On December 2, 2016, President Obama blocked a Chinese-owned German company, Grand Chip Investment GmbH (“Grand Chip”), from acquiring the U.S. business of German company Aixtron SE (Aixtron), a semiconductor equipment manufacturer with a U.S. subsidiary headquartered in Sunnyvale, California. According to a related Treasury Department press release, the national security risk posed by the proposed acquisition was, in part, “the military applications of the overall technical body of knowledge and experience of Aixtron . . . and the contribution of Aixtron’s U.S. business to that body of knowledge and experience.” The press release also noted that the acquisition was funded in part by a Chinese government-supported investment fund.
The president’s order followed the recommendation of the Committee on Foreign Investment in the United States (CFIUS), a U.S. Government interagency committee that conducts national security reviews of foreign investments. CFIUS apparently had warned the parties that it intended to recommend that the president block the transaction, and the committee encouraged the parties to withdraw their filing and abandon the transaction. When parties receive such a message from CFIUS, they typically follow the committee’s advice. Instead, Grand Chip and Aixtron chose to let the U.S. Government’s review proceed to the president.
President Obama’s order marks only the third time a U.S. president formally has blocked an acquisition on national security grounds since CFIUS’s establishment in 1975. In 2012, President Obama ordered a Chinese-owned U.S. company to divest itself of U.S. wind farm project companies located near a U.S. Navy training facility in Oregon. In 1990, President George H.W. Bush ordered a Chinese government-owned firm to divest itself of a Seattle-based aerospace company.
This transaction is noteworthy not only because of President Obama’s order, but also because a parallel foreign investment control investigation by the German government apparently involved close cooperation between U.S. and German authorities. German press reported that U.S. authorities informed their German counterparts of security concerns about the potential military use of Aixtron’s products. In an unusual step, the German Ministry of Economics withdrew a certificate of non-objection that it had already granted to Grand Chip and re-opened its investigation of the transaction.
The German-Chinese part of the deal technically could still move forward, but it would require the approval of German authorities. This process is still unfolding, and the German government stressed that it will review the transaction independent from the U.S. decision. Similar to the U.S. Government review, the German review is likely to focus on the military applications of Aixtron’s technology and its impact on German national security. Recently, Germany has stressed its openness to foreign investment, and it has approved the vast majority of such deals. (It remains unknown, though, how many foreign investment control applications were confidentially withdrawn.) Indeed, Chinese companies in particular already have spent upwards of $11 billion in German investments this year. For parties to international transactions, the German government decision to re-open its investigation is an important development that mirrors what already has been common for merger control procedures: exchange of information between authorities around the globe and the need for a coherent strategy when seeking foreign investment control approvals in multiple jurisdictions. While the target’s activities are global, in CFIUS-type foreign investment control procedures the decisive benchmarks are still national.
Hogan Lovells will continue to monitor the implications for CFIUS reviews going forward, along with the consequences for trade and security coordination between the United States and both Germany and China, and we may provide additional commentary, as warranted.