Conductive Discussions: CFIUS, Trade Regulations, and the Impact on the Semiconductor Industry

April 13, 2021
13:10 minutes

Ropes & Gray’s podcast series Conductive Discussions focuses on legal issues of interest to the semiconductor industry. In this episode, IP litigation partner Mark Rowland and litigation & enforcement partner Ama Adams, counsel Brendan Hanifin and associate Emerson Siegle discuss recent developments regarding the Committee on Foreign Investment in the United States (CFIUS) review process, enhanced export controls, and novel economic sanctions. These evolving foreign investment and trade regulations present complex challenges for semiconductor companies, particularly those with dealings involving China.


Mark Rowland: Welcome to Conductive Discussions, a Ropes & Gray podcast series focused on legal issues of interest to the semiconductor industry. My name is Mark Rowland, and I am a partner at Ropes & Gray in our IP litigation practice, based in the firm’s Silicon Valley office. With me are Ama Adams, a partner in our Washington, D.C. office, Brendan Hanifin, counsel in our Chicago office, and Emerson Siegle, a senior associate in our Washington, D.C. office.  Ama, Brendan, and Emerson focus their practices on the regulation of global trade and foreign investment, including advising clients on economic sanctions, export controls, and the CFIUS review process that we will hear more about shortly. Welcome, Ama, Brendan, and Emerson.

Silicon Speak: In late February, President Biden signed an Executive Order on America’s supply chains, which initiated a 100-day process of reviewing and assessing the strengths and weaknesses of supply chains across several key industries, including the semiconductor sector. As the world continues to grapple with the shortage of semiconductors during the COVID-19 pandemic, this Executive Order seeks to ensure there is sufficient U.S. production of semiconductors to protect both economic and national security. At the conclusion of the 100-day review in early June, the Secretary of Commerce will release a report “identifying risks in the semiconductor manufacturing and advanced packaging supply chains and proposed policy recommendations to address these risks.” This report should serve as a strong indicator for what the Biden Administration intends to target in its initiative to domesticate the semiconductor supply chain. 

In the private sector, Intel announced a $20 billion investment into two new fabrication facilities at its Ocotillo campus in Chandler, Arizona. Construction on the new factory is set to begin right away. The expansion is part of Intel’s “IDM 2.0,” a major evolution of the company’s integrated device manufacturing (IDM) model. With this announcement, Intel has demonstrated its commitment to continue manufacturing most of its products internally and that development of its 7-nanometer process technology is progressing. CEO Pat Gelsinger said the company expects to tape in the computer tile for its first 7nm client CPU, in the second quarter of the year.

Mark Rowland: Now, turning our discussion to CFIUS and related issues. Ama, to begin, could you provide an overview of recent changes to the CFIUS review process and explain why CFIUS seems to be commanding increased attention in recent years?

Ama Adams: Absolutely, and thanks for having us. CFIUS refers to the Committee on Foreign Investment in the United States, an interagency committee of the U.S. government with the authority to review foreign investments in U.S. businesses that may pose an actual risk to national security. Historically, CFIUS’s jurisdiction was limited to transactions in which a foreign person made an investment that could result in control of a U.S. business. However, legislation enacted in 2018, and gradually implemented over the intervening two years, has expanded significantly the scope of CFIUS’s authority to review foreign investments in U.S. businesses. Today, CFIUS has authority to review non-passive, non-controlling investments in certain categories of U.S. businesses, including companies that produce, design, test, manufacture, fabricate, or develop so-called “critical technologies.” In some cases, advance notification to CFIUS of qualifying investments is now mandatory. CFIUS’s jurisdiction over certain non-controlling investments, in conjunction with the mandatory filing requirement, represents a significant departure from the traditional CFIUS review process, which was strictly a voluntary notification regime focused on control transactions.   

Mark Rowland: So how is CFIUS relevant to the semiconductor industry, in particular? My sense is that the U.S. government had a history of vetting foreign investments in U.S. semiconductor businesses prior to 2018. 

Ama Adams: That’s right. Even prior to passage of the 2018 reform legislation (commonly known as FIRRMA), CFIUS had demonstrated particular interest in the semiconductor industry, and presidents of both parties have blocked transactions involving the semiconductor industry for national security reasons. For example, in 2016, President Barack Obama blocked the proposed sale of Aixtron SE, a German semi-conductor equipment supplier, to China-based Grand Chip Investment GmbH. And in 2017, President Donald Trump blocked Chinese-backed investment firm Canyon Bridge Capital Partners from acquiring Lattice Semiconductor Corporation. At the time, the Aixtron and Lattice Semiconductor transactions were two of the higher profile examples of U.S. presidents intervening in transactions over national security concerns. 

Brendan Hanifin: In October 2018, CFIUS announced a “pilot program” that implemented certain aspects of FIRRMA on a temporary basis. The pilot program introduced, for the first time, a mandatory CFIUS notice requirement for certain non-passive investments in critical technology companies that operated within, or developed technology for use in, any of 27 designated, sensitive industries. The initial list of sensitive industries included the Semiconductor Manufacturing and Semiconductor Machinery Manufacturing industries, which was a formal acknowledgement of CFIUS’s concern that foreign investors could leverage non-controlling investments in U.S. semiconductor companies to obtain access to technology with national security-related applications. Although the pilot program expired in 2020, and CFIUS has since replaced the pilot program’s industry nexus with requirements focusing on export controls, foreign investments in U.S. semiconductor businesses still may trigger a mandatory CFIUS filing, because certain semiconductor materials and related technology qualify as critical technology within the meaning of the CFIUS regulations.

