Accepting an apparent unanimous recommendation from the Committee on Foreign Investment in the United States (CFIUS or the Committee), President Trump issued an Executive Order dated September 13, 2017 (Order), prohibiting on national security grounds the proposed acquisition of Oregon-based Lattice Semiconductor Corporation (Lattice) by Canyon Bridge Fund I, LP (Canyon Bridge). The Order directs the parties to take all steps necessary to fully and permanently abandon the proposed acquisition of Lattice within 30 days, and prohibits Canyon Bridge and any of its related entities including its shareholders from entering into any substantially equivalent transaction.

Canyon Bridge transaction

Canyon Bridge is a Chinese-backed private equity fund with the limited partner Yitai Capital Limited, a subsidiary of China Venture Capital Fund Corporation Limited. Lattice is a publicly traded US company that manufactures programmable logic devices – general purpose semiconductors end users can program to provide functionality similar to microchips, which are designed and produced for specific applications. Lattice and Canyon Bridge submitted a notification to CFIUS under a regulatory process that permits a foreign investor to seek a determination that the US government will not seek to block on national security grounds its proposed acquisition of a US business.

CFIUS and the President instead concluded that the transaction posed an unacceptable risk to the national security of the United States that could not be resolved through risk mitigation terms. Treasury Secretary Steven Mnuchin, as the chair of CFIUS, explained that “the national security risk posed by the transaction relates to, among other things, the potential transfer of intellectual property to the foreign acquirer, the Chinese government’s role in supporting this transaction, the importance of semiconductor supply chain integrity to the US government, and the use of Lattice products by the US government.”

Despite Lattice’s plea that the transaction was good for US employees in light of Canyon Bridge’s pledge to double Lattice’s US workforce, Secretary Mnuchin reiterated “the CFIUS process focuses exclusively on identifying and addressing national security concerns. This focused mandate reinforces our commitment to welcoming foreign investment, while at the same time reinforcing our commitment to protecting national security.”

Neither Secretary Mnuchin’s statement nor the Order provide details regarding the specific Lattice intellectual property or products that raised concern, albeit Lattice’s Products Reliability Report states that its products are used in military systems and that it employs certain military standard testing methods related to temperature and other characteristics.

This is only the fourth time a US President has prohibited a proposed investment by a foreign person, and the first time for President Trump, under the now almost 30-year-old authority of the Exon-Florio amendment to the Defense Product Act. Chinese investment was prohibited in all four cases, and this Order comes less than a year after President Obama in December 2016 blocked another proposed Chinese investment.[1] The Order issued from President Trump because while CFIUS has the authority to review transactions and make a recommendation, only the President has the authority to block a transaction on national security grounds.

Increasingly unpredictable CFIUS process

Under the relevant statute, CFIUS has no more than 75 calendar days (or approximately 2.5 months) from when it accepts a notification as complete to finish its review. But after the parties announced the Canyon Bridge transaction in November 2016, CFIUS spent eight months reviewing it to no avail. CFIUS can consent to a party request to withdraw and refile a notification, thereby restarting the clock, which Canyon Bridge did multiple times. Historically CFIUS would grant such a request only when a resolution seemed viable but unable to be finalized within the statutory deadline.

In this case, however, despite CFIUS permitting the parties to withdraw and refile their notification multiple times, Canyon Bridge was unable to find a path to resolve the Committee’s concerns. And Canyon Bridge is not alone. CFIUS is not accepting proposed mitigation solutions, but nonetheless allowing the parties to withdraw and refile multiple times, in several other similarly situated transactions. While the majority of these cases involve Chinese acquirers, some involve Canadian and European acquirers.

This foreign investment purgatory is a symptom of a broader problem: the rapidly increasing uncertainty, both in terms of predictability of timing and result, of the CFIUS process. Predictability is the cornerstone of the voluntary CFIUS process. If CFIUS becomes more arbitrary and harder to predict with any degree of confidence, parties necessarily will have to recalculate the relative cost-benefit analysis of submitting a voluntary filing.

Historically, parties could reasonably predict how long it would take to complete a CFIUS review and identify most of the potential areas of concern. CFIUS on average would: accept notifications as complete and start the review clock within five days of submission; clear more than 50 percent of its docket within the initial 30 day review period; conclude action on 99 percent of all other cases within the initial 75 days, including the 10 percent of cases that required risk mitigation; and refer less than one case per year to the President. This predictability allowed foreign acquirers to confidently conclude that the benefits of voluntarily filing with CFIUS (e.g. a safe harbor against future adverse action by the Committee or President) were more than offset by burdens of filing.

Over the past year, however, this equation has changed, in that CFIUS is now: (i) taking up to six weeks to accept a filing as complete; (ii) clearing only 20 percent of its docket within 30 days, meaning that CFIUS is now routinely sending relatively benign cases into the longer investigation phase; and (iii) threatening to send more transactions to the President unless parties agree to withdraw and refile.

It is also becoming more difficult for parties to predict where CFIUS will raise concerns. If parties cannot confidently identify areas of potential concern for CFIUS, they cannot properly assess the risks of pursuing proposed investment. For example, CFIUS increasingly is voicing concerns about the protection of personally identifiable information (PII) of US citizens. CFIUS has not defined what constitutes PII or explained how PII protection, or lack thereof, poses a national security concern. Nor has CFIUS issued any public guidance on how parties should determine if their particular data sets could raise national security concerns. Similarly, CFIUS is raising concerns based on the risk posed by technology transfers to countries of potential concern even where the technology at issue is neither classified nor prohibited from export to the acquiring country. When CFIUS takes action to prevent such transfers, which Congress currently is considering codifying through CFIUS reform initiatives, it effectively is creating a shadow export control regime that allows CFIUS – without any public notice, judicial review or direct contemporaneous congressional oversight – to prohibit unilaterally the export of any target company’s products, services, intellectual property and/or know-how. While CFIUS always had the authority to do this, trade-focused members of the multi-agency Committee historically compelled restraint by insisting that the existing export control regimes were both adequate and sufficient to address these types of concerns.

Another complicating factor is the growing risk aversion within CFIUS. CFIUS was never designed to eliminate risk; it was designed to manage and mitigate national security risk to an acceptable level. This is why CFIUS must certify that each cleared case poses no unresolved national security concerns. The governing statute specifically contemplates that CFIUS will seek to resolve any concerns via risk reducing mitigation. What constitutes an adequate resolution of an identified national security concern is an inherently subjective standard, and there are always latent risks in such a system: will the parties comply with the mitigation; will the enforcement mechanisms catch material acts of noncompliance; and will the penalty provision provide adequate incentives to comply? These questions are usually posed to the Presidentially-appointed and Senate-confirmed Assistant Secretaries of each agency, who provide the first-line politically accountable management of the CFIUS process; and currently all such positions are vacant. As a result, CFIUS must get clearances either from senior career officials who are acting in a capacity outside of their normal area of expertise or from their respective Deputy Secretaries. It is not surprising that acting career officials or Deputy Secretaries would be more risk averse than a dedicated Assistant Secretary with the experience associated with the day-to-day management of the CFIUS process. Under the current environment, CFIUS appears less willing to accept any latent risk by entering novel mitigation to resolve concerns and is therefore likely to push more cases to the President if parties, like Canyon Bridge, refuse to abandon the transaction voluntarily.

Conclusion

While Canyon Bridge is the first transaction the Trump Administration has blocked by Executive Order, other parties have abandoned their transactions this year after prolonged review when no resolution could be reached. Given the number of similarly situated pending transactions, others are expected to fail either voluntarily or not, perhaps reaching a record of transactions frustrated by CFIUS.