President Trump Orders Divestment of U.S. Company; CFIUS Clears Semiconductor Transaction

It has been an active last week in the world of the Committee on Foreign Investment in the United States (“CFIUS”). In addition to CFIUS’s publication of proposed regulations that would impose filing fees for parties’ submission of notices of transactions to CFIUS (see our alert), President Trump exercised rarely-used authority under the CFIUS authorizing statute to formally instruct a Chinese company to divest its interest in a U.S. company; and separately, CFIUS cleared an acquisition of a U.S. semiconductor company by a German company with connections to China.

• StayNTouch: On March 6, 2020, President Trump ordered the complete divestment of Beijing Shiji Information Technology Co., Ltd.’s and its wholly owned direct subsidiary Shiji (Hong Kong) Ltd.’s interest in StayNTouch, Inc. (“StayNTouch”), a U.S. company involved in mobile technology and property-management systems for hotels. StayNTouch previously announced its acquisition by Shiji in September 2018 (with initial investment dating back to 2016). The parties did not notify CFIUS of the transaction in advance of the transaction’s closing in September 2018. Post-closing, CFIUS reportedly instructed the parties to submit a notice and then initiated a review of the transaction. CFIUS was presumably concerned about the large amount of sensitive personal data of hotel guests that StayNTouch handles as it provides its SaaS services.
  
  
• Infineon: On March 9, 2020, Infineon Technologies AG (“Infineon”) and Cypress Semiconductor Corp. (“Cypress”) announced that CFIUS cleared Infineon’s acquisition of Cypress. In the days prior to the clearance, media reports indicated that U.S. government officials were recommending that the President prohibit the transaction. The Infineon-Cypress transaction reportedly underwent intense scrutiny by CFIUS, with national security concerns likely focused on a future Infineon-Cypress company’s semiconductor production, R&D, joint ventures and sales involving China. The parties originally filed a CFIUS notice after entering into their June 2019 merger agreement and, presumably, at least once withdrew and refiled the notice before being granted clearance. CFIUS doubtlessly conditioned clearance of the transaction on far-reaching mitigation commitments by the parties, but it does not appear that information about those commitments has been made public.^[1]

In several respects, these outcomes are instructive about current U.S. government practice in connection with authority accorded to the President by the “Exon-Florio” statute, as amended by the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), to “suspend or prohibit” covered foreign investment transactions.

First, the StayNTouch transaction confirms that U.S. presidents are increasingly willing to invoke the extraordinary authority granted by Exon-Florio to block or reverse foreign investment for national security reasons. During the 23 years after the law was enacted in 1988, a president officially acted under Exon-Florio only one time. In the last eight years, presidents have exercised this authority five times.^[2]

Second, treatment of the StayNTouch and Infineon transactions reinforces that CFIUS is unyielding in ensuring that foreign investment transactions do not lead to what it views as national security exposure—even when there is no traditional or obvious security threat. The StayNTouch transaction shows the acute sensitivity that CFIUS attaches to sensitive personal data, even when in the hands of a commercial, consumer hotel business. In 2019, as we described in a prior alert, CFIUS reportedly required two Chinese companies to sell their stakes in two U.S. companies that collect sensitive personal information: Grindr, an online dating app, and PatientsLikeMe, an online service that links individuals suffering similar health issues in an effort to improve disease detection and treatment. Beijing Kunlun Tech Co Ltd-Grindr and iCarbonX-PatientsLikeMe were both non-notified transactions. These cases and the StayNTouch order also demonstrate that CFIUS is not deterred by substantial passage of time following closing of a transaction that was not notified to it.

The Infineon transaction takes CFIUS’s longstanding and intensifying concerns about foreign investment in the semiconductor sector to a new level. Infineon is based in a NATO ally (Germany). Nonetheless, backed by the president’s willingness to act under Exon-Florio, CFIUS appears to have exercised its leverage to scrutinize and elicit commitments from the parties for more than eight months.

Third, at the same time, CFIUS treatment of the Infineon transaction provides reassurance that the United States is open to foreign investment even in an industry that is as sensitive as semiconductors.

¹ Separately, in 2017, Infineon failed to secure clearance for, and then abandoned, a proposed acquisition of North Carolina-based Cree, Inc.’s Wolfspeed Power and RF Division, which makes devices using gallium nitride that are used in the defense industry for radar systems.

² The six transactions with respect to which presidents have officially acted under Exon-Florio are as follows:

• The recent StayNTouch transaction (post-closing mandatory divestment)
• Broadcom’s acquisition of Qualcomm (2018) (pre-closing prohibition)
• Canyon Bridge’s acquisition of Lattice Semiconductor (2017) (pre-closing prohibition)
• Fujian Grand Chip Investment’s takeover of Aixtron (2016) (pre-closing prohibition)
• Ralls Corporation’s investment in an Oregon wind farm (2012) (post-closing mandatory divestment)
• China National Aero-Technology Import and Export Corporation (CATIC)’s control in MAMCO Manufacturing (1990) (post-closing mandatory divestment)