On September 13, 2017, the White House announced that President Donald Trump issued an executive order blocking Lattice Semiconductor Corp.'s proposed acquisition by Canyon Bridge Capital Partners, a U.S. private equity fund, for $1.3 billion.1 The order comes after the Committee on Foreign Investment in the United States (CFIUS) recommended that the parties abandon the deal due to unresolved national security concerns.
Although Lattice previously disclosed that CFIUS informed the parties of the intent to recommend a block of the transaction to the president, the parties declined to withdraw and refile their joint voluntary notice for a fourth time and had CFIUS forward the transaction to the president for a decision. President Trump's decision was expected and is consistent with the U.S. government's concerns about Chinese acquisitions of U.S. semiconductor companies, which have existed since the Obama administration. While Canyon Bridge is a U.S. fund, it reportedly is at least partially funded by China's central government.2
According to the U.S. Department of the Treasury, the CFIUS chair, the national security concerns were associated with "among other things, the potential transfer of intellectual property to the foreign acquirer, 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."3 Now, after approximately a nine-month CFIUS review, the parties must "take all steps necessary to fully and permanently abandon the proposed acquisition of Lattice not later than 30 days after the date of the order."4
U.S. Government Concerns Regarding China-Backed Acquisitions of Semiconductor Companies
The U.S. government has been expressing broad concerns with Chinese acquisitions of semiconductor companies for some time. As we noted in a previous WSGR Alert,5 President Obama's Council of Advisors on Science and Technology (PCAST) released a public report in January 2017 entitled "Ensuring Long-Term U.S. Leadership in Semiconductors." In an unusually direct statement, the PCAST stated that "Chinese industrial policies in [the semiconductor] sector...pose real threats to semiconductor innovation and U.S. national security."6 The report recommended heightened scrutiny of China-backed investments in the semiconductor industry. Further, in November 2016, then-Commerce Secretary Penny Pritzker directly criticized China's plans for the acquisition of semiconductor companies, stating that China's "unprecedented state-driven interference would distort the market and undermine the innovation ecosystem" in the semiconductor industry.7 Additionally, the proposed acquisition of Lattice by Canyon Bridge faced significant bipartisan opposition from U.S. lawmakers shortly after it was announced. In December, 2016, over 20 members of Congress wrote a letter to the Treasury Secretary requesting that the transaction be blocked due to national security concerns.8
Thus, President Trump's block of the Lattice acquisition is not surprising, even though it is only the fourth time that a U.S. president has blocked a foreign acquisition of a U.S. business based on national security concerns identified by CFIUS. It is, however, the second time in less than a year that a president has blocked an attempt by a China-backed fund to purchase a semiconductor company. In December 2016, President Obama blocked the attempted acquisition of the U.S. subsidiary of German semiconductor company Aixtron SE by Chinese investor Fujian Grand Chip Investment Fund LP.
Implications of the Order
CFIUS practitioners have spent the last eight months trying to determine how the Trump administration would handle transactions that CFIUS deems to raise U.S. national security concerns. After years of pro-globalism and free-trade tendencies in both Republican and Democratic administrations, President Trump's starkly different campaign rhetoric and his unpredictability left many wondering if the president would follow CFIUS's recommendation to block a transaction, even if the transaction would support the creation of jobs in the U.S. He did in the Lattice-Canyon Bridge matter, but we do not believe that the decision to block necessarily provides much insight regarding how CFIUS will ultimately change or remain the same under the Trump administration in light of the facts of the matter.
In this case, the target was a global semiconductor company whose products are used in communications and industrial products as well as consumer electronics, such as smartphones and TVs—areas that fall squarely within the sector recommended for heightened scrutiny by the PCAST report. In addition, the proposed acquirer was a newly formed private equity fund that reportedly is at least partially funded by China's central government and has indirect ties to China's space program. Furthermore, U.S. presidents have, to date, always followed CFIUS recommendations to block transactions due to national security concerns.
Conclusion
The Lattice-Canyon Bridge decision should not mean that any acquisition or investment by a Chinese entity will be blocked by CFIUS or the president, but it is important for PRC investors and U.S. businesses considering PRC investments to continue to carefully consider CFIUS risks when exploring investments and acquisitions, especially with respect to semiconductor companies with U.S. operations. Due to the record number and complexity of CFIUS filings this year, we expect increased timeframes for CFIUS reviews, including the frequency of parties withdrawing and refiling their notices, to continue for the foreseeable future and for CFIUS to continue to broadly interpret national security concerns. However, we believe it is necessary to watch more transactions make their way through the CFIUS process before drawing conclusions about changes in CFIUS reviews under the current Administration.
To properly navigate the CFIUS process, experienced CFIUS counsel should be consulted early and 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.