Emerson Siegle: Importantly, the scope of semiconductor-related materials and technology that qualify as critical technologies is likely to expand going forward. In particular, pursuant to the Export Control Reform Act, also signed into law in 2018, the U.S. Department of Commerce is leading an interagency process to identify and add to the U.S. Export Administration Regulations (or EAR) controls on “emerging” and “foundational” technologies that are “essential to the national security of the United States.” Although the process is still underway, the Commerce Department preliminarily has identified certain broad categories of technology as likely “emerging technologies,” including microprocessor technology, such as: (1) systems-on-chip; or (2) stacked memory on chip. 

Mark Rowland:  What do these changes mean for the U.S. semiconductor industry going forward? 

Ama Adams: Practically speaking, the changes mean that an increased volume of transactions involving foreign investors and U.S. semiconductor companies will be subject to the CFIUS review, either pursuant to a mandatory filing requirement or because the parties to the transaction assess the risk of foregoing a voluntary CFIUS filing to be material. For dealmakers, navigating the CFIUS review process typically means added delay and expense, each of which can be significant. The changes also have implications for deal certainty. CFIUS may impose mitigation measures on the parties to a covered transaction if the Committee determines that the foreign investment threatens to impair U.S. national security. CFIUS has authority to impose a wide range of mitigation measures, short of recommending that the U.S. President block (or unwind) a transaction. For example, CFIUS could (1) require parties to restructure a transaction so that the foreign party does not exercise control over sensitive assets or businesses; (2) require critical management decisions to be made by U.S. citizens; or (3) provide the U.S. government the right to review certain business decisions and object. Generally, all of these considerations need to be assessed on a transaction-by-transaction basis. 

Brendan Hanifin: However, the changes do not mean that foreign investment is off limits to U.S. semiconductor companies. As an objective matter, the overall percentage of CFIUS reviews resulting in mitigation measures is low—in calendar year 2019, CFIUS imposed mitigation measures in less than 20% of all transactions reviewed by the Committee (although we can assume that percentage was slightly higher for transactions involving sensitive industries, such as the semiconductor industry). By way of illustration, just last month, CFIUS approved the $9 billion acquisition of Intel’s NAND memory and storage business by SK Hynix, a company based in Korea. To be sure, investors from certain jurisdictions—including China and Russia—can expect their investments to be subject to greater scrutiny than those of investors based in jurisdictions that are closely allied with the United States.

Mark Rowland: Are there any related U.S. legal issues that semiconductor companies need to be thinking about, in addition to the CFIUS review process?

Emerson Siegle: CFIUS is one of multiple tools that the U.S. government has been wielding in pursuit of national security interests, particularly with respect to China. The CFIUS process focuses primarily on the inbound investment (meaning investment from foreign jurisdictions into the United States). However, the U.S. government also has been strengthening its tools regulating outbound trade (meaning transactions involving U.S. persons and exports of U.S. goods). For example, the U.S. government has strengthened the EAR by (1) designating additional parties to the Entity List; and (2) by strengthening certain provisions of the EAR, including the foreign direct product rule and the military end use rule. These changes have had direct relevance for semiconductor companies. First, a number of Chinese semiconductor companies—including Semiconductor Manufacturing International Corporation (“SMIC”), Shenzhen DJI Sciences and Technologies Ltd. (“DJI”), along with a range of their affiliates—have been designated to the Entity List. As a result, U.S. and non-U.S. companies alike must obtain export licenses prior to transferring anything subject to the EAR—including all U.S.-origin products—SMIC, DJI, and other listed companies. Second, the strengthening of the foreign direct product rule means that certain foreign-produced items that are derived from controlled U.S.-origin technology are subject to the EAR, when transferred to certain Chinese companies and their affiliates. Third and finally, the strengthening of the military end use rule means that a broad range of transactions involving controlled technology and certain jurisdictions (including China and Russia) may be subject to new licensing requirements. Overall, the trend has been towards enhanced export controls, which means that semiconductor companies dealing in items subject to the EAR must ensure their export compliance programs are sufficiently robust to meet these challenges.

Brendan Hanifin: Along similar lines, the U.S. government has enacted a novel form of economic sanctions restriction, the Chinese Military Company Sanctions. While these sanctions do not prohibit U.S. persons from engaging in all transactions with designated companies, the sanctions require U.S. persons to refrain from making new investments in designated companies (within 60 days of the designation), and to divest any preexisting holdings in designated companies (within 365 days of designation). Notably, SMIC and a range of other Chinese semiconductor and technology companies—including companies on the Entity List—have been designated to the Treasury Department’s Non-SDN Communist Chinese Military Companies List. The Chinese Military Company Sanctions dovetail with the export restrictions that Ama and Emerson described. The former are aimed at limiting targeted entities’ access to U.S. funds, while the latter are aimed at limited targeted entities’ access to U.S. technical know-how, as part of a coordinated effort to combat China’s military-civil fusion strategy. 

Ama Adams: In sum, the semiconductor industry is at the center of a web of complex and evolving U.S. regulations governing trade and foreign investment. Semiconductor companies looking to engage in strategic transactions—including acquisitions and investments—must carefully consider the CFIUS risk of a given transaction. Semiconductor companies engaged in exports of products subject to the EAR must carefully assess whether the contemplated transactions are subject to new or heightened licensing requirements, all while maintaining compliance with U.S. sanctions regulations. Today, cross-border transactions in the semiconductor industry are subject to novel and nuanced regulatory considerations, and the picture continues to grow more complicated. 

Mark Rowland: Thanks, Ama, Brendan, and Emerson for joining us today, and for sharing these insights. Subscribe to Conductive Discussions and other RopesTalk podcasts in the newsroom of If you have any questions or comments, just drop us a line. For more information about our practice, specific to semiconductors, just type “semiconductors Ropes Gray” to get to our semiconductors page. Thank you for listening, and we hope you join us next time. This is Mark Rowland—goodbye.

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