Embedded Files
The Committee on Foreign Investment in the United States (“CFIUS”) presents one of the biggest challenges for Chinese investors looking to invest in U.S. businesses, particularly amid the geopolitical tension between the world's two largest economies. CFIUS's review of transactions that might present a national security threat has always been a black-box operation, causing unpredictability and uncertainty for investors.
We know that Chinese investors in critical technology, critical infrastructure, and sensitive personal data (“TID businesses”) generally present a higher national security risk for the purposes of CFIUS review. However, there is a lack of clear guidance on the specific features or characteristics that would assure CFIUS that a proposed transaction does not pose a national security threat. This leaves Chinese investors without concrete guidance when making strategic investment decisions.
This article hence seeks to fill in the void by summarizing all attempted transactions by Chinese investors that did not eventually pass CFIUS review, known to the author after an extremely diligent exercise.
Background of CFIUS
CFIUS was established in 1975 by President Gerald Ford’s Executive Order 11858, but it initially had a very limited role in monitoring and coordinating policy on foreign investment rather than outright blocking transactions.[1] In 1988, Congress passed the Exon-Florio Amendment to the Defense Production Act, which gave the President the authority to block foreign acquisitions on national security grounds. This amendment was largely prompted by concerns over Japanese investment at that time, particularly a proposed purchase of Fairchild Semiconductor by Fujitsu. Then in 1992, Congress passed the Byrd Amendment which required CFIUS to investigate proposed mergers, acquisitions, and takeovers where the acquirer is acting on behalf of a foreign government and affects national security.
CFIUS was not statutorily established until the Foreign Investment and National Security Act of 2007 (“FINSA”). In 2018, President Trump signed the Foreign Investment Risk Review Modernization Act (“FIRRMA”), which significantly expanded CFIUS’s power over particular types of in-bound investments, such as real estate investments, minority investments that provide access to U.S. TID business, etc. FIRRMA has since had a huge impact on Chinese investors.
George H.W. Bush (1989 - 1993)
China National Aero-Technology I/E Corp.
On February 1, 1990, President H.W. Bush issued an order to nullify the acquisition of control of MAMCO Manufacturing, Inc. (“MAMCO”) and its assets by the China National Aero-Technology Import and Export Corporation (“CATIC”). As a result, CATIC had to divest all of their interest in MAMCO and its assets within three months from the date of the order.[2] President H.W. Bush’s order was the first action under the 1988 Exon-Florio Amendment as well as the first order directing a Chinese investor to divest its interests.
CATIC is an export-import company controlled by the Chinese Ministry of Aerospace Industry, and MAMCO was a small closely held company that produces metal parts and assemblies for aircraft. MAMCO filed a voluntary notification to CFIUS on November 3, 1989, and CATIC purchased all the voting securities of MAMCO by November 30, 1989 (before CFIUS finishes its review). CFIUS conducted an on-site visit to MAMCO and worked with export control agency Bureau of Industry and Securities (“BIS”) within the Department of Commerce to analyze whether MAMCO’s technologies are controlled items. The export control analysis eventually formed the basis of the ordered divestiture.[3]
William Clinton (1993-2001)
My research did not unveil any notable CFIUS rejections of Chinese investments during Bill Clinton’s presidency. However, as laid out below, there was a significant and controversial CFIUS decision during that time that has been criticized heavily retrospectively by U.S. legislators.
Consortium including Chinese SOEs
In 1995, CFIUS reviewed and ultimately approved the sale of Magnequench, a division of General Motors, to a consortium that included two Chinese state-owned enterprises (“SOEs”). Magnequench was a producer of rare earth magnets, which are critical components in various military and civilian technologies, including precision-guided weapons systems. Critics argue that the CFIUS approval allowed China to gain access to important technology related to rare earth elements and permanent magnets, and that the CFIUS review during the Clinton era generally underestimated the long-term strategic implications of Chinese investments in sensitive technologies. Following the acquisition, the new owners began transferring operations to China and eventually shut down the U.S. production facilities.[4]
George W. Bush (2001-2009)
During the George W. Bush administration (2001-2009), there were some notable cases and developments related to CFIUS reviews of Chinese investments which eventually led up to a more stringent review regime during the Obama era.
