The long arm of the Committee on Foreign Investment in the United States (CFIUS) is reaching far beyond the country’s borders, strangling mergers between companies that could pose a threat to US security, even when they have the lightest of links to the country.
A case in point is the planned acquisition of South Korean semiconductor company Magnachip by Chinese private equity firm Wise Road Capital. The planned $1.4bn merger was announced in March 2021 as an all-cash transaction that would make Magnachip a wholly owned subsidiary of Wise Road.
Magnachip appears to have no operations, assets or information systems in the US, but it is listed on the New York Stock Exchange (NYSE) and incorporated in Delaware.
While Magnachip chose not to make a voluntary disclosure of the merger to CFIUS, CFIUS asked both companies to file a notice of the merger and undergo a formal CFIUS review in May. The companies complied in June.
Four days later, CFIUS ordered the companies to take interim mitigation measures. These included taking no steps to finalise the merger, change Magnachip’s state of incorporation or delist from the NYSE.
On August 27, CFIUS notified the companies that it had identified risks to the national security of the US as a result of the merger, and found their proposed mitigation measures to be inadequate. In September, the companies requested, and CFIUS granted, permission to withdraw and refile their notice of the merger. The investigation is to be completed on December 13.
Korea’s Ministry of Trade, Industry and Energy has also requested that Magnachip apply for approval of the transaction after its technology was classified as ‘national core’. China, however, has given the deal the go-ahead.
“CFIUS intends to use whatever tools it has to further assert US national security interests, even if it never before acknowledged such tools existed,” says Brandon L Van Grack, who co-chairs the law firm Morrison & Foerster’s national security and global risk groups in Washington DC. “That toolbox now includes the ability to assert jurisdiction over transactions taking place largely outside of and with a very limited nexus to the US.”
Mr Van Grack notes that prior to the passage of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), CFIUS defined a US business as “any entity, irrespective of the nationality of the persons that control it, engaged in interstate commerce in the United States, but only to the extent of its activities in interstate commerce”. When CFIUS published its new rules following FIRRMA, however, the phrase “but only to the extent of its activities in interstate commerce” was left out, widening the scope of its application.
US incorporation boost
Delaware is a popular state for foreign companies to incorporate in. They are able to host a US entity that falls under the laws of Delaware, without the need for them to have headquarters in the country — in short, “there is nothing there but a legal entity,” notes Mr Van Grack.
Being a publicly traded company in the US enables a company to take advantage of its financial markets, he explains. “But in terms of CFIUS jurisdiction, there was a belief before that business operations were the driver of CFIUS — not any specific touchpoints.”
Experts are sceptical about the companies’ prospects of winning approval of the merger. “I suspect the US government is giving Magnachip and Wise Road very draconian limits to adopt. The question is how much pain the companies will be willing to endure,” Mr Van Grack says.
It is too early to tell whether CFIUS’s action will affect corporate willingness to invest in the US or raise capital on its stock markets, Mr Van Grack continues. “I think we would have to see far more regulatory actions like this from CFIUS before we see real consequences,” he comments.
However, Martin Chorzempa, a senior fellow at the Peterson Institute for International Economics in Washington DC, sees it as a distinct possibility. He questions whether potential investors will be willing to go through the bother of hiring lawyers, considering the likelihood of getting the deal through. “In the past, you might have got through with a mitigation, but now it’s much harder,” he comments.
CFIUS’s more aggressive stance has created a lot of uncertainty for industry, Mr Chorzempa notes. “It provides a lot of flexibility for CFIUS to define its jurisdiction and what it is looking for.”
Meanwhile, many other countries are intensifying their foreign investment screening. “That trend is only going to continue, and it will be increasingly difficult because many transactions trigger multiple regimes wherever you have assets,” Mr Van Grack comments. “Typically these can be mitigated, but it makes the cost of business more expensive and global finance more challenging. When we are talking about transactions and how to navigate the space, it is really critical to understand the law, but also the foreign policy implications.”
Indeed, after its first meeting in Pittsburgh, Pennsylvania, on September 29, 2021, the newly formed high-level US–EU Trade and Technology Council announced coordinated approaches to key global issues, including investment screening and its enforcement to address risks to national security.
The US is also reportedly pressuring the government of the Netherlands to prevent Chinese companies from purchasing ASML Holding, a manufacturer of a machine necessary for making advanced microprocessors.
Meanwhile, foreign investors in the US can look ahead to even more regulation. In a July speech, US National Security Advisor Jake Sullivan stressed the need to work closely with partners to posture investment screening regimes for intense technology competition.
“Quieter initiatives on export controls and investment screening will only pick up the pace in the months ahead,” he said.
This article was first published in the December 2021/January 2022 edition of fDi Intelligence magazine. Read the online edition here.