As we discussed in a recent alert, the Committee on Foreign Investment in the United States (CFIUS) refused to approve the proposed $710 million acquisition of Aixtron GE, a German-based technology company, by Grand Chip Investment GmbH (GCI), a German subsidiary of Fujian Grand Chip Investment Fund LP of China. On Friday evening, December 2, 2016, the Department of the Treasury (Treasury) and the White House announced that President Obama had prohibited the acquisition of the U.S. business of Aixtron by GCI, pursuant to his authority under Section 721 of the Defense Production Act, as Amended by The Foreign Investment and National Security Act of 2007 (FINSA).
The combination of press releases from Treasury and the White House inform other entities contemplating transactions potentially subject to CFIUS jurisdiction.
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While Aixtron and GCI are German entities, and Fujian Grand Chip Investment Fund LP is Chinese, CFIUS claims jurisdiction over any transaction “by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States.” The President's findings underpinning his objection to the transaction identified the U.S. business of Aixtron as including not just AIXTRON, Inc., its research, technology and sales facility in California, but also “any asset of Aixtron or AIXTRON, Inc. used in, or owned for the use in or benefit of, the activities in interstate commerce in the United States of AIXTRON, Inc., including without limitation any interest in any patents issued by, and any interest in any patent applications pending with, the United States Patent and Trademark Office . . . .” In other words, the existence of U.S. patents, granted or pending may be considered an independent ground for finding sufficient interstate commerce for CFIUS jurisdiction.
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As we reported in our recent alert, CFIUS remains very likely to exercise its authority to review covered transactions involving critical technologies or Chinese involvement. In particular, the semiconductor industry remains a high priority of CFIUS and its member agencies. To this end, in its press release regarding the President’s action blocking the transaction, Treasury focused on Aixtron's role as an equipment manufacturer for the “global semiconductor industry, including Metal-Organic Chemical Vapor Deposition (MOCVD) systems used to build compound semiconductor materials.” Treasury specifically identified the perceived national security risk posed by the transaction as “among other things, ... the military applications of the overall technical body of knowledge and experience of Aixtron, a producer and innovator of semiconductor manufacturing equipment and technology, and the contribution of Aixtron's U.S. business to that body of knowledge and experience."
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Treasury was careful to claim that, despite this decision by the President, the Administration will “continue to ensure that the United States remains the most attractive place for businesses to locate, invest, grow, and create jobs” and “ and this decision is not a determination with regard to any other foreign direct investment from China or any other country.” At the same time, Treasury emphasized that the proposed acquisition was to have been funded in part by a component of China IC Industry Investment Fund, described as “a Chinese government-supported industrial investment fund established to promote the development of China's integrated circuit industry.”
This is the second time President Obama has issued orders prohibiting or requiring unwinding of a transaction under CFIUS. The first was in 2012 when the President ordered Chinese-owned Ralls Corp. to unwind its acquisition of a wind farm near a Navy base in Oregon. Please see our discussion of that transaction here. The only other U.S. President to exercise such authority was George H.W. Bush, who blocked a Chinese-based company from acquiring MAMCO Manufacturing Inc., a manufacturer of aircraft components in 1990.
So what happens next? The President's order prohibits the acquisition by GCI only of Aixtron U.S., but appears to define that broadly to include not just the facility in California, but also “any asset of Aixtron or AIXTRON, Inc. used in, or owned for the use in or benefit of, the activities in interstate commerce in the United States of AIXTRON, Inc., including without limitation any interest in any patents issued by, and any interest in any patent applications pending with, the United States Patent and Trademark Office . . . .” Conceivably, therefore, Aixtron could try to spin-off its California facility in order to sell its remaining assets to GCI, but CFIUS may maintain jurisdiction over any transaction that includes US patents. Furthermore, Aixtron previously announced on October 24, 2016, that the German economics ministry had withdrawn clearance for the transaction over concerns about Chinese takeovers of German companies. As of December 3rd, Aixtron announced the transaction parties are evaluating the impact of the Order and will coordinate with the German Federal Financial Supervisory Authority (BaFin) to examine the consequences of the Order on the takeover process.
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