China National Offshore Oil Corporation
In 2005, China National Offshore Oil Corporation (“CNOOC”) attempted to acquire Unocal, a relatively small U.S. oil company. The deal immediately faced significant political opposition with some members of Congress voicing concerns about Beijing’s strategy for a more energy secure policy. Although CFIUS did not formally reject the deal, the intense scrutiny and political pressure led CNOOC to withdraw its bid voluntarily.[5]
Huawei
In 2008, CFIUS blocked a proposed investment by Bain Capital and Huawei to acquire 3Com, an American networking equipment manufacturer.[6] The proposed deal would have given Huawei a 16.5% minority stake in 3Com, with an option to acquire an additional 5%. This seems to be Huawei’s first attempt to purchase assets in the United States. It caught CFIUS’s attention against the backdrop that the Congress started to review the nation’s telecommunication infrastructure and identified Huawei as a potential national security threat.
Barack Obama (2009-2017)
My research unveiled that CFIUS blocked 12 Chinese investments during the Obama administration, a significant leap from the previous Bush administration. These investments focused on key technologies sectors such as solar, semiconductor, and natural resource mining, and covered both strategic buyers and financial buyers. Though not a focus in this article, there are also some important acquisitions that were cleared by CFIUS during this period, such as CNOOC’s USD 15.1 billion acquisition of a Canadian energy firm Nexen Inc. which has oil and gas assets in the U.S. Gulf of Mexico, and Wanxiang America Corp.’s USD 257 million acquisition of most of A123 Systems Inc., a Massachusetts-based advanced battery manufacturer.[7]
Northwest Nonferrous
In December 2009, CFIUS was ready to block a proposed 51% investment by a Chinese government-controlled company, Northwest Nonferrous International Investment Company (“Northwest Nonferrous”), in a Nevada gold mining company, Firstgold Corp., allegedly due to the proximity of the target’s mining facilities to a naval air station and other nearby sensitive military installations and assets. The parties withdrew the CFIUS notice on the day the transaction was to be referred to the President.[8]
TCIC
In June 2010, Emcore Corporation (“Emcore”), a producer of fiber optic and solar power components, announced that it was withdrawing its CFIUS filing for its proposed sale of 60% of its fiber optics business to a Chinese company Tangshan Caofeidian Investment Corporation (“TCIC”). Emcore is based in the state of New Mexico and supplies compound semiconductor-based components and subsystems for the fiber optics and solar power markets. On February 3, 2010, the two companies announced a joint venture plan under which Emcore would sell 60% in its fiber optics business to TCIC for USD 27.75 million. The proposed sale would have expressly excluded Emcore’s satellite communications and specialty photonics fiber optics business.[9] However, such exclusion apparently did not relieve CFIUS of concerns associated with a Chinese buyer acquiring U.S. semiconductor assets.
Anshan Iron & Steel
On July 2, 2010, fifty members of the House of Representatives wrote to the Secretary of Treasury, requesting the Committee to “thoroughly investigate” the plans announced in May 2010 by Anshan Iron & Steel Group (“Ansteel”) to invest in steel plants owned by a Mississippi entity called the Steel Development Company. The members expressed that Ansteel “could have access to new steel production technologies and information regarding American national security infrastructure projects.”[10] Ansteel had planned to invest in as many as five of Steel Development’s U.S. production mills. The terms of the agreement have not been made public, but existing information indicated that Ansteel was only trying to purchase a minority position for USD 175 million in Steel Development Company’s rebar steel facility.[11] According to an August 23, 2010 article, it seems that Ansteel received great resistance from Congress and CFIUS despite maintaining interest.[12] Further searches on the internet suggested that the deal likely did not move forward.
Huawei Cases
Various reports lightly mentioned that in around mid-2010, CFIUS blocked Huawei from purchasing the mobile wireless network division of Motorola, as well as 2Wire, an American supplier of broadband internet software.[13] Further details are unavailable despite the author’s diligence searches.
Also in 2010, Huawei attempted to join deal to buy out United States telecommunications company SprintNextel, which was heavily opposed by members of Congress due to the belief that Huawei had ties to the Chinese military and presented a threat to U.S.’s key infrastructure.[14]
In another significant case, CFIUS ordered Huawei to unwind its May 2010 acquisition of assets from bankrupt U.S. virtualization firm 3Leaf Systems in February 2011. The transaction was particularly notable because Huawei had acquired only technology and key personnel (but less than a third of 3Leaf Systems’ employees) for $2 million, without purchasing any equity interest or physical assets.[15] This unconventional structure led both Huawei and 3Leaf Systems to conclude that a CFIUS filing was unnecessary. According to certain reports, after the purchase closed, CFIUS invited Huawei to seek approval for the completed transaction and Huawei voluntarily filed in November 2010.[16] The 3Leaf Systems case remains a remarkable example of CFIUS ordering divestiture for a limited acquisition scope.
