Lawyers specializing in regulatory matters related to the Committee on Foreign Investment in the United States, or CFIUS, are having a busy year—especially with transactions related to Chinese investors.
On Sept. 13, President Donald Trump barred a Chinese-backed private equity firm co-founded by longtime Jones Day Beijing chief and former partner John Kao from acquiring Portland, Oregon-based Lattice Semiconductor Corp., citing potential national security threats.
Trump’s decision to block Canyon Bridge Capital Partners’ $1.3 billion deal was only the fourth time that a U.S. president has prohibited a Chinese investment transaction from being completed based on recommendations from CFIUS, a Treasury-led interagency committee responsible for checking foreign investment transactions for national security risks. And so far, these four transactions involving Chinese acquirers are the only ones to ever have been blocked by a presidential review.
CFIUS lawyers said the committee will likely continue to heavily scrutinize Chinese investments under the Trump administration. “Chinese investment into certain advanced technologies, like semiconductors, will continue to face significant scrutiny from [CFIUS],” said Shawn Cooley, a Washington, D.C.-based special counsel at Freshfields Bruckhaus Deringer.
The heightened attention is making this a busy time for CFIUS lawyers. “We are seeing more demand for lawyers with CFIUS expertise to be involved on deal teams early in cross-border transactions as the scrutiny has increased,” said John Carlin, Morrison & Foerster’s Washington, D.C., partner and chairman of global risk and crisis management practice.
Freshfields’ Cooley, who used to review CFIUS cases as a former director of foreign investment risk management at the Department of Homeland Security before joining the Magic Circle firm in March, said he has integrated his practice with M&A lawyers in all of the firm’s offices, including China.
Despite the decline of inbound deals from China into the U.S. this year following the Chinese government’s policy shift to control capital outflow, U.S. regulatory work for Chinese clients will remain in high demand. Farhad Jalinous, White & Case’s Washington, D.C.-based national security and CFIUS practice chairman, said he expects there will be extensive work for CFIUS lawyers advising on Chinese cross-border transactions.
Cooley said CFIUS is reviewing more deals overall than ever before, expected to hit 250 this year. “Chinese CFIUS reviews also can be more complex and raise more potential concern from CFIUS and therefore can require more work from beginning to end,” he added.
Trump’s decision to block the Lattice deal was consistent with prior action by CFIUS and by former presidents, said Cooley. In December, former President Barack Obama ordered a ban on a Chinese investor’s bid to acquire German chipmaker Aixtron S.E.’s U.S. business due to concerns of the technology’s military applications.
The four transactions that have been blocked shared something in common: they all involved sensitive technologies with some national security or military nexus, said John Carlin, a Washington, D.C., partner of Morrison & Foerster. Before the two most recent cases, Obama in 2012 also prohibited China’s Ralls Corp. from buying a wind farm in Oregon that was close to a U.S. naval air station; and in 1990, state-owned China National Aero-Technology Import and Export Corp. was ordered by then-President George H.W. Bush to divest its interest in aerospace component maker Mamco Manufacturing Inc. All four deals involved Chinese acquirers.
Canyon Bridge’s proposal to acquire Nasdaq-listed Lattice, according to Bloomberg, had been under CFIUS review since last November when the deal was announced. Although based in Palo Alto, Canyon Bridge, advised by Jones Day, drew initial investments from state-run China Venture Capital Fund Co. Ltd., a $30 billion fund directly controlled by the Chinese government.
In a statement, Secretary of Treasury Steven Mnuchin cited “the Chinese government’s role in supporting this transaction, the importance of semiconductor supply chain integrity to the U.S. government, and the use of Lattice products by the U.S. government” as reasons for CFIUS’ concern over the transaction.
Freshfields’ Cooley said it likely would not have made a difference if the Chinese backer of Canyon Bridge was not state-owned. “The distinction between privately owned enterprises and state-owned enterprises is relatively insignificant from CFIUS’ perspective,” he said. MoFo’s Carlin noted because of the interaction between the government and some Chinese companies, CFIUS often exercises a higher level of scrutiny even if they are not technically state-owned.
In December, The Asian Lawyer reported that Chinese acquisition proposals in the semiconductor sector would generally be endorsed and sponsored by the state regardless of actual ownership.
“Given that China has reportedly committed to investing $150 billion to advance its semiconductor industry, Chinese investors are likely to continue to look for opportunities to invest in U.S. semiconductor companies, and political attention around these transactions will likely continue,” said White & Case’s Jalinous.
Carlin, a former assistant attorney general for the Department of Justice’s national security division under the Obama administration, also noted that the Trump administration does appear to be intensifying the heightened scrutiny and concerns about Chinese acquirers that were present in prior administrations. In addition, Jalinous said the frequency of presidential reviews, which have historically been rare, has increased recently: three of the bans have occurred in the past five years—and two in the past 10 months alone.
Several deals involving Chinese investors are currently under CFIUS review. One of particular note involves Chinese conglomerate HNA Group Co. Ltd.’s joint proposal—with RON Transatlantic Offshore Ltd.—to acquire former White House director of communications and longtime Trump supporter Anthony Scaramucci’s New York-based hedge fund, SkyBridge Capital. In July, CFIUS said it would not approve a deal in which an HNA affiliate would acquire a large stake in Los Angeles-based in-flight entertainment service provider Global Eagle. Without CFIUS’s approval, the parties scrapped the deal. HNA has cleared CFIUS before, however, successfully acquiring technology distributor Ingram Micro Inc. and buying a 25 percent stake in Hilton Worldwide Holdings Inc.
Lawyers specializing in matters involving CFIUS review remain optimistic that they will have ample business in the coming years. Cooley said that cases involving Chinese parties will likely remain the majority of CFIUS reviews. “The CFIUS bar is having a very busy year,” said Jalinous. “And the expectation is that it will continue to stay busy for the foreseeable future.”
Anna Zhang is based in Hong Kong, where she writes about the business of law and legal issues in Asia and Australia. Contact her at firstname.lastname@example.org. On Twitter: @annazhangc.