For just the third time in history, a US president has formally blocked a proposed foreign acquisition of a US business due to national security concerns identified during the review process by the Committee on Foreign Investment in the United States (CFIUS).

On December 2, 2016, pursuant to Section 721 of the Defense Production Act of 1950, President Obama issued an administrative order to prohibit the proposed acquisition of a controlling interest in Aixtron SE (Aixtron) by Grand Chip Investment GbmH (GCI), a German company partially owned by Fuijan Grand Chip Investment Fund LP, a Chinese partnership with some Chinese government ownership. Aixtron is a German semiconductor equipment maker; its US business (Aixtron US) accounts for about 20 percent of the company’s workforce and a similar percentage of the company’s global sales in 2015.1 The €670 million (approximately US$720 million) transaction was to have been financed by Sino IC Leasing Co. Ltd., which belongs to the Chinese government-established and –supported China IC Industry Investment Fund.

Though CFIUS’s national security reviews are not public, it appears that the CFIUS concerns centered around Aixtron’s work to manufacture equipment for Metal-Organic Chemical Vapor Deposition (MOCVD) systems. These systems are used to produce the multilayer crystalline films necessary for semiconductor production. The US Treasury Department (Treasury), acting in its capacity as the chair of CFIUS, said the following in its statement regarding the decision: “The national security risk posed by the transaction relates, among other things, to 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.” Of note, the reference to the US business’s “overall technical body of knowledge and experience,” rather than to its specific products or technology, suggests a very expansive view of the kinds of transactions that could pose a threat to US national security.

When faced with concerns from CFIUS, most parties to a transaction under review seek to mitigate those concerns under agreements with CFIUS or choose to abandon or restructure the transaction. That was not the case here: apparently CFIUS did not believe that its concerns could be mitigated, and the parties were unwilling to abandon or unable to restructure the transaction. Consequently, the transaction was referred by CFIUS to the president, who blocked the transaction, stating, “The proposed acquisition of Aixtron US by the Purchasers is hereby prohibited, and any substantially equivalent transaction, whether effected directly or indirectly through the Purchasers' shareholders, partners, subsidiaries, or affiliates is prohibited.” The administrative order defined the US business broadly, including patents and patent applications: “The U.S. business of Aixtron consists of AIXTRON, Inc., a California corporation, the equity interests of AIXTRON, Inc., and 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.”

As noted, the blocking of the transaction was only the third by a US president (and the second by President Obama, who previously blocked the purchase of four Oregon wind farm companies by Ralls Corp., a company owned by Chinese nationals). But this action demonstrates CFIUS’s expansive approach to reviewing transactions and its increasing concern over national security issues involving China.

Investors and potential sellers should take heed of the implications of this decision for foreign investment in the US technology sector and Chinese investment in the United States in general. Parties should carefully assess their risks when determining whether a CFIUS filing or informal outreach to CFIUS is warranted for a potential transaction and should take steps early in the development of a transaction to assess how the transaction could be structured and defined to enhance the prospects for CFIUS clearance.

1 The executive order prohibits the acquisition of Aixtron US. It does not affect the sale of the non-US business of Aixtron, though prohibition of the US portion of the transaction may scuttle the entire deal. Moreover, the German government recently rescinded its approval of the transaction based on similar security concerns.