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Chinese Deals Still Clearing CFIUS Despite Increased Scrutiny, Lawyer Says

Although the Committee on Foreign Investment in the U.S. has increased scrutiny of Chinese investments in recent years, it still continues to clear a range of transactions involving China, said Antonia Tzinova, a CFIUS lawyer with Holland & Knight. Chinese investors are using several tactics to ensure their deals aren’t blocked, Tzinova said, and in some cases are restructuring their investment agreements.

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“It's not completely: ‘OK, this is off limits,’” Tzinova said during a conference call hosted by the Capitol Forum. “There will be continued activities, it’s just that investors need to be more mindful.”

Tzinova said Chinese investors have practiced “self-restraint” in recent years as the U.S. has made it known that it’s closely monitoring Chinese companies in critical industries, including those involving sensitive technologies (see 2109010051). That has led to a chilling effect on Chinese companies’ willingness to invest in the U.S (see 2009170017 and 2103240073).

But “there are Chinese transactions that are closing,” Tzinova said. Some businesses have restructured their acquisitions “so they don't have to come in front of CFIUS,” she said, including by proposing only minority investments in target companies or by giving up any voting rights involving the firm.

She also said Chinese deals are clearing CFIUS if they have “clear private money involved” with no ties to the government. “I mean, the U.S. prides itself on being the most open investment environment in the world, and we want to take the money,” Tzinova said. “Chinese transactions do go through.”

But she also pointed to several sectors that are receiving more scrutiny than others, including the semiconductor, quantum technology, artificial intelligence and biotechnology industries, which were mentioned in President Joe Biden’s September executive order that gave specific direction to how CFIUS should prioritize reviews (see 2209150053 and 2209260076).

There is “still quite a lot of Chinese investment in health sciences,” Tzinova said. She also said Chinese investments in artificial intelligence can sometimes be difficult to capture. “AI is so hard to define" and limit. "What should be controlled? What shouldn't be?” Tzinova said. “Pretty much everything is AI.”

As CFIUS has increased scrutiny on investments from China, it has also encouraged allies to do the same, including the U.K. Stephen Whitfield, a lawyer with Travers Smith, pointed to the U.K.’s decision last year to order a subsidiary of China’s Wingtech Technology to divest from Britain's largest microchip facility, Nexperia Newport (see 2211170041). Republicans had asked the Biden administration to convince the U.K. to block the acquisition (see 2204210033), saying the U.S. should have threatened to remove the U.K. from the CFIUS excepted foreign states list.

“I think it would be naive to think that there isn’t a good degree of influence coming from the United States on complex international transactions,” Whitfield said.

Most of the “interventions” under the U.K.’s new foreign investment screening regime (see 2111160043) have involved Chinese companies, Whitfield said. But he doesn’t think “there are any sectors which are completely off limits to Chinese investors,” even though the U.K. doesn’t provide much detailed data on investment reviews.

He said the U.K. has so far taken a range of steps to address national security concerns in foreign investments, including through agreements that impose “controls to protect sensitive information and technology from unauthorized access” and requirements for companies to conduct U.K. government-approved audits.

“Some of these measures can be quite interventionist, but they're all predominantly behavioral,” Whitfield said. “In many respects, I think they're all evidence that the government is willing to think in a flexible way to try to preserve a transaction.”

But Whitfield said he wishes the U.K. were more transparent in its reviews. He said parties in an investment have “no clear case management milestones” that establish “when the national security review has ended and the remedies phase begins.” He also said the U.K. doesn’t release much public information on reviews, so “it's quite hard for parties to self-assess going into a transaction” whether their deal may receive scrutiny.

“I think there is work that could be done there,” Whitfield said. But “substantively, the U.K. appears to have taken quite a flexible approach to behavioral remedies up to now.”