More Acquisitions May Be Blocked in the Future
Last month, asserting national security concerns, President Trump blocked a $1.3 billion acquisition of Oregon-based Lattice Semiconductor by a subsidiary of the Canyon Bridge Fund (Canyon Bridge), a private equity fund backed by Chinese investors. This is one of the few instances to date in which a sale to a non-U.S. buyer of a U.S. company has been blocked under rules administered by the U.S. Committee on Foreign Investment in the United States (CFIUS). Yet the facts of this matter suggest that more potential acquisitions are likely to be blocked in the future.
What is CFIUS and How Does It Work?
CFIUS is the U.S. government’s interagency committee that reviews acquisitions of U.S. businesses where the transaction raises potential national security concerns. Generally speaking, parties to a transaction voluntarily notify CFIUS about the transaction including, increasingly, through an initial draft filing followed by a formal filing that reflects and responds to questions CFIUS raises during the draft stage.
Once a formal filing is submitted and CFIUS deems it to be final, CFIUS has 30 days to review the transaction; if the review is not completed after 30 days, CFIUS can – and commonly does – extend its review to an additional 45-day investigation. At the conclusion of that 45-day period, CFIUS can conclude its review without further action (meaning the transaction can proceed), authorize the transaction to proceed contingent on the implementation of measures to mitigate national security risks, or – in rare cases – recommend to the president that the transaction be blocked altogether.
Despite Extensive Communication with CFIUS, Deal was Still Prohibited
As noted above, parties to a transaction that may trigger national security concerns generally make a voluntary filing to CFIUS – but not always. And with a couple of the recent transactions that CFIUS blocked, the parties did not make a voluntary filing; instead, in each case, CFIUS required the parties to submit a filing after the transaction closed. This is likely at least part of the reason that each of those transactions was blocked.
Yet that was not the case with Lattice. In fact, Lattice and Canyon Bridge had extensive communications with CFIUS representatives, including the following:
- Well prior to entering into an agreement and plan of merger, Lattice met with CFIUS to discuss “the potential acquisition interest received … from parties based in China.”
- Once Canyon Bridge was identified as the buyer, both parties met with CFIUS to preview the potential transaction and the parties involved.
- The parties filed a joint voluntary draft notice with CFIUS in December 2016 and, after receiving comments, filed a voluntary final notice.
- The parties subsequently went through three rounds of CFIUS filings, e., the parties withdrew their filing and submitted a new filing (presumably with revised deal terms and/or assurances to address national security concerns) on March 24, 2017, and again on June 9, 2017, “to allow more time for review and discussion with CFIUS.” With each refiling, the 30-day review period restarted.
Nonetheless, in late August 2017, CFIUS indicated it would recommend to the president to suspend or prohibit the transaction. On September 13, 2017, President Trump issued an executive order blocking the transaction.
White House Details Reasons Deal was Blocked
According to the White House’s statement on the president’s decision, the deal was blocked based on the following national security concerns:
- the potential transfer of intellectual property to the foreign acquirer;
- the Chinese government’s purported role in supporting the transaction;
- the importance of the integrity of the semiconductor chain supply to the U.S. government; and
- the U.S. government’s reliance on Lattice products.
Takeaways / Tips for Working on CFIUS Matters
While it is impossible to know all of the details of this matter, it is striking that even with extensive communications between the parties and CFIUS, it was impossible to get this transaction approved. Perhaps the government’s concerns were simply insurmountable from a commercial standpoint. For example, the government might have wanted Canyon Bridge to divest itself of certain intellectual property that was essential to the deal, making economic sense for Canyon Bridge. Perhaps Canyon Bridge wanted to appoint officers or directors that were simply unacceptable from the U.S. government’s perspective.
Regardless, we want to illustrate three takeaways from this matter:
- Ample communication with CFIUS is not a silver bullet. At least based on the reported facts, Lattice and Canyon Bridge were abundantly transparent with CFIUS about the transaction, and tried to work with the agency to make the transaction acceptable. Companies sometimes think that transparency is the key to a successful CFIUS transaction. It is indeed critical – but not by itself adequate. Just ask Lattice and Canyon Bridge.
- Chinese transactions receive extra scrutiny. All of the transactions that CFIUS has blocked have involved Chinese buyers. And quite a few other transactions were withdrawn or perhaps never even submitted to CFIUS because of concerns that a Chinese buyer would make the transaction too difficult to get approved. In fact, in January 2017 (soon after Lattice and Canyon Bridge submitted their draft filing in December 2016), the President’s Council of Advisors on Science & Technology issued a report identifying Chinese acquisitions in the semiconductor space to be a national security concern. Even in seemingly innocuous transactions in which we have been involved and which included a Chinese buyer, CFIUS has taken a very close look. We do not see this changing.
- The Trump administration may generally be tougher on foreign acquisitions. It is too early to say with any certainty, but based on the president’s rhetoric, it would not be surprising to see more transactions blocked. This is all the more reason to communicate early and often with CFIUS about a transaction that could have national security concerns – recognizing number 1 above – to craft the transaction in a way that meets CFIUS’s expectations.