Huawei’s unsuccessful interaction with CFIUS was believed by some commentators to be a result of its inability to navigate the CFIUS review mechanism, given that CFIUS cleared another Chinese investor having a stronger state background, AVIC International, in its acquisition of a U.S. aviation company roughly at the same time.[17]
Far East Golden Resources
A less reported case is the Hong Kong-based Far East Golden Resources Investment Limited’s (“Far East”) 2010 acquisition of shares in Nevada Gold Holdings Inc. (“Nevada Gold”). Based on existing public information, in 2012, CFIUS initiated a review of the transaction and proposed certain measures to mitigate risks to U.S. national security as a result of the proximity of certain Nevada Gold properties to the Fallon Naval Air Station. Rather than accepting the burdensome mitigation measures, both parties agreed to unwind the transaction and divest Far East’s interests in Nevada Gold.[18]
Ralls Corporation
On September 28, 2012, President Obama issued an executive order that required Chinese-owned Ralls Corporation (“Ralls”) to divest its ownership in four wind farm project companies located near restricted naval airspace in Oregon based on CFIUS’s recommendations.[19]Ralls is an Oregon corporation owned by two Chinese nationals who also hold senior management positions within the Sany Group (“Sany”), a Chinese global manufacturing company. In March 2012, Ralls acquired interests in four wind farm project companies in Oregon from a Greek company Terna Energy USA Holding Corporation (“Terna”), and the project sites overlap with a restricted airspace zone used by military aircraft out of Naval Air Station Whidbey Island. Ralls planned to install wind turbine generators manufactured in China by a Sany subsidiary reportedly to demonstrate Sany products’ reliability for purpose of attracting customers in the United States.[20]
Ralls and Terna did not voluntarily notify CFIUS of the transaction before closing their deal. They submitted a CFIUS notice only after CFIUS requested so. At that time, a Treasury official advised Ralls to postpone construction on the project sites until after CFIUS’s review was completed, but Ralls declined to heed that advice and proceeded with construction prior to receiving CFIUS’s approval. On June 25, 2012 and August 2, 2012, CFIUS issued two mitigation orders directing Ralls to cease all construction and operations at the project sites, prohibiting all access to the project sites except by CFIUS-approved U.S. citizens, prohibiting Ralls from transferring Sany-produced items to third parties for use at the project sites and selling the project companies without first removing all affixed items at the locations.[21]After CFIUS completed its review, it recommended to President Obama to unwind the transaction.
Before President Obama issued his executive order, on September 12, 2012, Ralls took the unprecedented step of challenging CFIUS’s and the President’s authority to thwart its acquisition. Ralls argued that the divestiture requirement constituted an unconstitutional “taking” of property without due process of law, and the Presidential and CFIUS orders violated the Exon-Florio Amendment and the Administrative Procedures Act (“APA”).[22] On February 26, 2013, the court dismissed Ralls’ claims of violations of the Exon-Florio Amendment and the APA, but allowed the due process claim to proceed. In July 2014, the appellant court said that Ralls should have been shown all unclassified information that led to the government order and given a chance to respond. In December 2015, Ralls settled with the U.S. government but the terms of the settlement were not released. Ralls announced, however, that it would be able to use Sany turbines in its “other U.S. projects” likely in Colorado and Texas.[23]
Procon
On June 18, 2013, Canada-based Lincoln Mining Corporation (“Lincoln”) announced that as a result of CFIUS review, Chinese strategic investors Procon Mining and Tunnelling, Ltd. along with China National Machinery Industry Corporation (collectively, “Procon”) would divest their entire investment in Lincoln within 120 days.[24] In September and November 2012, Procon acquired controlling shares of Lincoln. Yet, the parties filed their CFIUS notice on April 1, 2013, after the transaction had closed.
Although details unclear, the proximity of Lincoln’s properties to U.S. military bases was a significant factor.[25] Despite being a Canadian company, Lincoln’s core mining operations are in Nevada and California. Lincoln’s Bell Mountain and Pine Grove properties are near the Fallon Naval Air Station in Nevada, where the TOPGUN flight training school is located, while the Oro Cruz property is in California, near the Marine Corps Air Station Yuma. Moreover, until the divestment is complete, all access to Lincoln’s properties at Bell Mountain, Pine Grove and Oro Cruz will be subject to prior authorization from the U.S. government.[26]
GO Scale Capital
In October 2015, Philips Lighting (“Philips”) announced that CFIUS expressed concerns about the sale of its majority stake in one of its subsidiaries, Lumileds, to GO Scale Capital Co. Ltd. (“GO Scale”), a China-led private equity group. The transaction was scheduled to close in the third quarter of 2015. On January 22, 2016, Philips announced that it withdrew its notice to CFIUS and terminated the transaction with GO Scale Capital because CFIUS refused to grant regulatory clearance.
