President Obama issued an executive order on December 2, 2016 blocking the sale of the U.S. business of Aixtron SE (“Aixtron”), a German semiconductor manufacturer, to a German subsidiary of a Chinese fund, Fujian Grand Chip Investment Fund (“FGC”). The order followed the recommendation from the U.S. Committee on Foreign Investment in the United States (“CFIUS”), an interagency committee chaired by the U.S. Department of Treasury responsible for conducting national security reviews of foreign acquisitions of U.S. businesses. Notably, the order represents only the third time that a U.S. president has blocked a foreign acquisition due to U.S. national security concerns. On December 8, 2016, FGC announced that it would abandon its intended purchase of Aixtron altogether.
Background on CFIUS
CFIUS is an interagency committee principally comprising nine members, chaired by the Secretary of Treasury, tasked with reviewing transactions that could result in control of a U.S. business by a non-U.S. person (“covered transactions”) in order to determine the effect of such transactions on the national security of the United States. CFIUS operates pursuant to the Defense Production Act of 1950, as amended by the Foreign Investment and National Security Act of 2007, which defines a “covered transaction” as “any merger, acquisition, or takeover… by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States."
Upon receipt of a complete notice of a covered transaction, CFIUS commences a 30-day review and is authorized to conduct an additional 45-day investigation if warranted. CFIUS may also negotiate an agreement with any party to a covered transaction to mitigate perceived threats to national security. Once CFIUS completes its review and/or at any time during a subsequent investigation, CFIUS may conclude that national security concerns raised by a transaction have been addressed. If such concerns remain unaddressed at the conclusion of an investigation, CFIUS refers the transaction to the President for a decision. The President enjoys broad discretion in taking actions deemed appropriate to suspend, prohibit, or unwind a covered transaction when acting based on credible evidence, but must announce a decision within fifteen days.
Significance of Aixtron Order
According to the order, President Obama had credible evidence to believe that by acquiring control over Aixtron’s U.S. business, FGC might take action that would threaten to impair the national security of the United States. A press release from the U.S. Treasury Department stated that the transaction was blocked due to concerns over military applications of Aixtron’s semiconductor manufacturing equipment and technology. The order prohibited only the acquisition of Aixtron’s U.S. business and other assets used for the benefit of activities in U.S. interstate commerce, and not of other non-U.S. Aixtron assets. However, in October 2016, the German Ministry of Economics withdrew a certificate of non-objection that it previously had granted regarding the acquisition of Germany-based Aixtron by FGC and announced that it was re-opening its review based on security concerns communicated to the ministry by the U.S. Government. Due to the combination of the ongoing German review and the presidential order, FGC announced on December 8 that it was abandoning the entire deal due to the failure to obtain CFIUS approval, which was a condition of FGC’s offer to Aixtron.
The order marks only the third time that a U.S. President has blocked an acquisition due to unresolved national security concerns since CFIUS was established in 1975. Both prior occasions also involved Chinese acquirers. In 1990, President George H.W. Bush ordered the state-owned China National Aerospace Technology Import and Export Corp. to divest its recently-acquired interest in the Seattle-based MAMCO Manufacturing Inc. In 2012, President Obama ordered Chinese-owned Ralls Corp. to divest certain windfarm assets located near a U.S. military base.
There have been many other instances where potential acquisitions of U.S. businesses by non-U.S. companies (from China and other countries) have been abandoned due to concerns raised by CFIUS during its review.1 For example, in 2016 the potential acquisition of Royal Philips’ Lumileds light business to a Chinese-led consortium and the potential acquisition of a stake in Western Digital Corp. by Chinese state-owned Unisplendour both were called off after CFIUS expressed concerns that the deals raised unresolved national security concerns. In those cases, however, the parties to the transaction agreed to call off the deal without being expressly required to do so by a presidential order.2 In the Aixtron matter, CFIUS reportedly had warned Aixtron and FGC that it intended to recommend that the president block the transaction and encouraged the parties to terminate the transaction. Despite the warning, Aixtron and FGC decided to let the matter proceed to the president.
Potential Shift in CFIUS Focus
While the Aixtron decision does not mark a significant shift in CFIUS policy, U.S. congressional members recently have been calling for the committee to scrutinize foreign acquisitions of U.S. businesses more intently. Last month, the U.S.-China Economic and Security Review Commission – a congressional panel responsible for monitoring trade and security links between the United States and China – issued a report that noted “growing political concern” over Chinese acquisitions of U.S. assets and called on Congress to pass legislation requiring CFIUS to prohibit all Chinese state-owned enterprises from gaining effective control over any U.S. companies – regardless of whether the transaction raised any specific national security concerns.
In September 2016, a bipartisan group of congressmen sent a letter to the U.S. Government Accountability Office requesting a review of whether CFIUS has effectively kept pace with the “growing scope of foreign acquisitions in strategically important sectors” in the United States. The congressmen specifically raised concerns regarding Chinese acquisitions of U.S. businesses that “may pose a strategic rather than overt national security threat.” The letter also called for changes to CFIUS’ mandate, including by: (i) requiring a mandatory review of all transactions in which Chinese state-owned or controlled companies acquire controlling interests in U.S. businesses; (ii) considering agriculture and media businesses as part of U.S. “critical infrastructure” covered by CFIUS review; (iii) blocking investments in certain industries by foreign companies where the relevant foreign government prohibits U.S. companies from investing in the same industry; and (iv) adding a net economic benefit test to the existing national security review conducted by CFIUS.
Many of these recommendations have been made before but failed due to a lack of support from Congress or the president. As discussed in our prior OnPoint, however, President-elect Trump has indicated a willingness to use U.S. trade policy as a weapon against China. Chinese companies seeking to invest in U.S. businesses operating in electronics, utilities, transportation, and other sectors that may be seen to raise potential threats to U.S. national security may face more obstacles during the Trump Administration. Some of the proposed CFIUS reforms – in particular, a broad prohibition on acquisitions by Chinese state-owned or controlled enterprises and a requirement to evaluate net economic benefits in addition to national security concerns – would have a significant impact on contemplated foreign acquisitions of U.S. businesses.
The Aixtron action demonstrates the need for foreign parties considering transactions that may involve acquiring control over U.S. businesses, as well as potential U.S. targets themselves, to carefully consider the impact CFIUS may have on a contemplated transaction. These parties also should keep abreast of legislative and political developments that could affect CFIUS scrutiny of acquisitions of U.S. businesses by Chinese and other non-U.S. parties.