review process under the new administration. CFIUS is currently under staffed as a number of the secretary and assistant secretary positions forming its membership remain vacant or await Senate confirmation. Career staffers are undertaking the review process with little top-down guidance, which likely accounts for lengthier and more conservative review. Against this backdrop, it is important to remember that the filing of a CFIUS notice is voluntary—there are no sanctions for not filing (though the risk of a transaction being unwound remains even if a notice is not filed). Parties should give careful consideration to whether a proposed transaction would likely be covered, i.e., whether the transaction “threatens to impair the national security.”