While the communications between the parties and CFIUS were confidential, commentators say that CFIUS might have categorized the transaction as one affecting critical infrastructure, given that Lumileds is the biggest supplier of LED lamps to the automotive industry, and that the production of LED lamps involves the use of advanced semiconductor technologies that could be deployed in military applications. Reportedly, the acquisition included an agreement to transfer more than 600 patents related to LED manufacturing and lighting from Philips to Lumileds, which would benefit GO Scale Capital.[27]
Fairchild Semiconductor
In February 2016, Fairchild Semiconductor International Inc. (“Fairchild”) announced that it had rejected an acquisition offer from China Resources Microelectronics Ltd. and Hua Capital Management Co. Ltd., citing concerns over the U.S. approval process. The two Chinese investors allegedly had offered USD 2.46 billion for Fairchild, but Fairchild believed that there was an “unacceptable level of risk.” Fairchild Semiconductor eventually sold itself to another U.S. semiconductor company for USD 2.4 billion.[28]
HNA Group
On October 24, 2016, Chinese aviation and shipping conglomerate HNA Group announced that its subsidiary HNA Tourism Group Co. Ltd. would buy approximately 25% interest in Hilton Worldwide Holdings Inc. from its largest private equity shareholder Blackstone. According to the stock purchase agreement, the transaction will only be subject to CFIUS clearance if (1) CFIUS requests a notification; (2) the parties agree to notify CFIUS; or (3) CFIUS commences an investigation on its own initiative.[29] No news report indicated that a CFIUS filing was eventually submitted.
During the Obama era, HNA Group secured CFIUS clearance for its acquisition of Ingram Micro at the end of 2016.[30] However, HNA Group’s acquisition efforts took a downturn for HNA Group during the Trump era, further detailed below.
Fujian Grand Chip
On December 2, 2016, President Obama issued an executive order prohibiting a proposed USD 710 million acquisition of Aixtron GE, a German-based technology company, by Grand Chip Investment GmbH (“Grand Chip”), a German subsidiary of Fujian Grand Chip Investment Fund LP of China (“Fujian Grand”).[31] Aixtron makes devices which produce crystalline layers based on gallium nitride that are used as semiconductors in weapons systems.[32] Fujian Grand is held 51% by Chinese private investor Zhendong Liu and 49% held by Xiaman Bohao Investment Ltd. (which is then ultimately owned by Chinese private investors). The acquisition consideration reflects a 50.7% premium to the three-month volume weighted average share price prior to the announcement.
Aixtron’s U.S. business in 2015 comprised nearly 20% of the company’s entire staff and accounted for more than 20% of global sales. In CFIUS’s assessment, the transaction posed a national security risk that could not be resolved through mitigation, particularly that some of Aixtron’s products have defense application.[33]
Also, before the executive order, the German government already withdrew its approval in October 2016 reportedly at the bidding of the U.S., and after the executive order, the German government dropped the review of the deal.[34]
Donald Trump (2017-2021)
My research indicated that there are also 12 Chinese investments that were blocked by CFIUS during the first Trump term. Although the volume of blocked investments did not raise, there is a clear pattern that CFIUS was willing to expand its jurisdiction to go after acquisitions that might just be indirectly related to China (e.g. the Broadcom case below).
TCL
On September 21, 2016, TCL Industries Holdings (Hong Kong) Limited entered into a Stock Purchase Agreement with Delaware-based Novatel Wireless, Inc. (“Novatel”), which is a leading global provider of software-as-a-service and solutions for the internet of things. Under the agreement, Novatel would sell its “mobile broadband business, which includes its MiFi branded hotspots and USB modem product lines,” by creating a holding company Inseego Corp. (“Inseego”). Parties filed a voluntary notice with CFIUS which was accepted for review by CFIUS on November 22, 2016. The deal is contingent on obtaining clearance from CFIUS.[35] After CFIUS’s announcing its investigation plan, parties had to withdraw and refile twice in order to refine mitigation agreement terms. Eventually on June 7, 2017, Novatel announced that it had decided to terminate the purchase agreement it entered into with TCL in September 2016.[36]
HNA Group
During Trump term, Chinese conglomerate HNA Group attempted to purchase interests in various U.S. businesses with a mixture of success and failure. In the process, the U.S. regulators expressed concerns about the HNA Group’s opaque ownership structure and its debt-laden business operation. In one report, it was suspected that relatives of some top party officials own material stake in HNA Group, and Bank of America had to suspend business with HNA Group due to KYC concerns.[37]
In January 2017, HNA Group announced its intention to buy the majority of SkyBridge Capital, a hedge fund investment firm founded by President Trump’s former aide Anthony Scaramucci. The terms of the acquisition were not made public. In May 2018, Reuters reported that HNA Group had dropped its bid due to CFIUS resistance.[38] Notably, roughly at the same time, HNA Group obtained CFIUS clearance in purchasing an asset management company. On March 24, 2017, HNA Group entered into a share purchase agreement through its U.S. subsidiary with OM Group (UK) Limited (“OM Group”), in which HNA Group would acquire 24.95% of the outstanding shares of OM Asset Management plc from OM Group for approximately USD 446 million. The transaction was divided into two tranches: tranche 1 was closed on May 12, 2017 where HNA Group purchased 9.95% of the shares (apparently to just avoid hitting the CFIUS 10% safe harbor), and tranche 2 contemplates the purchase of the remaining stock, contingent on CFIUS approval. CFIUS later cleared the transaction.[39]
