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ANALYSIS: Semiconductors Made CFIUS

June 12, 2020, 9:51 AM

The Committee on Foreign Investment in the United States is what it is today because of the U.S. semiconductor industry. CFIUS first received its mandate to review foreign investment for national security concerns as a direct result of a proposed foreign investment in a U.S. semiconductor chip maker in 1987. Of the six transactions blocked by a U.S. President at the recommendation of CFIUS, three were semiconductor deals: the 2018 block of the Qualcomm–Broadcom deal, the 2017 block of the Lattice Semiconductor Corp.–Canyon Bridge deal, and the 2016 block of the Aixtron–Fujian Grand Chip Investment Fund deal.

The U.S. semiconductor industry is now, and has long been, of central importance to national security. The ongoing trade war and competition with China, the largest market for semiconductor chips, have caused the U.S. to ramp up legal protections of the industry through increasingly coordinated foreign investment restrictions and export controls. The impact is clearly visible in the mergers and acquisitions deal data, with less and less deal activity in the sector involving U.S. targets over recent years.

Now, a boost for the industry may be on the horizon. On Wednesday, Sen. John Cornyn introduced new bipartisan proposed legislation, dubbed the CHIPS for America Act, “to restore American leadership in semiconductor manufacturing by increasing federal incentives in order to enable advanced research and development, secure the supply chain, and ensure long-term national security and economic competitiveness.”

If the legislation is enacted, the question is: How will these evolving legal regimes be adapted to support and protect the industry while still allowing its growth via cross-border trade, transactions, and investments?

Critical Technology Definition & Export Controls

Under the current CFIUS regulations, which went into effect in February, certain investments in the “Semiconductor and Related Device Manufacturing” and “Semiconductor Machinery Manufacturing” sectors of the North American Industry Classification System (NAICS) are considered investments in critical technology and trigger mandatory declaration requirements.

A new proposed rule issued for comment on May 21 will remove these NAICS codes from the analysis and instead make mandatory declarations apply “only to the extent that the critical technologies that the U.S. business produces, designs, tests, manufactures, fabricates, or develops would require a U.S. regulatory authorization to export, re-export, transfer (in-country), or retransfer to the foreign persons involved in the transaction or certain foreign persons in the ownership chain as specified in § 800.401(c)(1)(i)-(v).”

Because the semiconductor industry is already subject to various export controls, including the newly added stringent rules pertaining to Huawei Technologies Co. announced last month, investments in U.S. semiconductor targets may be subject to mandatory filing requirements when the new rule comes into effect. As far as being subject to CFIUS review through the standard voluntary process, it would be surprising if any deal involving a semiconductor target would not receive scrutiny on the basis that it is a critical technology or otherwise.

The new proposed rule emphasizes that it “does not modify the definition of ‘critical technologies,’” which is defined by the Foreign Investment Risk Review Modernization Act (FIRRMA). But the definition in FIRRMA already covered anything deemed to be “[e]merging and foundational technologies controlled pursuant to section 1758 of the Export Control Reform Act of 2018.” The main takeaway here is that export controls were already linked to CFIUS jurisdiction over critical technologies, and with the new proposed rule, the two will be even more linked. To the extent that there are gaps in coverage of the semiconductor industry in export controls that would in turn leave CFIUS with gaps in its jurisdiction under the new rule, we can expect that those gaps will be filled and that there will be increased coordination between the two regimes.

As far as how the U.S. industry feels about these developments, on the Semiconductor Industry Association’s export controls page, a statement reads:

“Excessive and unilateral export restrictions stifle the ability of American companies to compete with foreign competitors that do not bear the same export-related administrative and bureaucratic burdens. Time to market is critical in international competition. Delays and backlogs, even of a few days, force buyers to look elsewhere.”

Steady Decline in Semiconductor Deals and CFIUS Notices

The number of cross-border semiconductor deals involving U.S. targets has been declining—and consistently outpaced by semiconductor deals involving U.S. acquirers and non-U.S. targets—in recent years.

According to official CFIUS data released last month that covers calendar year 2018, CFIUS notices for transactions involving U.S. targets in the semiconductor sector have also been declining, despite an overall increase in CFIUS’s caseload. In fact, of 2018’s top four U.S. target industry sectors—which include electric power generation, computer systems design, and software publishers—the semiconductor sector is the only to see a drop in CFIUS notices. That being said, CFIUS reportedly recently cleared the $8.7 billion Cypress Semiconductor Corp.–Infineon Technologies AG deal and other large deals in technology-related sectors, so the Committee is staying true, at least in part, to the slogan that the U.S. is open for investment.

With fewer semiconductor deals overall, terminations and withdrawals of deals involving U.S. semiconductor targets have also dropped off since reaching a peak in 2016.

Fairchild Semiconductor and the Exon–Florio Amendment

CFIUS was established in 1975 to study foreign investment in the U.S. The Committee for the first time received authorization to review and act against foreign investments in 1988, through the Exon-Florio Amendment (50 USC app 2170), which was passed a year after the proposed purchase of U.S. company Fairchild Semiconductor by Japan’s Fujitsu. In 1987, Fairchild Semiconductor called off the sale, reportedly “bowing to intense pressure from Reagan Administration officials.” The potential deal apparently sparked the realization that concrete foreign investment restrictions were needed to protect the industry. Back then, the primary concern was Japan.

Japan still plays an important—though now different—role in the foreign investment arena, especially in the global semiconductor market. The most recent official data available, released by CFIUS last month, indicates that across all industries, Japan came into second place to China as the acquirer country with the highest number of covered transactions reviewed by the Committee in 2018. This data confirms that a significant number of Japanese transactions had faced CFIUS hurdles around the time of FIRRMA’s enactment. In 2018, CFIUS reported that 55 deals involving Chinese acquirers were reviewed and 31 involving Japanese acquirers were reviewed.

CHIPS for America Act

According to a June 10 Semiconductor Industry Association press release detailing the CHIPS for America Act, the proposed legislation “would make significant federal investments at the Department of Defense, the National Science Foundation, and the Department of Energy to promote semiconductor research and drive chip technology breakthroughs. The bill would establish a National Semiconductor Technology Center to conduct research and prototyping of advanced chips, as well as create a center on advanced semiconductor packaging.”

If the proposed legislation is ultimately enacted to provide federal incentives to the U.S. semiconductor industry, foreign investment and export control regimes may need to be further harmonized—not just with each other, but also with the incentive program in place.

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