Among the various challenges facing stakeholders in cross-border M&A deals is a potential national security review of the transaction by the Committee on Foreign Investment in the United States (CFIUS) and the possibility of such review impeding, or even blocking, a non-U.S. acquirer of a U.S. business.
On Dec. 2, 2016, President Barack Obama issued an order, on the recommendation of CFIUS, prohibiting the acquisition of a German semiconductor manufacturer, Aixtron SE (Aixtron) by a German company, Grand Chip Investment GmbH (Grand Chip), beneficially owned by Chinese nationals.
Aixtron and its subsidiaries manufacture equipment for the global semiconductor industry, including metal-organic chemical vapor deposition (MOCVD) systems used to build compound semiconductor materials with military applications. Aixtron’s U.S. subsidiary is headquartered in and operates out of Sunnyvale, California.
In the run-up to the transaction, the acquirers, Grand Chip and its beneficial Chinese owners, agreed on financing terms for €500 million with Sino IC Leasing Co. Ltd., a Chinese government-backed investment fund dedicated to semiconductor technology investments.
On May 23, 2016, Aixtron, Grand Chip and affiliates signed a business combination agreement to undertake a takeover offer process under German securities law. On July 29, 2016, Grand Chip launched its public takeover offer for all Aixtron shares in a transaction valued at approximately €670 million.
A condition precedent of the tender offer was clearance by both the German Federal Ministry of Economics and Energy (the Ministry) and CFIUS. This condition was unfulfilled when the Ministry revoked a previously issued clearance certificate on Sept. 8, 2016, and CFIUS notified the parties on Nov. 18, 2016, that it would recommend that President Obama prohibit the transaction unless the parties abandoned it. The parties chose to press on with the takeover offer in spite of these developments.
The Presidential Order
In response to the CFIUS recommendation, on Dec. 2, 2016, President Obama issued an order finding that Grand Chip’s beneficial owners might take action that threatens to impair U.S. national security. The order prohibited the acquisition of a broad swath of Aixtron assets involved in U.S. interstate commerce, including interests in U.S. patents.
The Department of the Treasury’s press release cited as factors for the president’s decision the military applications of Aixtron’s knowledge of semiconductor technology and the fact that a Chinese government-backed investment fund, established specifically for the purpose of shoring up China’s semiconductor technology know-how, would finance the proposed transaction.
The order required the parties to fully and permanently abandon the “U.S. business” aspects of the proposed transaction. Grand Chip announced on Dec. 8, 2016, that it was abandoning the entire Aixtron deal, and shortly thereafter, Aixtron announced it was delisting from Nasdaq and deregistering with the SEC.
Analysis and Conclusions
The Aixtron order was unusual because:
- It was only the third presidential order ever pursuant to a CFIUS recommendation, and the first to prohibit a transaction prior to closing.
- It defined U.S. assets broadly enough (i.e., as any Aixtron asset “used in, or owned for the use in or benefit of, the activities in interstate commerce”) so as effectively to block the deal completely, including its extraterritorial aspects.
- The parties attempted to continue with the transaction (with adverse consequences) even after CFIUS notified them of its contemplated recommendation to the president.
After a year rife with concerns over cybersecurity and protection of domestic industries, a number of trends point toward a heightened importance of CFIUS review in cross-border transactions in the years to come, including:
- The imposition of diverse mitigation measures and increased CFIUS activity year over year.
- A special emphasis on reviewing Chinese government-backed acquisitions of critical technologies.
Forward-looking practitioners will further note President-elect Donald Trump’s international trade positions and the U.S.-China Economic and Security Review Commission’s 2016 annual report to Congress recommending that Congress amend Section 721 to bar Chinese state-owned enterprises from acquiring or controlling U.S. companies.
In light of these recent trends and the Aixtron transaction, companies involved in cross-border M&A transactions and their advisers should consider:
- Closely reviewing any deal involving the transfer of critical technologies or infrastructure to a foreign acquirer, in particular those where the acquirer is owned or controlled by a foreign government.
- Structuring deal financing to avoid receiving funds earmarked for a specific purpose that may be perceived as threatening to U.S. national security interests.