U.S. President Vetoes the Acquisition of an U.S. Chipmaker by a Chinese Company
By Valerio Cosimo Romano
On 13 September 2017, the President of the Unites States, Donald Trump, issued an executive order (“Order”) prohibiting the acquisition of Lattice Semiconductor Corporation (“Lattice”) by Canyon Bridge Capital Partners, Inc. (“Canyon”). This Order is in line with a recommendation previously issued by the Committee on Foreign Investment in the United States (“CFIUS”).
The parties and the proposed transaction
Canyon is a private equity fund headquartered in Silicon Valley, backed by the Chinese state-owned entities that manages industrial investments and venture capital. Lattice is an Oregon-based tech company which manufactures computer chips with both commercial and military applications. In November 2016 Canyon announced the entry into a definitive agreement to acquire Lattice for a deal value of $1.3 billion.
CFIUS is an interagency committee which assists the President in evaluating the national security implications of foreign direct investment in the American economy. Although CFIUS is not authorized to block deals, it can impose a wide range of mitigation measures where it determines such requirements can effectively address national security issues. Where CFIUS determines that national security concerns cannot be overcome with mitigation measures, it typically recommends that parties formally commit to abandoning the transaction. In the vast majority of cases, the parties agree to terminate the transaction (or to divest, if the transaction has already been completed).
CFIUS’s negative recommendation
That has not been the case for the acquisition of Lattice, where the parties went forward, hoping that the President would approve the transaction despite CFIUS’s objections. In early September 2017, CFIUS recommended that President Trump block the transaction because of potential risks to national security which could not have been addressed through mitigation. Indeed, in a statement released on September 13, 2017, CFIUS clarified that the national security risk linked to the acquisition related to 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 use of Lattice products by the U.S. government.”
The strategic relevance of semiconductors’ industry
CFIUS’s statement builds on an earlier report (here and here) commissioned by the Department of Defense. Reportedly, the document concluded that China is engaging in a long-term strategy to transfer technological know-how from the U.S. to China by increasing its investments in prospectively key technologies (robotics, virtual reality, artificial intelligence), many of which require semiconductors. The Report identified the CFIUS as one of the key regulatory tools available to prevent such intellectual property transfers, and concluded that it should be given additional authority to prevent potentially harmful deals.
As we have just seen, notwithstanding the negative recommendation by CFIUS, Canyon and Lattice deferred the decision to the President, asserting that all the risks for national security could have been addressed by “comprehensive mitigation measures”. Despite this pleading, President Trump nixed the acquisition.
This is the fourth time in the American history that a President has blocked the acquisition of a US company, and the second time in a row that a deal has been blocked in the semi-conductor industry. Previously, President Obama halted the acquisition of a German semi-conductor equipment maker by a Chinese-backed company. President Obama also blocked a U.S.-based company owned by two Chinese nationals from acquiring four Oregon wind farm companies close to a naval base. Similarly, President George W. Bush prohibited a Chinese entity from buying an aerospace and aircraft parts manufacturer.
There is reason to believe that, during the current presidential mandate, the U.S. administration will increase the scrutiny of commercial transactions in areas which might prove strategic to national interests. Technology is certainly one of the chief areas of concern.