In late July 2017, Chinese HNA Group’s proposed joint venture investment of USD 416 million with Global Eagle Entertainment (“Global Eagle”), a Los Angeles-based in-flight entertainment company, failed to secure clearance by CFIUS.[40] The deal was announced first in November 2016, under which a HNA Group subsidiary would acquire a 34.9% stake in Global Eagle for USD 103 million and 51% of the joint venture. Although parties did not disclose the reason for CFIUS rejection, some reports say that CFIUS was concerned about the protection of customer data that passed through Global Eagle’s in-flight Wi-Fi service.[41]
Further, Reuters reported in August 2018 that CFIUS ordered HNA Group to sell its majority stake in a Manhattan building whose tenants include a police precinct tasked with protecting the Trump Tower.[42]
Canyon Bridge
On September 13, 2017, President Trump issued an executive order blocking a Chinese-backed private equity firm headquartered in California, Canyon Bridge Capital Partners Inc. (“Canyon Bridge”), from acquiring Lattice Semiconductor Corporation (“Lattice”), a chipmaker based in the state of Oregon. Lattice is a publicly traded semiconductor company that manufacturers programmable logic devices for uses in vehicles, computers, and mobile phones. In February 2016, Lattice started seeking potential buyers, and on April 8, 2016, China Reform Fund Management Co. (“CRFM”) approached Lattice for a potential takeover. After the parties reached a preliminary understanding, CRFM decided to establish Canyon Bridge with a CRFM subsidiary being its sole limited partner. CRFM also engaged two U.S. nationals as its general partners to oversee the fund. Parties announced on November 3, 2016 that Canyon Bridge would buy Lattice for USD 1.3 billion. [43]
On December 28, 2016, parties jointly filed with CFIUS. The acquisition attracted bipartisan attention, and a group of 22 members of the U.S. House of Representatives objected the proposed transaction because the deal could “disrupt the U.S. military supply chain and possibly lead to a reliance on foreign-sourced technologies for many critical U.S. Defense Department programs.” CFIUS reportedly submitted a package of information to President Trump and recommended that the President block the proposed acquisition. The national securities concerns include (1) the potential transfer of intellectual property; (2) the Chinese government’s role in supporting the transaction (source of funds); (3) the importance of semiconductor supply chain integrity to the U.S. government, and (2) the use of Lattice products by the U.S. government. The below chart shows CRFM’s connections to the Chinese government that might have been considered by CFIUS and President Trump.[44]
Ant Financial
On January 26, 2017, MoneyGram International, Inc. (“MoneyGram”) – a Texas-based provider of money transfer services – entered into an agreement and plan of merger with Alipay (UK) Limited and its wholly owned U.S. and Hong Kong subsidiaries, whereby MoneyGram will merge into Alipay. Alipay is a subsidiary of Ant Financial Services Group (“Ant Financial”). The merger was conditional upon CFIUS clearance, and parties submitted a voluntary filing. In MoneyGram’s SEC filing, it stated that Ant Financial was not owned or controlled by the Chinese government, and had successfully completed a CFIUS review in 2016 when it purchased Kansas City-based EyeVerify.[45]Some other reports indicated that the Chinese government held a 15% stake in Ant Financial which prompted CFIUS’s concern that data held by MoneyGram could be used by the Chinese government.[46] In January 2018, parties reportedly were advised that a CFIUS clearance “[would] not be forthcoming”, causing them to abandon the filing. Parties later sought other cooperation modes to combine their capabilities in remittance and digital payments for the Asian market.[47]
Hubei Xinyan
In February 2018, Xcerra Corporation (“Xcerra”) announced terminating its merger agreement with Chinese Unic Capital Management Co. (“Unic Capital”) and China Integrated Circuit Industry Investment Fund following negative feedback from CFIUS.[48] The parties previously reached a merger agreement on April 7, 2017, under which the U.S. semiconductor testing company Xcerra would be merged with a specifically created merger vehicle for USD 580 million.[49] Unic Capital subsequently assigned all of its rights under the merger agreement to Hubei Xinyan Equity Investment Partnership (Limited Partnership) on August 4, 2017. The closing of the merger was conditional upon CFIUS clearance, for which parties jointly submitted a voluntary notice. CFIUS provided feedback which prompted parties to cease efforts to seek CFIUS clearance and enter into a termination agreement.[50]
Broadcom
On March 12, 2018, President Trump issued an executive order blocking Singapore-based Broadcom Limited (“Broadcom”) and its affiliates from taking over Delaware-based Qualcomm Inc. (“Qualcomm”).[51] In this order, President Trump also disqualified 15 individuals from standing for election as directors of Qualcomm that were listed as potential candidates on the Form of Blue Proxy Card filed by Broadcom with the SEC.[52] Notably, Broadcom’s takeover of Qualcomm was a hostile takeover, and Qualcomm had actually used CFIUS as a defense mechanism via a strong lobbying campaign.
