In January 2017, the President's Council of Advisors on Science and Technology (PCAST) issued a report to then President Barack Obama titled "Ensuring Long-Term U.S. Leadership in Semiconductors."1 The report assesses the state of the U.S. semiconductor industry, concluding that there is an emerging threat to U.S. national security interests posed by the industrial policies of the People's Republic of China (PRC) and certain other factors. The report also makes recommendations to bolster and protect the U.S. semiconductor industry from the assessed threats. This WSGR Alert focuses on the report's analysis and recommendations relating to the Committee on Foreign Investment in the United States (CFIUS), the unilateral U.S. national security tool, focusing particularly on how CFIUS review of PRC investments into U.S. businesses can help combat PRC policies that put U.S. national security at risk.
U.S. Semiconductor Industry Challenges
As detailed in the report, the U.S. is the global leader in the semiconductor industry—a key industry for U.S. businesses, U.S. consumers, and the U.S government. Semiconductors are essential to the growth and success of computers, connected devices, mobile devices, solar panels, medical tools, and self-driving cars, and are critical to U.S. defense systems and U.S. military strength. The report explains, however, that the U.S. semiconductor industry faces significant challenges, including technological limits, evolving markets, and PRC industrial policies.2
PRC Industrial Policies—Advancement Through Acquisition
According to the report, PRC industrial policies have compounded the challenges facing the U.S. semiconductor industry. The report provides that PRC industrial policies are aimed at making China less dependent upon other countries and "achieving a global leadership position in semiconductor design and manufacturing through non-market means" by 2030.3 The report further states that "the most likely avenue for Chinese growth will be the acquisition of global players (or divisions of them) in the United States, Europe, or Japan."4 More specifically, the report provides that China intends to spend "$150 billion in public and state-influenced private funds over a 10-year period, aimed at subsidizing investment and acquisition as well as purchasing technology" and that "multiple PRC-government investments executed by investment firms are enabling the government directed strategy."5 These policies, coupled with the limited access to Chinese markets afforded to U.S. businesses, raise concerns for U.S. national security.
Recommendations to Combat PRC Industrial Policies
The report includes a range of recommendations intended to address the current challenges facing the U.S. semiconductor industry and to strengthen the U.S. global leadership position in the industry. Critically, in light of the PRC industrial policies, the report recommends stricter and more rigorous scrutiny of Chinese investments into U.S. businesses and exports to China if there is an unfavorable response by China to U.S. policy. The report states that U.S. review of PRC investments into the United States and U.S. export controls provide the U.S. government with "its greatest leverage" in challenging the PRC industrial policies aimed at the semiconductor industry.6 According to the report, these national security tools have the ability to positively influence the PRC policies as well as restrict Chinese actions if China does not respond adequately to U.S. policy.7
CFIUS
CFIUS is an interagency government committee comprised of multiple executive branch agencies that has jurisdiction to review investments that could result in control of a U.S. business by a foreign government, entity, or person (a "covered transaction"). CFIUS reviews covered transactions to determine whether the transactions could negatively affect U.S. national security interests.
Under the CFIUS regulations, control is defined to include any form of power over a company that gives the foreign person the ability to determine important matters affecting the U.S. business, whether exercised or not; majority ownership is not required. Thus, partial investments, including ones that result in an investor acquiring as little as 10 percent of the voting shares, may be subject to CFIUS jurisdiction. Further, for CFIUS's purposes, a "U.S. business" includes businesses headquartered outside the U.S., so long as the business to be acquired is engaged in U.S. interstate commerce.
CFIUS has the power to impose significant conditions on the investment, including on the foreign person's access to the U.S. technology, reporting to the U.S government, or the divesting of certain assets. Further, CFIUS is empowered to recommend to the president that a specific transaction be blocked if CFIUS believes that the transaction threatens the national security of the U.S. and those concerns cannot be mitigated. Further, when the parties close a transaction without obtaining CFIUS clearance, CFIUS, in conjunction with the president, may require divestiture where the national security concerns cannot otherwise be mitigated.
Addressing the CFIUS Risk
As noted above, the report specifically notes the importance of CFIUS as a tool available to the U.S. government to deal with the assessed threat to the semiconductor industry. The report states that "CFIUS...plays a vital role in reviewing certain transactions with important national security implications involving potential foreign control of U.S. businesses."8 The import of the report's discussion and assessment of PRC policy is clear—prior to acquiring interests in a U.S. business, whether or not the target is a U.S. company, PRC investors and the target businesses should have an agreed-upon plan to address CFIUS.
Conclusion
The challenges and recommendations laid out in the report make it clear that PRC investors and U.S. businesses considering PRC investments must carefully consider and weigh CFIUS risks when exploring investments and acquisitions, especially with respect to semiconductor companies with U.S. operations. Where parties ignore or do not prioritize CFIUS issues, there could be serious adverse consequences, including restricted or prohibited access to the investment, or even blocking of the investment. Thus, experienced CFIUS counsel should be involved at all stages of the process, including during the negotiation of a specific transaction, deciding whether to file with CFIUS, the drafting and submitting of the CFIUS notice, and discussions and negotiations with CFIUS. These steps are essential to maximizing the potential for clearance of a covered transaction by CFIUS.
