On December 2, 2016, President Obama issued an Executive Order blocking the proposed acquisition of Aixtron, Inc., a California-based U.S. subsidiary of Aixtron SE ("Aixtron"), a German semiconductor firm.  The Committee on Foreign Investment in the United States ("CFIUS") had recommended that he block the transaction.  This marks only the third time in over a quarter century that a President has moved to block a foreign investment.1  The order blocks only the proposed acquisition of the U.S. subsidiary, not the German parent company.  Unless the parties elect to exclude the U.S. subsidiary from the transaction, it is possible that the entire deal could collapse.

Proposed Transaction

Aixtron, a publicly traded company organized and headquartered in Germany, manufactures equipment for the global semiconductor industry, including systems used to build compound semiconductor materials.  Aixtron's U.S. business includes its wholly owned subsidiary, Aixtron, Inc., which is organized and headquartered in California.  Aixtron SE was the target of a proposed acquisition by Grand Chip Investment GmbH, a German limited liability company, whose ultimate owners included Fujian Grand Chip Investment Fund LP and other Chinese investors, some of which have Chinese government ownership.  The proposed acquisition was to have been funded in part by Sino IC Leasing Co., Ltd., a financing provider belonging to China IC Industry Investment Fund, a Chinese government-supported industrial investment fund established to promote the development of China's integrated circuit industry.

CFIUS Review Process

CFIUS is a multi-agency U.S. governmental committee established in 1975 to review transactions that could result in control of a U.S. business by a foreign person ("covered transactions") in order to determine the effect of such transactions on U.S. national security.2  Companies involved in a potentially covered transaction may voluntarily submit a notice with CFIUS, or a review may be initiated by CFIUS or by the President.  Once a filing is submitted, CFIUS conducts a 30-day review.  At that point, the Committee may issue a determination that no threat to national security is presented, and the transaction can proceed, or the Committee may determine that an additional 45-day investigation is warranted.  At the end of the 45-day investigation, the Committee may offer no recommendation or make an adverse recommendation to the President, who then has 15 days to make a decision. In some circumstances, the parties agree to mitigation measures with CFIUS to address CFIUS concerns so that an adverse recommendation can be avoided.

The President has almost unlimited authority to take "such action for such time as the President considers appropriate to suspend or prohibit any covered transaction that threatens to impair the national security of the United States."3  However, before invoking such authority, the President must conclude that other U.S. laws are inadequate or inappropriate to protect the national security, and must have "credible evidence" that the foreign investment will impair the national security.  The President must consider a variety of factors in deciding to block a foreign acquisition, including, for example, the potential national security-related effects on U.S. critical infrastructure and whether the transaction is a foreign government-controlled transaction.4

CFIUS reviews and findings are confidential.  However, according to a statement issued by the Treasury Department, which overseas CFIUS, the President's decision regarding the proposed Aixtron transaction took into account a number of the required factors as well as CFIUS's recommendation that the President issue an order prohibiting this transaction.  The statement further explained, "The national security risk posed by the transaction relates, among other things, to the military applications of the overall technical body of knowledge and experience of Aixtron, a producer and innovator of semiconductor manufacturing equipment and technology, and the contribution of Aixtron's U.S. business to that body of knowledge and experience."

Practical Implications

This action is notable for several reasons:

  • It is rare for the President to block a foreign investment as a result of the CFIUS process.  President Obama's blocking of the Aixtron acquisition is only the third such ban on a foreign acquisition of U.S. business assets.  It is more common for the parties to agree to mitigation measures based on the concerns raised by CFIUS or, when that cannot be accomplished, to withdraw the transaction before Presidential action is required.
  • According to press reports, Aixtron's U.S. subsidiary employs approximately 100 people at a facility in California.  It is therefore worth noting that CFIUS review can apply to a transaction which is predominantly offshore and in which the U.S. elements are relatively small.
  • Although Aixtron is a chip maker, and press reports have focused much of their attention on the national security risks posed by Chinese buyers in that industry and other information technology fields, it also appears from reports that an additional national security concern may have been Aixtron's technology that creates chips based on an advanced semiconductor material called gallium nitride.  Press reports have suggested that transfer of technology using the same material may have contributed to  CFIUS concern in other transactions.
  • This action comes at an important time in U.S.-China relations.  There is uncertainty regarding whether and how the CFIUS review process may be impacted by the policies of the incoming Trump administration and Congressional expressions of concern about the potential national security implications of Chinese and other foreign investment in the United States.

The scope of CFIUS review is often difficult to predict.  This means it may be difficult to provide a quick analysis of potential CFIUS concerns of any given transaction without a more thorough review of the parties and U.S. assets and operations at issue.  We will continue to monitor these developments and issue additional briefings as warranted.

1 There are two other instances since the creation of CFIUS in which the President has blocked a foreign investment: (1) in February 1990, President George H.W. Bush voided the sale of Mamco Manufacturing, a Seattle-based aircraft parts maker, to a Chinese state-owned aviation company; and (2) in 2012, President Barack Obama ordered Ralls Corporation, owned by the Chinese Sany Group, to divest itself of four small wind farm projects located in close proximity to a U.S. Navy weapons systems training facility in Boardman, Oregon.  http://www.cfr.org/foreign-direct-investment/foreign-investment-us-national-security/p31477; https://fas.org/sgp/crs/natsec/RL33388.pdf.  Although Ralls Corporation subsequently sued CFIUS on claims of lack of due process and then settled its case with the government, the forced divestment was ultimately upheld (although under the terms of the settlement, Ralls was permitted to sell its rights to the wind farm projects to another foreign investor to whom CFIUS had previously objected). http://blogs.wsj.com/riskandcompliance/2015/10/09/chinese-wind-company-settles-with-u-s-in-cfius-battle/.   

2 CFIUS operates pursuant to section 721 of the Defense Production Act of 1950, as amended by the Foreign Investment and National Security Act of 2007 ("FINSA") (section 721) and as implemented by Executive Order 11858, as amended, and regulations at 31 C.F.R. Part 800.

3 50 U.S.C. § 4565.

4 See id.


Of Counsel
Chief Legal Officer, United States

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