Blocking Broadcom’s takeover of Qualcomm was considered unusual because it was a departure from the “CFIUS trend” to block acquisitions by Chinese investors. CFIUS was apparently concerned about the “risks associated with Broadcom’s relationship with third party foreign entities” – speculated to be referring to Huawei, indicating that the Trump administration largely expanded CFIUS’s focus to transactions with an indirect nexus to China. The Treasury’s letter indicates that it was concerned that a foreign buyer could later make a business decision that might have the effect of “boosting China’s competitive position vis-a-via a critical technology.”[53]
iCarbonX
In 2018, CFIUS identified a January 2017 investment in the amount of approximately USD 100 million by the Tencent-backed iCarbonX into a Massachusetts healthcare internet start-up PatientsLikeMe Inc. (“PatientsLikeMe”). PatentsLikeMe’s business connects patient-reported information with biological data to find new clues about diseases. Reports in April 2019 indicate that CFIUS was forcing a divestiture by iCarbonX, and PatientsLikeMe eventually sold the stakes to UnitedHealth Group.[54]
Kunlun
In March 2019, several news outlets reported that the Kunlun Group (“Kunlun”), a China-based technology firm, was preparing to sell its wholly-owned subsidiary Grindr after CFIUS determined that its continued ownership of Grindr constituted a national security risk. Grindr is an online application used primarily by gay men to find hookups in their immediate vicinity, and was sold to Beijing Kunlun Technology Co. in 2016. CFIUS intervened after Kunlun announced plans to do an initial public offering for Grindr in 2018.
Just like in many other cases, CFIUS did not disclose what exactly it viewed as national security threats posed by the acquisition. Commentators opined that CFIUS’s divestiture order is based on Grindr’s owning some of the most sensitive data about its users, including some of the filthiest kind. Also, Grindr attracts members of the U.S. military and likely its intelligence agencies, and China’s access to such data might enable it to understand American troop movements.[55]
Beijing Shiji
On March 6, 2020, President Trump issued an executive order directing the divestiture of StayNTouch, Inc. (“StayNTouch”) by Beijing Shiji Information Technology Co. Ltd. and its Hong Kong subsidiary (collectively, “Shiji”) within 120 days. The order comes 18 months after Shiji Group acquired StayNTouch in September 2018. StayNTouch provides cloud-based property management system software to hotels, which suggests that the company might handle a significant volume of individuals’ travel-related personal information. Further, StayNTouch’s software tools leverage ID scanning and facial recognition technology to authenticate hotel guests’ identities. This suggests that CFIUS’s primary concern is U.S. citizens’ sensitive personal data.[56]
ByteDance
On August 14, 2020, President Trump issued an executive order prohibiting a transaction that resulted in the acquisition of Musical.ly, now known as TikTok, by the Chinese company ByteDance. The order directs ByteDance to divest all interests and rights in any assets or properties used to support TikTok’s operations in the U.S., and any data obtained or derived from TikTok or Musical.ly users in the U.S.[57] ByteDance merged Musical.ly into its existing TikTok app after purchasing Musical.ly in 2017 without submitting the transaction to CFIUS. After the merger, TikTok’s popularity in the U.S. skyrocketed.
