On September 13, 2017, President Trump issued an Executive Order citing unresolved national security concerns in prohibiting the $1.3 billion acquisition of a publicly traded semiconductor manufacturer by a group of investors with ties to Chinese state-owned entities. Exercising his authority under Section 721 of the Defense Production Act, as amended by the Foreign Investment and National Security Act of 2007 (FINSA), the President ordered Lattice Semiconductor Corporation (“Lattice”) and Canyon Bridge Capital Partners, LLC (“Canyon Bridge”) to abandon the proposed transaction. Following the President’s order, Lattice announced that the acquisition has been terminated.
This marks the second transaction in the past year to be blocked by a President citing national security concerns related to the proposed acquisition of a U.S. business in the semiconductor industry by an entity with Chinese connections. In recent years, Chinese investors have accounted for both the greatest number and the greatest percentage of covered transactions notified to CFIUS, and there have been calls for increased scrutiny of such transactions. Earlier this year, Senator John Cornyn (R - Texas) announced he will introduce legislation to update FINSA by expanding the Committee’s authority and jurisdiction while explicitly requiring CFIUS to apply heightened scrutiny to transactions involving countries of concern, most notably China. Similarly, in January of this year, the President’s Council on Science and Technology issued a report concluding that China is encouraging acquisitions of existing semiconductor companies as part of an attempt to exert control over the global semiconductor market and recommending CFIUS include an analysis of Chinese policy in analysing Chinese investment in relevant U.S. businesses.
Lattice is a Portland, Oregon company that manufactures programmable silicon chips that may be incorporated into weapons and defense systems. Canyon Bridge represents a group of investors including China Venture Capital Fund Corporation Limited (“CVCF”), a Chinese corporation owned by Chinese state-owned entities. Although Lattice had announced that it had promised “substantial mitigation measures” in its bid for transaction approval, a statement released by the White House noted CVCF’s ties to the Chinese government and listed the Chinese government’s role in supporting the acquisition as a factor leading to the determination that the transaction presented a risk to national security. Thus, regardless of what happens to pending legislation, CFIUS and the President are likely to continue to closely scrutinize foreign investments in the semiconductor market, as well as other technology, defense and intelligence. Such investments with ties to China now face an inevitable uphill battle for approval by the U.S. government.
By issuing this order, President Trump became the third president to prohibit or require the unwinding of a transaction on the grounds of national security. Notably, all such executive orders have involved Chinese investors. In 2016, President Obama issued an order prohibiting the proposed $710 million acquisition of Aixtron GE, a German-based technology company, by Grand Chip Investment GmbH (GCI), a German subsidiary of Fujian Grand Chip Investment Fund LP of China, as discussed in our alert here. Four years earlier, President Obama ordered Chinese-owned Ralls Corporation to unwind its acquisition of a wind farm near a Navy base in Oregon, as discussed in our alert here. The only other president to exercise this authority was President George H.W. Bush, who blocked a Chinese-based company from acquiring MAMCO Manufacturing Inc., a manufacturer of aircraft components, in 1990.