Magnachip Deal Likely Warranted Mandatory CFIUS Filing, Lawyer Says

The proposed merger between Magnachip Semiconductor and Wise Road Capital (see 2106150039) was likely never going to avoid U.S. scrutiny, a trade lawyer said, and it is puzzling why the two companies didn’t voluntarily submit a declaration to the Committee on Foreign Investment in the U.S. Scott Flicker, who advises clients on CFIUS matters for Paul Hastings, said the decision was either a mistake or a calculated decision by the two companies’ lawyers.

“Some determination must have been made by the party to that transaction that it didn't trigger a mandatory filing,” Flicker said in a recent interview. “What I can't fathom, sitting from the outside looking in, is how they determined that this one should not be brought to CFIUS on a voluntary basis.”

The proposed merger is almost exactly the type of investment transaction that CFIUS is most interested in reviewing. Under the deal, South Korea-based Magnachip would be acquired by Beijing-based Wise Road Capital, potentially handing a Chinese company sensitive semiconductor manufacturing information and equipment.

But in a May Securities and Exchange Commission filing, after being asked by CFIUS to file a notice with the committee, Magnachip said it believed “there should not be any approvals required for the Merger in the United States.” CFIUS recently said it planned to refer the merger to President Joe Biden after determining it couldn’t identify measures to mitigate the deal’s national security risks (see 2108310008).

Flicker said lawyers can make “deliberate determinations about how to structure a transaction” so that they may fall outside the scope of a mandatory filing, but reaching those conclusions for this deal would be tricky, especially as CFIUS remains laser-focused on foreign investments from China that involve critical technologies. That scrutiny is having an increasingly chilling impact on Chinese companies’ willingness to invest in the U.S. (see 2103240073).

Flicker said it is “pretty well known that CFIUS is actively scouring the news in the marketplace to try to figure out all the deals that are happening in the semiconductor sector,” and a high-profile deal like this was likely to be detected. “If you have a deal in the semiconductor sector that involves Chinese investment, Chinese acquisition, that’s a deal that I think most CFIUS practitioners would conclude needs to be brought to the committee for review, even if on a voluntary basis,” he said. “The risk that CFIUS might identify the transaction, intervene and require a filing is very high.”

Although Flicker said it’s “never clear-cut” whether CFIUS may approve or reject a deal, similar deals haven’t been approved in the past. “You’d be challenging me pretty hard to try to identify a recent case in the semiconductor industry that China was able to get approved. That's not going to happen in a case of an outright acquisition, for sure,” he said. “CFIUS’ attitude is that it's almost impossible to mitigate the acquisition or the effects of the acquisition of a company where the acquiring party has a significant footprint in China.”