In 2019, CFIUS opened an investigation over the Musical.ly acquisition. While details of the CFIUS investigation were not available, James Lewis, director of the CSIS Technology Policy Program, expressed concerns that TikTok might be a vehicle for Chinese intelligence to collect U.S. personal information, despite several mitigation measures by TikTok to create separation from the Chinese counterpart platform Douyin, such as locating its data centers in Virginia and Singapore. [58]
Then, in July 2020, President Trump announced plan to ban TikTok if it is not bought by a U.S. company by September 15, using the results of CFIUS investigation as justification. Shortly after, TikTok filed a lawsuit against the U.S. government, alleging the ban violates the U.S. Constitution. The TikTok case warrants a more wholesome article which the author shall not belabor here.
Joseph R. Biden (2021 to date)
There have been far fewer Chinese investments into the United States during the Biden administration, largely as a result of a rapidly deteriorated relationship between the two countries since Trump. But to the extent there are still Chinese investments, they are heavily scrutinized by CFIUS particularly in the semiconductor sector. In the Wise Road Capital matter below, CFIUS even blocked a Chinese investor’s acquisition of a South Korean semiconductor company that has no meaningful U.S. operations because the latter was listed on a U.S. stock exchange.
Wise Road Capital
Earlier in 2021, a Chinese private equity firm Wise Road Capital entered into an agreement to purchase Magnachip Semiconductor Corporation (“Magnachip”), a South Korean chip manufacturer. By August 27, 2021, Magnachip disclosed that CFIUS identified national security risks associated with the transaction, and that CFIUS “has not identified any mitigation measures, including those proposed jointly by [the parties], that CFIUS believes would adequately mitigate the identified risks.” CFIUS also stated that it would likely refer the matter to the President for a decision.[59] In December 2021, parties had to announce that they would terminate the USD 1.4 billion transaction after failing to receive CFIUS clearance. As a result, Magnachip would receive USD 70.2 million in termination fees.[60]
What is notable about this matter is that the vast majority of Magnachip’s technical capabilities and operations resided outside the United States; it is listed on a U.S. stock exchange, which serves as the jurisdictional hook for the CFIUS review. This matter also indicates that transaction counterparties need to carefully consider a target’s activities even outside of the U.S.[61]
MineOne Partners
On May 13, 2024, President Biden issued an unprecedented executive order ordering the divestiture of land acquired by a Chinese private investor MineOne Partners (“MineOne”), because the acquired land was adjacent to the Francis E. Warren Air Force Base in the State of Wyoming. MineOne acquired the concerned land in June 2022 and then made improvements to the land to allow for its ensuing cryptocurrency mining operations. The transaction was not filed with CFIUS until after CFIUS’s non-notified transaction team investigated the transaction as a result of a public tip.[62]
Unknown Chinese Buyer (Sale of DuPont Assets)
On August 12, 2023, the Wall Street Journal reported a highly unusual article entitled “A DuPont China Deal Reveals Cracks in the U.S. National-Security Screening.”[63] The underlying technology is DuPont’s sustainable fabrics technology which was suspected by Pentagon officials as being capable of being tweaked to produce fuel for advanced weapons. The article reveals information about the deliberation process at the cabinet-level regarding whether to approve the sales of certain DuPont assets to a prospective Chinese buyer. According to the article, following a cabinet-level meeting that included Secretary of Defense Lloyd Austin and Secretary of the Treasury Janet Yellen, members of CFIUS were split on whether to prohibit the transaction or approve the transaction subject to a mitigation agreement. Pentagon officials seeking to block the deal requested a meeting with President Biden, but the request was declined. The officials spoke to National Security Advisor Jake Sullivan, but he instructed the agencies to work it out themselves.
Ultimately, CFIUS agreed to clear the transaction subject to a mitigation agreement. But shortly after the deal was signed, the parties notified CFIUS that the mitigation agreement was allegedly breached (reasons unknown). Pentagon officials reportedly suspected the breach was intentional, causing the Department of Defense and Department of Energy to refer the matter to the Federal Bureau of Investigation.[64] There have not been any updates available online since then.
Conclusion
With President Trump’s comeback to the White House, one can expect even more scrutiny on China’s investments into the United States, and much more unpredictability with the CFIUS review process. I hope this article will offer some guidance should you seek investment into the U.S. market.
