Magnachip Semiconductor Corporation (“Magnachip”), a South Korea-based semiconductor company, recently disclosed that the Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”) threatened to recommend that President Biden exercise his authority to block a Chinese private equity firm’s acquisition of Magnachip due to unresolvable national security concerns.  Given Magnachip’s very limited nexus to the United States, this case demonstrates the willingness of CFIUS to stretch its jurisdictional arms, especially when it comes to transactions implicating sensitive sectors.

Background on the Proposed Transaction

In March 2021, the Chinese private equity firm Wise Road Capital agreed to indirectly acquire Magnachip for $1.4 billion.  Magnachip designs and manufactures analog and mixed signal semiconductors.  Based on its interest in previous transactions (particularly those involving Chinese investments), it is well established that CFIUS views the semiconductor sector as a sensitive sector from a U.S. national security perspective.  Nonetheless, Wise Road Capital and Magnachip did not notify CFIUS of the transaction, presumably as a result of thinking that CFIUS lacked jurisdiction because of Magnachip’s limited connections to the United States.  In June 2021, the Committee requested that the parties submit a CFIUS filing and issued an interim order on June 15 preventing the parties from closing the transaction until the Committee finished its review.[1]

Approximately two months later, Magnachip disclosed, in a public filing, that it had received a letter from CFIUS in which the Committee found that the proposed transaction posed “risks to the national security of the United States” and that no “mitigation measures, including those proposed jointly” by the parties would “adequately mitigate the identified risks.” The Committee’s letter to Magnachip also stated that “absent new information arising during the investigation period that alters CFIUS’s assessment of the national security risks, CFIUS anticipates that it will refer the matter to the President for a decision.”[2]  When faced with such a letter, parties typically decide to abandon the proposed transaction to avoid a public Presidential Order blocking the transaction.

CFIUS’s Long Jurisdictional Arm

CFIUS has jurisdiction over, among other transactions, transactions pursuant to which a foreign person acquires control over a U.S. business.  The term “U.S. business” historically 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.”  In its initial rulemaking implementing the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”), CFIUS removed “but only to the extent of its activities in interstate commerce” from the definition of “U.S. business.”[3]  At the time, the amended definition raised concerns that any business with a U.S. nexus (which could include a business with no physical U.S. presence) could be considered within the jurisdiction of CFIUS.  In the final rule implementing FIRRMA, CFIUS clarified that the amended definition simply tracks the language of FIRRMA and 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.  According to the examples included along with the amended definition, the definition is not without some limits.  Indeed, the examples confirm that a company organized outside the United States with no branch offices, subsidiaries, or fixed places of business in the United States may export and license technology to related and unrelated companies in the United States and may provide remote technical support services in the United States (without having any assets or personnel located in the United States) without necessarily qualifying as a U.S. business.

Magnachip, which is incorporated in Delaware and listed on the New York Stock Exchange, also has a Delaware subsidiary.  However, Magnachip has little real presence in the United States. Indeed, according to its May 2021 8-K: (i) all of Magnachip’s manufacturing and research and development activities take place in South Korea; (ii) the company’s sales activities occur primarily in South Korea, with the remainder of sales operations in China, Hong Kong, Taiwan, Japan, and Germany; (iii) the company does not have any employees, tangible assets, or IT systems in the United States; and (iv) all of Magnachip’s intellectual property is owned by its operating company or other non-U.S. subsidiaries.[4]  With that in mind, to assert jurisdiction over the proposed transaction, CFIUS presumably (we say presumably because there is no publicly available explanation from CFIUS regarding its jurisdiction in this case) relied on the fact that Magnachip was a U.S.-listed company incorporated in Delaware with a Delaware subsidiary.

In the wake of this case, parties engaged in transactions involving non-U.S. investments in non-U.S. companies with even a limited nexus to the United States should carefully consider whether CFIUS could be interested in such transactions and conduct appropriate CFIUS due diligence and analysis.  This case also illustrates that the CFIUS office responsible for identifying so-called non-notified transactions has remained, and likely will remain, very active in identifying and “calling in” transactions that CFIUS believes could raise national security concerns.[5]

*Special thanks to Haley Denler, a law clerk currently in her third year of law school at Georgetown, for her assistance on this blog post.

 


[1] Magnachip Semiconductor Corp., Current Report (Form 8-K) (Jun. 15, 2021).

[2] Magnachip Semiconductor Corp., Current Report (Form 8-K) (Aug. 27, 2021).

[3] 31 C.F.R. § 800.252.

[4] Magnachip Semiconductor Corp., Current Report (Form 8-K) (May 26, 2021).

[5] Please see our recent blog post for information regarding CFIUS outreach associated with non-notified transactions – https://www.clearytradewatch.com/2021/07/cfius-releases-2020-annual-report/.