The Committee on Foreign Investment in the United States (CFIUS) is among the most significant tools in the U.S. government’s arsenal to further its national security interests. In response to concerns that Organization of the Petroleum Exporting Countries (OPEC) countries were purchasing strategic U.S. assets, President Ford created CFIUS to empower agencies to review transactions involving foreign investments in order to determine their effect on national security. The U.S. government has increasingly leaned on CFIUS, originally a bureaucratic review process, to mitigate or block transactions that it views as posing national security risks, such as CFIUS’s unprecedented intervention in the recent attempt by Wise Road Capital, a China-based private equity firm, to acquire Magnachip, a South Korean semiconductor company.
The foundation for CFIUS’s aggressive action in the Magnachip transaction began in 2018, when Congress empowered and emboldened CFIUS to influence an even larger subset of foreign investments with the passage of the Foreign Investment Risk Review Modernization Act (FIRRMA). FIRRMA created mandatory filing requirements for certain transactions (all filings previously were voluntary) and added provisions focusing on data of U.S. persons, critical technology and critical infrastructure, among other changes. CFIUS has in turn taken full advantage of these new authorities. As compared to pre-FIRRMA annual levels, CFIUS has reviewed an unprecedented number of transactions under even greater levels of scrutiny. And yet, one change that dramatically expands CFIUS’s reach flew largely under the radar until its intervention in the Magnachip transaction.
CFIUS jurisdiction has long required three things—a foreign person, a transaction and a U.S. business. When CFIUS updated its regulations following the passage of FIRRMA, it changed the definition of “U.S. business,” as reflected in FIRRMA. Prior to the update, a U.S. business was defined 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” (emphasis added). This meant that CFIUS jurisdiction was limited to entities’ activities in furtherance of interstate commerce in the United States. When CFIUS published its new rules, it removed the phrase “but only to the extent of its activities in interstate commerce.”
Practitioners immediately flagged this issue when the regulations were first published, prompting CFIUS officials to publicly seek to allay those concerns by indicating that the update did not reflect a new view of its jurisdiction. The preamble to the regulations notes that the new language “is not intended to suggest that the extent of a business’s activities in interstate commerce in the United States is irrelevant to the Committee’s analysis of national security risk.” Adding credence to these statements, CFIUS left largely unchanged the relevant examples in the regulations, which showed the import of a business’s activities in the United States.
The parties in the Magnachip transaction did not notify CFIUS of the transaction, reportedly believing that the transaction was outside CFIUS’s jurisdiction due to Magnachip’s limited U.S. nexus. Magnachip does not appear to conduct semiconductor-related business activities in the United States. The substantive elements of Magnachip’s business—management, sales activities, production, and research and development—are located outside the United States. According to public filings, all of Magnachip’s manufacturing and research and development activities take place in South Korea, and substantially all of its sales activities take place in South Korea, with the remainder of sales operations located in China, Hong Kong, Taiwan, Japan and Germany. And substantially all of its employees are based in South Korea with the remainder located outside the United States. Magnachip has no tangible assets or information technology systems located in the United States. Only its public listing on the New York Stock Exchange and a Delaware organized entity, whose activities appear limited to owning entities that conduct business outside the United States, appear to be located inside the United States.
Yet shortly after the transaction was announced, CFIUS determined it had jurisdiction, requested that the parties submit a filing, and issued an interim order preventing the parties from closing the transaction during its review. While it was historically rare for CFIUS to reach out to parties that fail to otherwise notify CFIUS, referred to as a “non-notified transaction,” CFIUS scrutinized a record number of non-notified transactions over the past year.
The U.S. government’s desire to intercede here is unsurprising given its long-standing interest in the transfer of sensitive semiconductor technology outside of the United States, with a particular focus on China. The U.S. government has adopted a whole-of-government approach to dealing with perceived national security issues pertaining to China generally. This effort has included launching the China Initiative at the Department of Justice, utilizing the Export Administration Regulations to place Chinese companies on the Entity List, requiring the registration of Chinese-media entities under the Foreign Agents Registration Act, the designation of numerous Chinese entities as foreign missions under the Foreign Missions Act, and using the International Emergency Economic Powers Act to prohibit U.S. persons from holding certain shares of Chinese companies. The U.S. government has also become hyperfocused on protecting the U.S. supply chain, within which semiconductors play a central role and “are essential to national security.”
None of the tools mentioned above can bar a transaction between two predominantly foreign companies. So the U.S. government explored its jurisdiction under CFIUS and leaned on the plain language of FIRRMA, which defines a U.S. business as “any entity, irrespective of the nationality of the persons that control it, engaged in interstate commerce in the United States.” Since its parent company is organized in Delaware and publicly traded in the United States, Magnachip meets this low bar—empowering CFIUS to inject itself into the process.
The U.S. government’s position, however, overlooks CFIUS’s history and past statements on jurisdiction. As mentioned above, Magnachip does not appear to have semiconductor-related business activities in the United States, no management, no production, and no research and development. In other words, the extent of Magnachip’s activities in interstate commerce are minimal. The U.S. government appears to have adopted a more aggressive view of its own jurisdiction to achieve a desired result—the prohibition or severe restriction of a China-based company acquiring a South Korean semiconductor company.
Prior to the Magnachip transaction, CFIUS had interpreted its jurisdiction in a manner consistent with the previous jurisdictional language, even when it extended its jurisdiction outside the United States. For example, in both President Obama’s Dec. 2, 2016 Order Regarding the Proposed Acquisition of a Controlling Interest in Aixtron SE by Grand Chip Investment GmbH and President Trump’s August 14, 2020 Order Regarding the Acquisition of Musical.ly by ByteDance Ltd., parts of Aixtron SE and Musical.ly located outside the United States but used in furtherance of interstate commerce in the United States were included in the prohibition. In each of those instances, the “extent” of the entities’ business in the United States was substantial as both companies had significant operations in the United States as well as assets outside the United States that were used in furtherance of significant activities inside the United States. That is not the case with Magnachip.
Since CFIUS asserted its jurisdiction, it notified Wise Road and Magnachip that it had identified risks to U.S. national security, had not identified any mitigation measures that it believed would adequately mitigate said risks, and anticipates referring the matter to the president to block the deal. In other words, the U.S. government intends to scuttle Wise Road’s acquisition of Magnachip, or impose severe mitigation measures.
The parties are reportedly continuing to search for a way forward and recently withdrew and refiled their notice with CFIUS, restarting (but not resetting) the CFIUS process for themselves. This gives them more time to work with CFIUS on a solution, but it does not guarantee that CFIUS will ultimately approve the transaction.
While it is unclear how the CFIUS process will unfold for Wise Road and Magnachip, CFIUS’s actions signal that the past is not prologue for the review of foreign direct investment in the United States. CFIUS intends to use whatever tools it has to further U.S. national security interests, even if it never before acknowledged such tools existed. That toolbox now includes the ability to assert jurisdiction over transactions taking place largely outside of and with a very limited nexus to the United States. Considering the countless businesses that trade on U.S. stock exchanges or set up limited liability companies in Delaware, it is difficult to know where that jurisdiction ends. Parties will need to carefully assess their nexus to the United States, even if the overwhelming majority—and most meaningful—of a business’s assets are outside the United States.
In the end, this expanded view of CFIUS jurisdiction will certainly afford the U.S. government greater ability and authority to protect national security. Far less certain is the effect this view will have on foreign companies, including whether they will be disincentivized from raising capital in the United States or prompt them to delist from U.S. exchanges.