[1] https://en.wikipedia.org/wiki/Committee_on_Foreign_Investment_in_the_United_States
[4] https://www.therobotreport.com/magnets-and-magnequench/
[5] https://www.everycrsreport.com/reports/RL33093.html
[6] https://www.forbes.com/2008/03/20/3com-bain-cfius-markets-equity-cx_cg_0320markets30.html
[8] https://www.lexology.com/library/detail.aspx?g=28302d19-ca91-4377-8096-bf53e07982e9
[12] https://www.lexology.com/library/detail.aspx?g=fbf46279-ef51-44a0-abb3-4c305f9d71b1
[13] https://www.globaltimes.cn/content/625736.shtml;
[14] Amrietha Nellan, AVIC International a Success: How Regulatory Changes to CFIUS Has Limited Political Interference and Empowered Chinese Investors to Obtain a Successful Review, Hastings Business Law Journal, Volume 9, Number 3 Spring 2013
[15] https://www.lexology.com/library/detail.aspx?g=5efa9584-d1d3-425a-9934-ba81e3170571
[16] https://www.kelleydrye.com/viewpoints/client-advisories/cfius-rejects-chinese-acquisition-in-u-s;https://webstorage.paulhastings.com/Documents/PDFs/1868.pdf
[17] Amrietha Nellan, AVIC International a Success: How Regulatory Changes to CFIUS Has Limited Political Interference and Empowered Chinese Investors to Obtain a Successful Review, Hastings Business Law Journal, Volume 9, Number 3 Spring 2013
[18] https://www.wiley.law/alert-2752
[20] https://www.wiley.law/article-2647#_ftn1
[21] Ibid.
[22] See Complaint in Ralls Corp. v. Barack H. Obama, et al., Case No. 1-12-cv-01513 (D.D.C. Sept. 12, 2012). Ralls’ complaint challenged only the CFIUS Order. Subsequent to the issuance of the executive order, Ralls amended its complaint to include claims against the President. See Amended Complaint in Ralls Corp. v. Barack H. Obama, et al., Case No. 1-12-cv-01513 (D.D.C. Oct. 1, 2012).
[23] https://nawindpower.com/wind-developer-ralls-corp-vs-us-government-case-settled
[24] https://lincolnmining.com/news/index.php?&content_id=255
[25] https://www.wiley.law/alert-2752
[26] https://www.wiley.law/alert-2752
[27] https://www.law.com/corpcounsel/almID/1202753073918/
[29] https://natlawreview.com/article/potential-cfius-filing-hna-group-and-hilton-worldwide-holdings
[30] https://www.researchgate.net/publication/329954138_Is_CFIUS_insurmountable_for_Chinese_enterprises_---_from_the_Perspective_of_HNA_Group_-_Ingram_Micro_Case
[32] https://www.semiconductor-today.com/news_items/2016/dec/aixtron_091216.shtml
[33] https://www.semiconductor-today.com/news_items/2016/dec/aixtron_091216.shtml
[37] https://apex.aero/articles/hna-groups-investment-global-eagle-entertainment-blocked/
[39] https://www.tradepractitioner.com/2017/12/hna-group-and-om-asset-management/
[40] https://www.wsj.com/articles/chinas-hna-deal-with-global-eagle-falls-apart-after-cfius-rejection-1501072364
[41] https://apex.aero/articles/hna-groups-investment-global-eagle-entertainment-blocked/
[42] https://www.reuters.com/article/business/u-s-tells-china-s-hna-to-sell-stake-in-nyc-building-near-trump-tower-wsj-idUSKBN1KW0GO/
[43] https://www.kwm.com/us/en/insights/latest-thinking/trump-blocks-his-first-cfius-deal-what-can-we-learn-from-it.html
[44] Ibid.
[50] https://www.sec.gov/Archives/edgar/data/357020/000119312518054209/d533034d8k.htm
[52] By voting for the Blue Proxy Card, shareholders can elect four new independent directors to the board, all of whom possess extensive industry and operating experience. See https://www.sec.gov/Archives/edgar/data/4281/000092189517001236/ex1todfan14a10168012_050117.pdf
[54] https://www.tradepractitioner.com/2019/06/icarbonx-patientslikeme/
[57] https://home.treasury.gov/news/press-releases/sm1094
[58] https://www.csis.org/analysis/tiktok-running-out-time-understanding-cfius-decision-and-its-implications
[59] https://www.winston.com/en/blogs-and-podcasts/global-trade-and-foreign-policy-insights/cfius-is-preparing-to-block-china-from-acquiring-magnachip-semiconductor-corporation
[61] https://blog.freshfields.us/post/102hfpq/cfius-decision-on-magnachip-deal-shows-long-reach-of-cfius
[62] https://www.whitehouse.gov/briefing-room/presidential-actions/2024/05/13/order-regarding-the-acquisition-of-certain-real-property-of-cheyenne-leads-by-mineone-cloud-computing-investment-i-l-p/
[63] https://www.wsj.com/articles/a-dupont-china-deal-reveals-cracks-in-u-s-national-security-screening-665cb50c
[64] https://www.delawarebusinessnow.com/archives/wall-street-journal-tech-leak-after-sale-of-dupont-unit-to-chinese-company-target-of/article_7f124ccf-77b7-5afa-9f63-48793ecd3c2a.html
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