Citing national security concerns, on December 2, 2016, US President Barack Obama issued an Executive Order (Order) prohibiting a Chinese-owned German company from acquiring control of Aixtron SE (Aixtron), a manufacturer of metalorganic chemical vapor deposition equipment for, among other applications, the semiconductor industry. This is the second time that President Obama has issued an Executive Order blocking foreign investment on national security grounds, and only the third time that a US President has ever issued such an order. The prohibition comes amid congressional efforts to broaden the scope of what constitutes national security and the authority of the Committee on Foreign Investment in the United States (CFIUS), the agency charged with conducting national security reviews of foreign investment and making recommendations for Presidential action.
In May 2016, Fujian Grand Chip Investment Fund LP (Fujian) announced a voluntary public takeover of Aixtron via its wholly owned German subsidiary, Grand Chip Investment GmbH (Grand Chip). Aixtron is a publicly traded company listed on the Frankfurt Stock Exchange with a wholly owned US subsidiary located in California.
CFIUS investigated the Aixtron transaction and ultimately recommended that the parties abandon the transaction in light of unresolved US national security concerns.1 Although the CFIUS process is confidential, there is speculation that the national security concerns relate to Aixtron’s GaN technology, a semiconductor commonly used in LEDs that reportedly has military applications. The parties declined to abandon the transaction and President Obama’s order followed. On December 8, Fujian announced that its takeover offer had lapsed due to CFIUS regulatory conditions not being satisfied.
The Order states that President Obama finds there is credible evidence that leads him to believe that by acquiring control over Aixtron’s US business, Grand Chip and its parent entities “might take action that threatens to impair the national security of the United States.” The Order defines the US business to include the US subsidiary, any interest of the US subsidiary, and any assets used in US interstate commerce, including patents and patent applications. The Order requires Aixtron, Grand Chip, and Grand Chip’s parent companies and their partners2 to take all steps necessary to fully and permanently abandon the proposed transaction and to provide weekly certifications to CFIUS as to steps taken to terminate the transaction. Furthermore, the Order prohibits any substantially equivalent transaction or any attempt to circumvent the order, directly or indirectly. The Order notes that the Attorney General is authorized to take any steps necessary to enforce the Order.
The Aixtron prohibition is only the third time that an Executive Order has issued prohibiting a transaction pursuant to the Exon-Florio amendment to the Defense Production Act of 1950 (Exon-Florio), a law that grants the US President the authority to take any action to suspend or prohibit any acquisition of control by a foreign person of a US business that threatens to impair US national security. Presidential action is rare, partly because mitigation measures often address national security concerns, and partly because parties typically decide to abandon a transaction following a recommendation from CFIUS to the President that the President issue a blocking order.
The only other Executive Orders blocking foreign investment on national security grounds also involved Chinese investors: (i) a 2012 Executive Order also by President Obama prohibiting a consummated transaction involving the acquisition by Ralls Corporation, a company ultimately controlled by two Chinese nationals, of certain Oregon wind farms (see briefing here); and (ii) a 1990 Executive Order by President George H.W. Bush prohibiting the consummated acquisition of MAMCO Manufacturing Inc. by China National Aero-Technology and Export Corp.3
CFIUS expansion proposals
The Aixtron prohibition issued at a time when bipartisan members of Congress have called for a re-evaluation of the scope of US national security interests, and the authority of the President and CFIUS to review and prevent foreign investment deemed harmful to those interests. Congress has vocalized concerns over a variety of foreign investments over the course of the current administration, calling on CFIUS to conduct reviews of certain transactions and proposing new legislation. These concerns have largely focused on, or been spurred by, Chinese investment. For example, in 2013 various legislators petitioned CFIUS to review thoroughly a Chinese investment in Smithfield Foods, the largest pork producer in the United States, and similarly in 2016, ChemChina’s acquisition of Syngenta over food safety and security concerns. Incoming Senate Minority Leader Charles Schumer (a vocal opponent of the Dubai Ports World (DPW) transaction discussed below) sent a letter to CFIUS this month calling for increased scrutiny with respect to Chinese investment in US movie studios.
Agriculture and media historically have not been sectors considered to raise national security issues, and CFIUS has cleared these types of transactions to date. However, reflecting concerns about these particular investments, members of Congress requested in September 2016 that the US Government Accountability Office (GAO) issue a report reviewing whether CFIUS has “kept pace with the growing scope of foreign acquisitions in strategically important sectors in the U.S.” The letter notes that there have been no updates to the law in almost ten years and that potential threats to national security continue to evolve, citing concerns over acquisitions in the media and agriculture sectors. The request also highlights concerns over increasing investment by Chinese state-owned enterprises, citing recommendations from a 2012 annual report issued by the US-China Economic and Security Review Commission (ESRC) with respect to reviewing such investment more vigorously. The ESRC’s 2016 annual report, issued after the letter to the GAO, recommends amending the CFIUS statute not just to review more vigorously, but instead to prohibit Chinese state-owned enterprises from acquiring or otherwise gaining effective control of US companies.
Additionally, legislation has been introduced (first following the Smithfield Foods transaction in 2013, and again in 2016) (i) to expand the scope of CFIUS review to include greenfield investments by a foreign person, and (ii) to add to CFIUS’ remit a “net benefit” review for transactions that are reportable under the US merger control statute. This legislation did not succeed in either Congress in which it was introduced, and would need to be re-introduced in 2017 when Congress reconvenes. Senator Schumer has stated that Congress will work to expand CFIUS’ oversight in 2017 and “look at ways we can enforce reciprocity with China.”
This cycle of transaction-spurred legislative reform played out previously from 2005 through 2008, when opposition to the proposed acquisition by DPW of the port management business of the Peninsular and Oriental Steam Navigation Company (P&O) resulted in a long-overdue overhaul of the underlying statute and regulations governing the CFIUS review process. The regulations resulting from that reform became effective at the end of December 2008 just before the end of the second Bush administration. The GAO will issue its report during the Trump administration, which has been initially very critical of Chinese trade policies.
The explicit expansion of national security considerations that resulted from the prior reform applied generally and did not merely address concerns over a particular transaction. Similarly any legislative reform that might result from current Congressional reaction to Chinese investment is not likely to be limited to Chinese investment, although the impact may be felt there most acutely.