On September 13, 2017, President Trump issued an Executive Order blocking the proposed acquisition of Lattice Semiconductor Corporation (Lattice), an Oregon-based semiconductor firm, by Canyon Bridge Merger Sub., Inc. (Canyon Bridge), an investment fund whose ultimate parent is Chinese state-owned China Venture Capital Fund Corporation Limited.1 The Committee on Foreign Investment in the United States (CFIUS) had proposed that the transaction be blocked due to national security concerns, and President Trump took such action for only the fourth time in the last 27 years. The previous similar action was taken by President Obama in December 2016 in connection with a proposed Chinese acquisition of semiconductor firm Aixtron, Inc. See our previous briefing, President Obama Blocks Proposed Chinese Acquisition of Controlling Interest in German Chip Maker.
Lattice is a publicly-traded semiconductor firm based in Portland, Oregon that manufactures programmable logic chips to global consumer, communications, industrial, computing and automotive markets. These chips have a wide variety of uses because their attributes can be changed using software. Lattice was the target of a proposed acquisition by Canyon Bridge, an investment fund organized in Delaware whose ultimate owner is China Venture Capital Fund Corporation Limited, a corporation organized under the laws of the People’s Republic of China. According to press reports, Canyon Bridge’s mandate is to make investments in US companies in the semiconductor industry.
CFIUS review process
CFIUS is a multi-agency US governmental committee established in 1975 to review transactions that could result in control of a US business by a foreign person (“covered transactions”) in order to determine the effect of such transactions on US 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 and accepted by CFIUS, 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 US 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 US 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 Lattice acquisition took into consideration a number of the required factors as well as CFIUS's recommendation that the President issue an order prohibiting the transaction. The statement further explained, “The national security risk posed by the transaction relates to, 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 US government, and the use of Lattice products by the US government.”5
The blocking of this transaction is notable for the following reasons:
- It is rare for the President to block a foreign investment as a result of the CFIUS process. As noted above, President Trump’s blocking of the Lattice acquisition is only the fourth such ban. 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. Press reports indicate that Lattice and Canyon Bridge withdrew and refiled their joint voluntary notice with CFIUS as many as three times.
- This is the second instance in less than one year where the President has blocked a possible acquisition of a semiconductor firm by a Chinese investor. At a minimum, this pattern would suggest that foreign investment in the semiconductor industry is a matter not taken lightly by CFIUS or the President. Accordingly, parties considering such transactions should proceed with caution.
- This action comes at a sensitive time for US-China relations marked by uncertainty. There has been a substantial amount of press and speculation about how and whether the CFIUS review process may be impacted by the policies of President’s Trump administration. Indeed, Chinese Ministry of Commerce spokesman Gao Feng has already commented on the matter, stating that China is concerned by this development, and that the CFIUS process does not lend itself to a fair and transparent business environment. In addition, as under President Obama, Congressional expressions of concern continue 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. Therefore, it is not always possible to provide a quick analysis of potential CFIUS concerns of any given transaction without a more thorough review of the parties and US assets and operations at issue. We will continue to monitor these developments and issue additional briefings as needed.
1 See “Order Regarding the Proposed Acquisition of Lattice Semiconductor Corporation by China Venture Capital Fund Corporation Limited.”
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.
5 See “Statement on the President’s Decision Regarding Lattice Semiconductor Corporation.”