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Targeting Chinese acquisitions, US to expand CFIUS powers
A new legislation aims to increase the powers of the Committee on Foreign Investment in the US
Michael Marray 1 Mar 2018

US President Donald Trump made headlines last week by announcing tariffs on steel and aluminium imports. And in addition to fears of a trade war, the Chinese government is also concerned about the progress through Congress of new legislation which will strengthen the powers of the Committee on Foreign Investment in the United States (CFIUS).

Recent decisions by CFIUS to block a series of takeovers of US companies have already shown that the Trump administration is taking a tougher line with China. But the proposed legislation will, if passed, expand the powers of CFIUS in blocking Chinese moves to acquire US companies, particularly those providing sophisticated technology. And it would not just cover controlling stakes in US firms, but also minority shareholdings. The bipartisan legislation has the support of President Trump.

Last November senator John Cornyn (Republican from Texas), the second-highest ranking Republican in the Senate, introduced the bill titled the Foreign Investment Risk Review Modernization Act (FIRRMA). The bill aims to modernise the CFIUS process, which since 2007 has been governed by the Foreign Investment and National Security Act of 2007 (FINSA).

The bill is co-sponsored by senator Dianne Feinstein (a Democrat from California) and senator Richard Burr (a Republican from North Carolina), the chairman of the Senate Select Committee on Intelligence, among other senators. Representative Robert Pittenger (a Republican from North Carolina), who has been a vocal critic of Chinese investment in the US, introduced a companion bill in the House of Representatives.

The number of acquisitions of US firms by Chinese companies has dramatically increased in recent years, and the workload of CFIUS has grown as a result. The current draft FIRRMA legislation would change some provisions in the current CFIUS implementing statute, specifically Section 721 to the Defense Production Act of 1950. This would expand CFIUS’s authority and the scope of its reviews of the national security implications of foreign investments.

In late February, US semiconductor testing company Xcerra Corp became the latest company to have a deal blocked by CFIUS, which makes a recommendation to the president before he signs off on a final decision. Norwood, Massachusetts-based Xcerra had announced the deal in April 2017.

The US$580 million acquisition of Xcerra by state-backed semiconductor investment fund Hubei Xinyan was viewed as sensitive because Xcerra equipment is used by chip manufacturers that supply the US government and military. Xcerra does not manufacture chips, but its testing equipment is used in the production process. The US is generally wary of the potential for technology transfer. Xcerra Corporation comprises four brands in the semiconductor and electronics manufacturing test markets: atg-Luther & Maelzer, Everett Charles Technologies, LTX-Credence and Multitest.

On February 22, Nasdaq-listed Xcerra and Hubei Xinyan Equity Investment Partnership announced that they had mutually agreed to withdraw their joint voluntary filing to CFIUS. “Despite our best efforts to secure approval, it has become evident that CFIUS will not clear this transaction and we and Xinyan have mutually decided to terminate our merger agreement,” says Dave Tacelli, president and CEO of Xcerra Corporation.

“Our transaction with Xinyan was about enabling Xcerra to accelerate its growth in the China market as well as broadening and strengthening our customer relationships around the world,” he adds. “While we are disappointed that we were not able to receive approval from CFIUS on this transaction, Xcerra and Xinyan are discussing alternatives to pursue opportunities in new and existing markets in China.”

Last year Canyon Bridge Capital Partners, which is a US-based private equity firm with links to the Chinese state sector, had its US$1.3 billion acquisition of US chip manufacturer Lattice Semiconductor Corp blocked by CFIUS, a decision which was then signed off by Trump, who has the final say.

And in January this year Ant Financial (an affiliate of e-commerce giant Alibaba) had its planned acquisition of US money transfer company MoneyGram International terminated upon the recommendation of CFIUS.

With regard to steel and aluminium tariffs that were announced last week, the initial response of China was critical, while at the same time not seeking to escalate the dispute.

“The US' unreasonable and excessive use of trade remedy measures will not help revitalize relevant industries at home. Rather, it will affect its employment and jeopardize the welfare of American consumers,” says Foreign Ministry spokeswoman Hua Chunying. “China will take necessary measures to safeguard its legitimate rights and interests.”

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