Foreign investment from China into the United States and, in particular, the U.S. science and technology sectors, has grown rapidly over the last decade. This development has not escaped the attention of the White House, nor is it news to the business community or the practitioners who navigate the regulatory processes associated with such investments. This short posting discusses the implications of two recent developments concerning Chinese investment: (1) President Obama’s December 2, 2016 order blocking a Chinese fund’s attempt to acquire a German semiconductor company, and (2) the election of Donald Trump, whose transition team has intimated a much more aggressive policy toward foreign investment, especially investment from China.
1. The President Blocks Chinese Fund’s Acquisition of Aixtron SE.
On December 2, 2016, President Obama issued an order prohibiting a Chinese investment fund’s acquisition of the U.S. subsidiary of Aixtron SE, a German semiconductor company. Under the Defense Production Act of 1950, the president has the authority to block foreign control of any business engaged in interstate commerce in the United States even if the business is owned by a foreign company. This is just the second time President Obama (and only the third time since 1990 that any president) has exercised the authority to block transactions that he finds threaten or impair national security. Although the exercise of this executive authority is rare, it is noteworthy that numerous other transactions, including several Chinese investments, have fallen apart while under investigation by the Committee on Foreign Investment in the United States (CFIUS), the interagency committee charged with reviewing foreign investments and advising the president on their impact on national security. Since 2009, at least nine Chinese acquisitions have fallen through as a result or due to the prospect of scrutiny from CFIUS.
The presidential action comes at a challenging time for Chinese investment in the United States generally, and specifically with regard to investments in key technologies like semiconductors. The congressionally established U.S.-China Economic and Security Review Commission recently issued its 500+ page Annual Report for 2016, which included recommendations for legislative enhancements to CFIUS to protect U.S. national security. One of the key recommendations made by the Commission was that “Congress amend the statute authorizing the Committee on Foreign Investment in the United States to bar Chinese state-owned enterprises from acquiring or otherwise gaining effective control of U.S. companies.” The scope of any such measures would therefore need to be detailed in proposed legislation.
In addition, on January 6, 2017, the President’s Council of Advisors on Science and Technology released its report to the president concerning the United States’ status as the long-term leader in semiconductor technology. Much of the report focuses on a perceived effort by China to “reshape the market in its favor,” by investing billions of government-backed dollars in bolstering its position as a leader in the global semiconductor market. The report finds that the “most likely avenue for Chinese growth will be acquisition of global players (or divisions of them) in the United States, Europe, or Japan.” Although recognizing that reflexively opposing Chinese investment may not be in the best interests of the United States, the report recognizes that some acquisitions of U.S. semiconductor companies may “pose intolerable national security risks that cannot be mitigated through steps short of stopping their acquisition.”
2. The Trump Administration May Intensify Scrutiny of Chinese Investment.
The bilateral relationship between the United States and China was a key tenet of Donald Trump’s 2016 campaign. It is difficult to know how or to what extent the sentiments he expressed on the trail will manifest in his administration, but he and his transition team have made statements suggesting that his administration’s policies toward foreign direct investment from China are likely to be fundamentally confrontational. According to Congressional Quarterly, the new administration’s action plan includes a dramatic change in CFIUS policy, under which the Committee would consider, as part of its evaluation of potential Chinese acquisitions of companies in the United States, whether the Chinese government restricts foreign purchases of Chinese companies. The Chinese government, of course, places strict restrictions on foreign ownership of domestic companies. The extent to which CFIUS considers such policies in approving or blocking transactions could significantly impact the volume and type of Chinese investment in the United States.
Furthermore, President-elect Trump’s public focus on China during the campaign had as much or more to do with job creation and the trade deficit as it did with traditional notions of national security. The new administration may thus seek to expand the purview of CFIUS’s review beyond national security and critical infrastructure to include economic considerations.
Although CFIUS may lack express statutory authority to review transactions from a strictly economic point-of-view, the Committee already construes its jurisdiction broadly and the term “national security” is arguably vague enough to tolerate an even more expansive interpretation. The new administration may also try to use its considerable discretion under the International Emergency Economic Powers Act (IEEPA) to declare certain acquisitions as national emergencies and block the transaction or even order that “offending” foreign investors’ property be blocked. President Obama recently retailored his authority under IEEPA to block the property of certain Russian entities associated with hacking the Democratic National Committee prior to the election.